美國西屋制動公司 (WAB) 2007 Q3 法說會逐字稿

Welcome to the Wabtec Corporation's third-quarter 2007 earnings release conference call. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS) For your information, this conference is being recorded.

I would now like to turn the conference over to Tim Wesley, Vice President, Investor Relations. Mr. Wesley, the floor is yours, sir.

Thank you, Mike. Good morning, everyone, and welcome to our third-quarter call this morning. I would like to introduce the rest of the Wabtec team who are here -- President and CEO, Al Neupaver; our CFO, Alvaro Garcia-Tunon; and our corporate controller, Pat Dugan.

As usual, we have 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 do ask that you please review today's press release as well as our SEC filings for the appropriate disclaimers. With that, let me turn the call over to Al Neupaver, our President and CEO.

Okay, thanks, Tim. Good morning. As usual, what I would like to cover is our quarterly results. I will talk a little bit about our market conditions and our outlook, and update you all on some significant strategic growth initiatives. Alvaro will cover financials in more detail, and then we will entertain any questions that you have.

Our third-quarter results were a very solid financial performance. We had strong sales, an increase of 32% to a record $355 million. The earnings per share come in at $0.55; this is versus $0.35 a year ago, but you have to add $0.09 too, because of restructuring back in '06. This is still a 25% improvement.

The backlog remained over $1 billion. This is noteworthy given the record sales in the quarter. It is obvious that our growth strategies are working.

Based on this strong performance in the third quarter, we have increased our guidance for 2007. We expect our sales growth to be between 22% and 24%. Our earnings per share will come in about $2.20; this is up from $2.15 last quarter.

Our diversified business model is servicing us well. Our OEM and aftermarkets were about 50-50 split. This quarter Freight and Transit, the split was 52% Freight and 48% Transit. This is compared to a year ago of 65% Freight and 35% Transit. In the previous quarter, it was 55% Freight and 45% Transit.

If we look at the split between US and international, we had 39% of our sales were outside of the US.

Taking a look at the markets, after record numbers in 2006 rail traffic has slowed down in 2007 as we all know. Car loadings are down 3.1%. Intermodal traffic is down 2%. As expected, railcar deliveries and the industry backlog are down. Most industry analysts expect delivery of railcars to be between 60,000 and 64,000.

In the third quarter, orders were only 8,000 and deliveries were at 15,000. The backlog stands about 67,000, still more than a year's production.

I think the key point here is that our Freight Group sales were actually up 5.2% versus car deliveries down year-on-year of 21%. This once again demonstrates the diversity of our business model that we always talk about. Only about 20% of our sales are directly related to this railcar build.

Locomotive OEM builds are strong at about 1,250 units. This is about the same rate as last year.

As you can tell from our numbers, our Transit markets are very strong. The strong market drivers are federal spending and passenger ridership. Federal spending is up 8% this year; expected to be 6% again next year. Ridership continues to increase. Overall transit usages up 30% in the past decade. High fuel costs and environmental concerns about emissions should continue to drive growth.

We see a lot of opportunity in several areas as it relates to Transit. First is our commuter locomotive business that has grown nicely. Secondly is the components for subway cars and busses. Lastly, we see a large global market that we are just starting to tap.

Now I would like to talk a little bit about our progress on our growth initiatives. The first item is related to growth related to global and market expansion. We are making progress in markets such as South Africa, where we are finalizing a joint venture to manufacture friction and other rail braking products. Progress is also being made in China, Russia, and South America.

As it relates to acquisitions, our pipeline is flowing, but not as fast as we would like. The Ricon integration is progressing well, and we are excited about its future potential. Both Schaefer and BECORIT are fully integrated.

As you know, we're devoting a lot of time and money to improving the safety, the efficiency, and the productivity of the railroads. Some of our new products are moving along quite well. The BNSF, the original pilot train that is testing our ETMS is still running successfully in Illinois. We have a second pilot train under BN expected to be running between Texas and Kansas starting in November. Our ETMS is being deployed on a Metra line; that is a transit line in Chicago. The equipment is being installed right now and testing should start in the first half of 2008. The UP has begun pilot testing in -- will begin pilot testing in November.

We're holding joint meetings with all the railroads to discuss interoperability solutions. This indicates to us that the industry continues to have a high level of interest in ETMS. There is a lot of activity going on behind the scenes right now, but no new news to announce.

A second new product is our electronic controlled pneumatics. We have had a system running in Australia on the Queensland rail train for a number of years now. We also are in testing and should have running by the end of the year in South Africa a train that has already passed interoperability tests with our competition's equipment. This is an important step for us.

In the US, Norfolk Southern [in] coal train will include some of Wabtec's equipment. This is the pilot train that is testing this in the North American market. In addition, we're in discussions with the BN for their intermodal train test. We also expect other railroads and electric utilities to begin exploring ECP. Again, no news to announce at this time, but stay tuned.

A third new product is our ultra-low emissions locomotive. There is growing demand in North America for low emissions switcher locomotives to reduce pollution in rail yards. Wabtec is developing a product to meet that demand. We completed successful track testing of our engine and propulsion system. A demo unit will be available by year end. We have many preliminary discussions with potential customers and generating strong interests. I would now like to turn it over to Alvaro.

Great. Good morning, everyone. Thanks very much, Al. As Al stated and I will repeat, we feel we have a good quarter, and I am pleased to share the highlights with you today.

Overall, we posted strong sales growth, which obviously led to positive results on the bottom line, and operating margins reflected our progress. This leads us to remain optimistic about the future.

To get more into specifics, sales came in 32% higher than last year and hit a record $355 million. About 60% of the increase came from organic growth, the balance through acquisitions. Just for comparison's sake, we had three acquisitions in the intervening period -- Ricon, which is our lift operation in California; Schaefer, which is our Freight operation in Ohio; and BECORIT, a brake shoe manufacturer in Germany.

Several units led the way to our organic sales growth. This includes our unit in the UK, WRL, which had an increase in its transit car refurbishment projects; continued strong sales of commuter locomotives in North America at our MPI unit in Boise; and the acquisitions which I mentioned before.

The Freight sales, Al pointed this out and I will repeat it in this section. But the Freight sales were also higher than last year, in line with our expectations. Again, we believe this particular factor is very important and reflects favorably on our performance and the benefits of our strategic growth initiatives, as we have been able to offset lower demand for OE freight car components with growth in other areas.

As you all know, we are very focused on driving margins higher, with particular attention on the operating margin. Margin can and will fluctuate quarter-to-quarter; but we are clearly delivering margin improvement over time, despite the shift in product mix towards lower-margin Transit products.

Our operating margin for the quarter was 12.9%, which included restructuring and other charges of about $2.7 million. I will discuss those, I will give you more details on that in just one minute. But excluding those charges, the operating margin was 13.6%, which was similar to the second quarter. This compares to 12% last year if you add back a restructuring charge in that quarter to make everything apples-to-apples.

The improvements in '07 really arise through two efforts -- lower costs through sourcing and lean, as a result of our Wabtec Performance System; and increased volume, which obviously provides operating leverage.

Operating expenses since last year increased $9 million which, at first blush seems like a large number. But $5.6 million of that resulted from acquisitions and the charges that I referred to earlier, about $2.7 million. And that really accounts for really most of the increase. Even including those charges and the acquisition, operating expense as a percent of sales were 14.1%, which is about the same as the second quarter of this year.

Now to go over those charges that I mentioned earlier. Again, they total $2.7 million in the quarter. This was composed of $800,000 for severance costs related to decrease in headcount at one of our Freight operations. The balance of the charge, the majority of the charge, was $1.9 million to reflect a commercial settlement. We actually tried to structure a win-win settlement with Bombardier regarding Acela.

To refresh everyone's memory, a couple years ago, Amtrak found cracks in some of the brake disks on their Acela trains and eventually filed claims against some of their suppliers, which included the car builder Bombardier as well as some of the suppliers. We did not design the braking system, I will stress that, nor did we source the disks. Other suppliers did that. But we did machine some of the disks, so we were in the chain for part of the disks.

Although we did not believe we had any material legal liability, because our efforts did not result in the cracks, we thought it suitable to reach a commercial settlement with Bombardier, which is a very good customer, that we think is beneficial to both parties. The settlement was first disclosed in the first quarter 10-Q. It calls for us to give Bombardier a rebate for business above historical levels, and the rebate is capped at $4.4 million.

Again, this is why we think it is a win-win. We do give Bombardier a rebate, but they have to provide us volumes that are in excess of historical levels. The way the accounting works is, once you determine that it is likely that you will get this additional business -- it hasn't all been booked yet, but we think it is likely -- then we will give Bombardier a full rebate.

We booked to $2.5 million in the first quarter when we first reached the tentative settlement. Now we are booking the remaining $1.9 million in the third quarter. Again, it is a significant rebate; but to us, this is actually good news in that we will be receiving significant additional business from Bombardier and a complete release from all the Acela liabilities.

Now to get more to the plenary session of my discussion where I give you some of the numbers that you are interested in. Working capital increased about $7 million in the quarter. Receivables, which you would expect with the increased sales, increased about $14 million. Inventories were about $1 million higher. Payables offset some of that growth, increasing by $8 million.

Working capital remained at about 14% of sales. This one area that we are focused on and we're hoping to improve during the rest of the year. As a lean Company, as a strong believer in the Wabtec Performance Systems, we think we can do better in this area.

Cash was about $158 million, at September 30, still in excess of our debt balances $150 million, which obviously gives us plenty of flexibility to invest in our growth strategies going forward.

A few of the other miscellaneous items. Depreciation was $6.5 million during the quarter, as opposed to $5.5 million last year. Amort was $1.2 million this quarter versus $1.4 million. CapEx was $4.4 million versus $4.5 million last year. So very steady.

Then getting to backlog, which again is more significant in the Transit operations than in Freight, but we think this is another positive indicator for the future. In spite of the strong sales climate, we managed to maintain the backlog at just over $1 billion.

I will give it to you in rolling 12-month as well as the multiyear. But the total for the rolling 12-month was $560 million versus $586 million last quarter. Breaking this down between Freight and Transit, Freight was $169 million this quarter versus $172 million last quarter. Transit was $391 million this quarter versus $414 million last year quarter.

The multiyear backlog, the one that will take longer than 12 months to execute but includes the 12-month, is $1.05 billion versus $1.05 billion last quarter. So we are pretty much level there. Freight was $231 million versus $235 million. Transit, $818 million versus $813 million. So very level, very steady and consistent with the prior periods.

That pretty much wraps up the financial summary. I will turn it back over to Al and then Q&A.

Thanks, Alvaro. In summary, we had strong earnings performance and record sales in the quarter, which gives us the confidence to increase our guidance for the year. We are pleased that we have shown growth in 2007, despite the sluggish Freight market which we believe demonstrates that our diverse business model is serving the Company well.

As we look beyond 2007, we see many reasons to be optimistic about the Company's future. The Freight market, although sluggish, still remained at historically high levels. We have a strong backlog, which extends out beyond 2010. Our growth strategies, global and market expansion, aftermarket expansion, new product development, and acquisitions are producing results and providing future opportunities.

Most importantly, the Wabtec Performance System, our lean manufacturing philosophy, provides a continuing path for margin improvement. We have a strong management team that is committed to profitable growth. We will now take your questions.

(OPERATOR INSTRUCTIONS) Brannon Cook of JPMorgan.

Good morning. Nice quarter, guys. So, the question on the improvement in Freight revenue growth. It accelerated from second quarter. I think you talked some about strong railcar locomotive deliveries as being a driver there.

Could you give a little more color on what led to that improvement against the situation where railcar deliveries are moderating a little bit, and how slower railcar loadings are impacting your aftermarket business there?

Okay, Brannon. If you take a look at the comparison, if we compare second -- or third-quarter '06 to '07, there is a lot of dynamics that impact our sales because of the diversity of our business model.

If you look at the railcar build, without a doubt that 20% decline has an impact on our business; but about 20% of it. Locomotive is basically flat year-to-year. What we have is the Schaefer business, which was an acquisition, adds about $6 million to that growth.

We also have some good growth in our Young Touchstone division, which manufactures heat exchangers not only for locomotives but also for power generation businesses, like Kohler, Caterpillar, and others. That business is very strong compared to a year ago.

This is one of the areas that we talk about when we talk about market expansion. That is our ability to take an existing product or technology and to apply it to markets outside of the rail area. That does a number of things for us. Obviously, it gives us growth opportunities. Secondly, it gives us some dampening of the impact of the cyclicality of the railcar market.

The last area that I think that we are making good progress on is that, although railcar build in the US is down, in some of the other countries on an international basis we have some good market dynamics going on. We are making some inroads in a number of the countries that I mentioned during my text.

Okay, that is helpful color. Then a question on Transit. I was very impressed that the backlog stayed mostly flat from second quarter to third quarter, even as you had a lot of revenues ramp up here, and upside performance there. Could you talk a bit about the Transit pipeline, looking to 2008?

You had the positive comments about Transit spending in the US. But is it reasonable to expect a continued pretty decent pace here from an organic perspective in growing that Transit business, looking to '08?

I guess another way to rephrase your question -- is the Transit volume or revenue sustainable?

I think if we take a look at our backlog for Transit alone, how that flows out. Alvaro talked about, currently, about -- let's see; 53% of our total backlog well flow out in the next 12 months. Of that, a good portion of that is Transit. About $400 million of the Transit backlog, which is -- totals at $800 million. About half of the Transit will flow out in the next 12 months.

But then, we will have -- the way we have our sales booked right now, about $150 million will flow out in the second year, third year, and fourth year. And we still have some that go out beyond 2010. So the backlog does support a lot of business.

When we look at the federal spending, that will have a positive impact. Because not only do we have this backlog, but we are also very active right now, including a lot of business in North America.

We also view in Transit that there is a lot of opportunity on a global basis. One of the nice growth areas this year has been our WRL business, which is in the UK, where they refurbish transit cars as well as locomotives. That business has grown real nice for us. We also are looking to break into some of the other markets in Asia and Europe as well in the Transit areas.

Okay, thanks for that color. Just a final question on the acquisition front. I think you mentioned something in your prepared comments that the acquisitions weren't coming quite as quickly as you would like, or is it something along those lines?

Yes, I think a lot of that has to do with I'm not a very patient person, I think that most of the staff would tell you. So it is never enough.

When you look at our opportunity, especially when you look at a business that is really a rail business, as we are, the number of opportunities get to be somewhat limited. So we are trying to expand that pond to open up other opportunities in adjacent markets.

A good example of an adjacent market that we just acquired is Ricon, where it is not directly rail, but it is more of a bus transit type of business. So we continue to look for those. We will never be satisfied we have enough flow.

So you feel like there's a number of opportunities out there, but just sometimes it takes a bit longer to get things done?

That's correct.

Okay, thanks for the time.

Wendy Caplan from Wachovia.

Good morning. You know, in all the years that I have followed this stock, I don't think I have ever heard you talked about so many pilot programs that were active. How do you explain that?

Is it that everybody is so excited about ETMS? Is it the emissions issue, the low emission test products? How do you explain it? What is your -- what are your thoughts about kind of hit rates here?

Okay, well, we are excited about our opportunities, Wendy. One of the things, if you go back in history and just look at what Wabtec has done well since it went public in 1995, and that is that it had a great strategy, and it really had the ability to generate cash. They also invested in technology that was associated with increasing the safety, the efficiency, and the productivity of the railroad. We really feel that we are one of the few companies in the world that can make that difference.

Now that investment has been for a number of years. It isn't something that just happened when I arrived. I think it has been there. What we have done is we have changed the focus of the Company to more of a growth than a cash generator. That new focus, I think we are trying to push these programs along.

But at the same time, the marketplace is realizing that in order to take advantage, the railroads is at a great opportunity. I use the analogy that there is this brass ring that only comes around a few times in your career. I think the railroads are at that point where they have to improve the safety, they have to prove the efficiency, they have to improve their productivity to take advantage of this opportunity.

I think that not only from that aspect, but I think that the government is really looking at trying to ensure that the safety of the railroads and the productivity are improved over time as well. There is a lot of interest in the public as well as the government.

There's a number of bills that exist in Washington right now. One is the safety bill that has passed through the House; and the Senate has their own version. Probably in six to 12 months, we will know if that will get passed. There's infrastructure tax credits being talked about.

There are also re-regulations being talked about, which we feel is a very negative thing to even consider the railroads, which would hamper some of their future expenditures. So I think from all aspects, the fact that we have invested on this technology, I think that we're going to get some of that payback into the future.

Again, I have to -- as excited as I am, I do get a bit impatient with the railroads because they move at a snail's pace. They're not going to be someone who accepts this technology in a rapid pace.

When you look at ECP, I read an article recently that talked about the full implementation of ECP would cost the railroads in the billions of dollars, upward around $8 billion. But it probably won't be done for about 15 years.

I think ETMS, the electronic train management system, is starting to get momentum. I think we have talked before about the opportunity that means to us, in the range of maybe 200 to $400 million over the next five or six years.

So there is a lot of good things happen. The same with the ultra-low emissions locomotive. There's a lot of incentives now for the railroad to replace some of their locomotives that are not as pollution friendly.

So we are excited, and I think the investment that was made over the past years is starting to pay off.

Thanks. Another question. You talked about the opportunities in power at Young Touchstone. Is that an area that you would look in terms of future acquisitions in the power space?

Without speaking specifically about any acquisition strategy, I use it as a good example of something that would make sense. There's a lot of opportunities in that area and other areas that we are exploring.

Okay. Finally, Alvaro, as you talked about working capital in the quarter, you talked about kind of the focus, the Company's focus, on reducing working capital. Can you talk about where you would be comfortable and where the biggest opportunities are in terms of receivables, inventories, or payables at this point?

Yes, in essence, receivables are tough, Wendy. In our industry with our customer base, if we can keep receivables at about 45 days, I think that is pretty good. Certain segments pay faster than others. For example, international is particularly slow. Domestic typically tends to pay higher; and certain customers pay faster, others pay slower obviously. But if we can get to 45, then I think we are doing pretty well in receivables.

On the inventory front, what we try and do that is -- the goal is to maintain a consistent inventory balance as a percentage of sales and improve that, obviously, every year. Our goal on inventory is to improve the inventory balance as a percentage of sales by half a point -- 50 basis points every year. Right now, we are not meeting that, and that is why we are disappointed. As a lean Company, we think we can do better. Overall, that would be our goal.

John Barnes with BB&T Capital Markets.

Hey, good morning, guys. Al, I have listened to the rails announce earnings now, and each of the rails is talking about -- I just got off the Norfolk call, and they were talking about 6,000 cars in storage. Union Pacific last week talked about 17,000 cars in storage. As you see them beginning to deal in this lower traffic situation and build up the stockpile of equipment, going back to --.

I got on right as Brannon was asking -- he got done asking a question; so I apologize if you already answered this. But given that level of storage, I mean obviously I think there is now a debate going on. Are we going to see material railcar orders over the next several quarters?

Secondly, in terms of aftermarket, could you just talk to, have you been able to look at that degree of idled equipment before and what it has done to your business? Kind of what are your thoughts right here?

Yes, our marketing people actually sensed that trend earlier in the year and started talking a little bit about cars being idled. Anytime you see a decrease in the carloadings and what we have seen in the railcar build and orders, it is obviously a concern to us.

I think that from an OEM standpoint, we continue to monitor it. The way we personally deal with it, which I think is the most important part of it, is that we -- only being 20% tied to that railcar build -- we are concentrating on growing in other areas and focused on our growth initiatives.

As we showed this quarter, with 20% down year-on-year, we were able to increase our Freight portion of the business. We will continue to concentrate on that, and that flows through on the OEM basis.

The aftermarket, obviously when the carloadings go down and their usage goes down there is going to be a slight decrease. But I think the history has shown that we don't anticipate the steep dropoff in the aftermarket. That is why we balance our business with 50% of our business -- about 50% in aftermarket, 50% in OEM.

We would expect it to come down as they utilize their equipment less. But not to the degree where carload -- I mean, OEM car build would go.

That drop in the future, a lot of the experts are talking about deliveries in the 50,000, even with a 67,000 car backlog. So we are very aware of it, we are very concerned about it, and it does impact our business. But everything about what we do when we get into our strategic sessions is about how do we dampen that cycle and be less cyclic.

Okay, all right. You know, I hear your frustration with the snail's pace at which decisions are made in the rail industry, and especially with a couple of your technologies right now. Is there anything that you can do to incent that decision process to speed up a little bit?

Is there an opportunity? Whether it is implementing some drop-dead date on, hey, after such a date we are only going to offer ECP brakes. Or is there something you can work with as part of this safety legislation moving through Congress that you get something that mandates some of this?

I think I was encouraged to see one of the provisions in there called for more signaling on the dark territory, which I think your technology addressed when we were at your demonstration. Is there anything you can do a little bit further to incent that decision process to speed up a little bit?

I think it is really on our shoulders to perfect the technology, make sure it is available, work to show how we think it is most -- would provide cost savings, safety productivity, and efficiency.

We really do not support the mandating of this type of equipment. We think that the actual value of the equipment should speak for itself, and we are seeing that. We are starting to see progress.

I think we have to be out there demonstrating. I think we have got to show where the cost savings are going to be, where the efficiency is, how the safety is improved. You know, the railroads spend an awful lot of money -- I don't know of another industry that spends 20% of their revenues to capital. That capital that they do spend, there is a lot of different places it goes, and there's a lot of competing factors.

We just kind of feel that the areas we are working in should get a higher priority; and it is our job to convince them of that and show that we have the right technology to solve their problems. That is what we are concentrating on.

All right. Without giving too much away, I don't want you to show everything, but as you talk about moving into ancillary businesses or extending the use of a product into another sector, can you give as a little bit more meat around the? Kind of what is on your wish list, or what do you view as any easy move into a similar type or a similar type business?

Okay, well, one thing we have found is there is no easy moves. But we have been successful. Right now, 10% of our businesses outside of rail, and we have worked pretty hard to get it to that point.

We really like things that are not far from our core. I think these examples that we have given in the past are excellent examples. I mean, there is a great opportunity in friction outside of the railway. We have tremendous technology.

We have got plants on five continents. We have got -- we just visited our operations in Europe. These are tremendously high-tech companies that we can use these friction products in other areas. So that is one of the things that we're really concentrating on.

The other is these heat exchangers that we talk about. So, I think that there is opportunity. We have to get the teams focused on it. Whenever you're a rail company, the one thing you don't want to do is get too far from the core and get into areas that would distract our management from doing their job. So there is a little bit of a balancing act, John.

Okay. Then last question, you've been doing a pretty good job of updating us on your guidance. And thanks for raising that, by the way. But when do you start to wrap up your view on '08 and provide some guidance on what you expect in '08?

Okay, what we're doing right now, John, is we just started our budget cycle. We will be meeting with every division and then presenting it to the Board in December.

We will be providing, as we have done in the past, '08 guidance early in January, some point in January. We are right in the process now of validating our plan with our budget process.

Okay. I fibbed a little, one more question. I hear in terms of there not being as many opportunities to take a look at, are you starting to re-examine again your use of cash?

If these opportunities on the acquisition front are going to come quite as fast as you hope, and given that you are generating pretty decent free cash, are you starting to look a little bit more aggressively at other uses?

We do. Every Board meeting, we take the time to take a look at what we need to be able to do with it. As we have said in the past, we would prefer to put that cash to use to grow the Company, because that is the best way to generate value for our shareholders. However, if there's -- opportunities are not there, then we have a lot of other options that we weigh at every Board meeting.

Okay. Nice quarter. Thanks for your time.

Lawrence Casse with M Partners.

Hi, good morning, guys. First question. In the quarter we saw a very healthy revenue increase. Was there any one contract or large division that accounted for that? Or was it spread across the board?

I think it was really across the board. But if you take a look at the growth, year-on-year quarter, $77 million of the $86 million comes from Transit. Okay? Of that, $29 million I believe was acquisition driven. There was some FX involved in the overall of about $5 million of the $86 million.

I think the only thing that was a little different in this quarter that somewhat surprised us is that we saw some really good strength in the international areas, where you normally have the European holiday impact, where the month of August there is not a lot of activity. I think some of the demands were strong enough that -- stronger than we had anticipated there.

We also -- as between any two quarters, what happens when you have contracts or deliveries in the OEM or the aftermarket business, sometimes you could have a large delivery of a product at the end of one quarter that might have otherwise gone a couple weeks into the next quarter. But other than that, there was nothing that awful strange about the quarters.

Okay. Could you comment on how the Ricon integration is going?

The Ricon integration is going well. We have been out there a number of times. We have got an integration team on the floor there, and we are excited about the opportunity. We think that the reasons why we acquired the company are very valid, still. It gives us some dampening from the fact that it is not directly tied to rail.

The bus market is doing well. It had 25% of the business internationally, which is a good foundation for European growth. We think there's a lot of opportunities, and we are finding them, related to synergies of applying our Wabtec Performance System.

That is key to us. If we can't make the business better based on that, then sometimes that weighs heavily in our decision to move forward with an acquisition; and that has proven out well as well.

Okay. Some of the international initiatives you were talking about, China, Russia, South Africa and so on, are these in the nature of more of a long-term growth plan? Or any of these going to significantly impact revenue in the next 12 to 18 months?

I think some of them could have an impact on the next 12 to 18 months, Lawrence. I mentioned in South Africa we are very close to closing a joint venture arrangement. In case you didn't know, we had signed a contract; I think it was about a $12 million contract with the railroad there called Spoornet, to our electronic control pneumatic system. So we already have a foothold there and an order and a relationship.

But there is also a market for our other braking products as well as our friction products. So we will be hopefully announcing soon that joint venture has been closed and that we can start producing this. So that should have pretty quick impact.

We also have a lot of things going on in similar nature in other countries that will have an impact in the short term.

Very good. Just one last question. The tax rate was a little higher than expected. I think it was 38.5%. Is that kind of unusual? Or is that the rate we should look out for going forward?

No, that is a little higher than normal. If you take a look at our tax rate, I will expand on your question a little bit, because I think probably other people may have the same question.

One of the things that has affected our tax rate is the adoption of an accounting pronouncement called FIN 48. FIN 48 makes you basically do two things. It makes you take a different approach to accruing a tax liability. Again, these aren't cash payments, these are strictly accruals, and I will emphasize that.

The second thing FIN 48 does is it makes you accrue penalties and interest when you take this more conservative approach into accruing a tax liability.

So what you'll probably see over time is -- we just recently did an analysis with the Board as a matter of fact that analyzed our tax rate. The provisions of FIN 48 have basically increased the way we accrue for taxes by about 1% to 1.2%.

So where historically our tax rate has been about 36.5%, really principally from the adoption of this you'll probably see it increase more to 37.5%, somewhere in that neighborhood over time.

This quarter is at 38.4% because we accrued -- it is always going to vary, because you may accrue for a specific item where you think you have some exposure; or you may release some items where you no longer feel you have an exposure. So it's always going to go up and down. But on a continuing basis, yes, that is higher than our normal. Our normal, you'd basically be somewhere in 37.5%, somewhere around there, give or take.

Okay. I am not sure if I understood the settlement with Bombardier. But is it done or are there further charges?

The bottom line is it is done.

Okay, it's done.

So you don't need to understand the particulars; it is done. You won't see any further liability. One of the principal points of the settlement was that we give a release from all the parties. So we are done.

Okay, and the Canadian charges are done as well?

Essentially our restructuring effort that we announced almost -- over a year ago, are essentially complete. The only thing left on that is what is called settlement charges, and that takes a few years to flow out.

We had anticipated that the charge for the year would be around $0.05, and that is exactly where we are at. The future charges there are a few million dollars; but they are going to be spread out over probably the next 36 to 48 months. I am getting Pat Dugan shaking his head up and down here. So three years.

Okay, thank you.

Mr. Wesley, gentlemen, we still have several more questions. Were you able to field those still?

Sure.

Art Hatfield with Morgan Keegan.

Morning, guys. A couple, just a couple housekeeping things. For Alvaro, I missed what you said the cash balance was at the end of the quarter.

It's about $158 million at the end of the quarter, Art.

And you had debt of $150 million?

Right, so the cash still exceeds the debt.

Okay. That is fine. But that is one of the reasons why we saw interest expense go up, because of the lower cash balances?

Right. Basically during the quarter, we spent about $72 million, $73 million for Ricon; and we get about 5% of that. I'm sorry, second quarter.

5% on that.

Lots of people here correcting me whenever I speak, so that is a good thing. We basically get about 5% on our cash balances, which we use to offset the interest expense on the bottom. So that is (inaudible) that is correct.

When did Ricon close? Refresh my memory.

That was early June.

Early June? Okay, that is close enough. Kind of a broader question, how we think about the Company going forward. I know you will help us out and give us guidance at some point. But if you could kind of from a philosophical standpoint help me think about going forward.

If you bear with me just a second, if we go back to -- as we came out of the bottom of last cycle, and you have done a great job of transitioning or repositioning the Company now. But earnings were driven back in '04 and '05 predominantly by very strong revenue growth. '06 revenue growth had slowed; but we got real strong earnings performance because you were able to do a lot on the margin side.

This year, we're seeing pretty strong revenue growth. Margins are a little bit down because of mix, no big deal. But a lot of that growth this year is driven by a lot of the new Transit contracts and the growth in the backlog that we saw in the prior year.

Now that we have seen backlog kind of flatten out, as I look forward, how do we think about growth? Because as the cycle lengthens, we have all heard the talk about rail volume slowing down. And as long as I have followed you guys, you have always talked about freight ton miles being critical to both the OE and the aftermarket side in the Freight business. And we are not seeing the Transit business grow.

Really outside of acquisitions, how should we think about growth over the next year or two? Both from a revenue and earnings standpoint, and really what is going to drive those two metrics.

Okay, Art, I think you did a nice job of recapping how -- the history really. We had the revenue growth. As you said, in '06 we regrouped and really focused on margins.

If you look at this year, we are kind of doing a combination of the two, but we also have the revenue is very positive. I think, to be successful into the future, we are going to have to have a combination of the two.

We face the brutal facts. The brutal fact is that this is not a double-digit growth business that we are in. But we think with our growth strategies and without repeating them time and time again, we think we can make and have intrinsic growth going forward.

We know there is going to be some downside related to railcar build and the cyclicality of that. But at the same time, we think that we should have equal focus on cost reductions and margin improvement. And we think we have a long way to go.

We realize that continuous improvement is what the Wabtec Performance System is about. We think we have opportunities in sourcing. We have opportunities in moving more product to low-cost platforms. We have pricing opportunities. We have got this lean manufacturing opportunity.

I think that if the market does what experts say it will do, we need a strategy to minimize that dampening. We have got not -- and everyone in the Company knows my term -- we are just not going to ride the rails. We are going to find ways to try to improve the profitability.

If you don't have the revenue growth, we will push harder on the cost reductions. But I think our growth initiative is going to allow us to have some good growth in other areas to offset this decline.

Are there big things out there in the near term, outside of the Freight real business, that you see that can mitigate a further slowdown in that business?

Are you saying that --?

Well, I mean, are there big potential new Transit opportunities? New markets that you can enter in the near term? Or other growth avenues in the very near term that, if the Freight rail side of things really slows down over the next 6 to 12 months, that would mitigate that?

We don't feel that there is any big item. We really feel it is going to take a lot of small things. It is going to take a lot of effort by our whole team to really focus on incremental improvement in growth in those areas where the opportunity exists, Art.

Okay, that is helpful. Thank you.

Paul Bodnar with Longbow Research.

Just a quick question here, on the backlog number you had for the quarter there in terms of the 12-month backlog in Transit. How does that break down between OEM and aftermarket? Is that still about 90% of that is OEM? Or what is the breakdown there, I guess, going forward?

We really don't break down the backlog between the two. But I think certainly the majority I would say probably, just to ballpark it, but 70% of that is OE.

Okay, about 70% or so? In the quarter, what was the actual breakdown between OE and aftermarket in Transit? I don't know if you gave that for the specific segment, or just the whole Company.

Give us one second here.

In Transit, it was 49% OEM and 51% aftermarket.

Okay. You expect any kind of change to that going forward? Or pretty much kind of remain in line for the next 12 to 18 months or so?

If you look at the same quarter last year, it was 47/53. Second quarter '07 was 45/55 so I think it just --.

What happens is, Paul, historically Transit has been about 60% aftermarket, 40% OE. But once you start adding these commuter locomotives, which are big-ticket items, it shifts that ratio more to a 50-50. And obviously we have a significant amount of that in the backlog. So I think, going forward, that is a pretty reasonable percentage to use.

Okay. Next, just on the -- in terms of acquisition, I guess. What kind of savings do you still have out there in terms of SG&A, things along those lines, from the acquisitions? Should we expect that rate as a percent of sales to kind of decline going forward? Or what is available out there, I guess, in terms of savings there?

If you look at the SG&A, the impact quarter-to-quarter, if you look at second quarter to third quarter, the increase in SG&A was -- total SG&A was like $5 million; and $2.7 million of that was related to the one-time.

Okay.

So the balance was the acquisitions. So we were able to get -- we are getting good leverage in the operating expense area on the acquisitions.

If you look back to '06 the acquisitions accounted for about 60% of the change. It was like a $9.5 million change. About $5.4 million was really related to the acquisition.

Okay.

We think we can continue to get leverage there. There is also -- we try to lean that as well. We think lean just doesn't happen on the manufacturing floor. As most of the departments will know, we expect lean principles to be applied to the functional departments as well. So there is always opportunities there.

Okay, thanks a lot, guys.

Waymond Harris of Bear Stearns.

Morning, gentlemen. Most of my questions were answered, but I actually had one follow-up, Al. I think you mentioned in a response to one of the prior questions that with respect to ETMS you have been working with the rails in terms of interoperability. As far as I understood, you guys were far ahead of everybody else. I didn't know if anyone really had a product out there like that.

So I was wondering if this was a case where you would have to maybe license your technology to somebody in order for there to be interoperability or another product out there. Or did I misunderstand that?

Yes, I think the interoperability that I was referring to is between the railroads. I think that your second portion of the question is a valid question; and that is -- are there other people working on this?

And there is. There's other people that have worked on positive train control, and it's being deployed in other parts of the world, primarily in the transit area. But not very similar to what we are doing. But there is competition, and there's other people that are involved.

Our program and our product is moving ahead, I think at a pretty good pace. There will be some requirement for interoperability if there were other product that is accepted in the marketplace, Waymond.

Then my very last question is -- you mentioned, I think in response to Brannon's question, that the Freight growth, much of that we saw was related to heat exchangers in markets other than I guess what we would typically think of as Freight rail markets.

Going forward, when we try to think of modeling that segment of the market, how much of the growth should we assume is actually coming from markets that we don't traditionally think of as Frieght?

That is a very difficult question. You would have to really start breaking it down much further than we would like to do, because it gets complex.

The one thing that we do say is our locomotive businesses are tied to locomotive builds. The railcar build is about 20% of it. We have 50% in the aftermarket. So it's a very difficult question to answer.

I think if you want to try to get a better understanding of that, we can try to help you maybe off-line. But I am not sure that I could give you that off the top of my head.

No, that's fine. I will follow up off-line. Thanks, gentlemen.

Steve Barger with KeyBanc Capital Markets.

Good morning, guys. This is actually [Garret Myers] on for Steve Barger. A couple quick questions. The first one, I have recently read several stories regarding railcar shortages in emerging and developing markets. Have you guys been taking any inquiries from foreign manufacturers for OEM or aftermarket foreign components? Or have you talked to any US railcar OEMs to maybe partner up and supply countries outside North America?

We do supply our Freight product components outside of the US, especially in the countries that utilize similar technology as North America, which is the AAR-approved product. So we do get a lot of inquiries.

We are seeing a lot of requests out of India where they are starting to really put a lot of emphasis on their freight markets. We have always been in Australia, South America. So, yes, we are seeing quite a bit of inquiries.

Okay. One last one, on the Transit side internationally, with new regional opportunities to take share or introduce new products, realistically, how much faster than the market can you grow?

Well, if you look at the market opportunity in Transit, the market in Europe is five times the size of North America. The market in Asia and China are five times the size of North America. So those two are about equal in size.

The growth that we really see in Transit is primarily in the Asian and China markets right now where there is tremendous amount of attention to the infrastructure there. So they are going to, obviously, grow a lot faster than North America, although North America is growing nicely as well.

We are primarily, I think, in the past most of our business -- a majority of our business is North America when we talk about Transit.

Okay, thank you very much.

Matt McGeary with Sentinel Asset Management.

Good morning. Just a couple of quick housekeeping if you don't mind. When you talk about 20% of sales being linked to railcars, is that all OE? Or can I assume a 50/50 breakdown between OE and aftermarket?

All OE.

All OE? Okay, thank you. What do you expect for capital spending for the full year?

Probably around $20 million give or take a couple million.

Yes, year-to-date. It runs about 4 to $5 million a quarter. We typically budget more; and then when it comes time to do the actual expenditure, we kind of dig deep and make sure it is absolutely needed. But historically, they have run about $20 million and I would expect this year to run somewhere around there.

With acquisitions and with other needs they may creep up slightly as we go forward. But basically year in, year out, they should be in the neighborhood of about 20, $25 million.

Okay, and so for next year, assume a similar trend? There is no -- are there any big capital programs?

Yes, we are not giving specific guidance for next year. But in answer to your question, there is really nothing specific that I see out there that would materially increase the need for CapEx going forward.

Great, thank you.

Mr. Wesley, gentlemen, I see no further questions at this time. Would you like me to give the instructions one more time?

No, I think that should do it.

All right, yes, sir. Okay, this does conclude today's event. We thank you very much for participating. At this time you may disconnect your lines. Thank you.