美國西屋制動公司 (WAB) 2008 Q2 法說會逐字稿

This is the Chorus Call Operator. And welcome to the Wabtec Corporation second quarter 2008 earnings release conference call. (OPERATOR INSTRUCTIONS.)

I'd like to turn the conference over to Tim Wesley, Vice President, Investor Relations. Mr. Wesley, please go ahead.

Thank you, Andrea. Good morning, everyone. Welcome to our second quarter earnings conference call today.

Let me 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 take your questions. We will make some forward-looking statements during the call. We ask that you please review today's press release for the appropriate disclaimers.

With that, I'll turn it over to Al Neupaver, our President and CEO.

Thanks, Tim. Good morning, everyone. What I'd like to do is review the second quarter results with a strategic update, take a look at our current market conditions, and the outlook for the rest of the year. I'll turn it over to Alvaro, and he'll cover the financials in a little more detail for you.

We had a record second quarter where, once again, many things went right for us. In the quarter, the sales were strong, with an increase of 20% to a record $390 million. We had a record earnings per share of $0.69, that's 21% higher than a year ago quarter. Our backlog is at about $1.2 billion. This is up 3% from yearend, and it really indicates a strong performance given our record sales in the quarter.

These results are being driven by good progress on our strategic growth initiatives. Those initiatives are global and market expansion, new product development, aftermarket expansion, and acquisitions.

We continued to make progress on all of our strategic initiatives. In the second quarter, a little more than 40% of our sales were outside of the U.S. We had good growth in Europe with our friction businesses, and in the UK with our transit car refurbishment business.

We also saw growth in the heat exchanges for the power generation market. Our aftermarket service businesses in North America continues to grow, as well. We had significant activity in the corporate development area. We completed an acquisition of POLI on June 30th, just after our accounting period ended. This acquisition gives us a base to grow from in the European brake equipment market. We're working to keep our pipeline filled with other opportunities.

Based on our performance and outlook for the rest of the year, we have increased our 2008 guidance. Sales growth should be between 12% and 14%. It was just high single digits. EPS of about $2.65, it was at $2.55. Both our freight and transit markets are expected to remain strong at a high level, with international being one of the key growth drivers for our businesses.

Keep in mind, this will be the second year in a row that our sales and earnings are forecasted to increase, even as the U.S. freight market is down. This shows the strength of our diversified business model and that our strategic initiatives are paying off. And we continue to drive our margins higher through the Wabtec Performance System.

Now, let's talk a little bit about the market conditions. Our freight rail market, thus far this year, rail traffic is up, ton miles are up 1.6%. overall car loadings are up slightly, also, with gains in major commodities, such as coal, chemicals, and agricultural products, more than offsetting lower volumes in housing, autos, and intermodal traffic.

This market is driven by the economy, and we will be watching this very closely. As expected, railcar deliveries will be down this year, but still at a good level. Most industry experts still expect low to mid 50,000 cars being delivered this year.

The second quarter numbers are not released yet, but our total data suggests that orders and deliveries were similar to the first quarter. If that's the case, then the backlog should be about 60,000 units, more than a year's worth of production. The locomotive market remains strong and OEM builds are expected to be up in 2008.

Taking a look at the transit market, we continue to see a strong market driven by federal funding and passenger ridership. Federal transit spending is up 6% this year, to a record $10.3 billion. The current spending bill runs through September 2009. It's likely that Congress will wait until the new president takes office next year before beginning any serious discussions about future funding levels.

Ridership continues to increase across the U.S. It's up 3.3% in the first quarter, after a 2% from last year, increase from last year. Setting records in cities such as Dallas and Charlotte, this growth has also driven some incremental aftermarket growth for Wabtec.

High fuel cost and environmental concerns about emissions continue to drive growth and new investment. For example, there's new computer rail activity in Minnesota, Utah, and New Mexico. The international transit markets are much larger than the U.S. and our market shares are much smaller, so we expect faster growth in overseas markets.

I'll turn it over to Alvaro, who will drill down into the financial results for you.

Thanks very much, Al. Good morning, everyone. I'm pleased to be able to review what we've felt was a very good quarter, with you, this morning.

Highlights for the quarter include strong sales and earnings growth, continued operating margin improvement, which is an area that, as Al mentioned, that we continue to stress, a growing backlog and good progress in executing our various strategies. As Al said, again, we're very optimistic about the future, but recognize that we face challenges with the uncertain economic outlook, which can affect the rail industry.

Now, to get to the specific numbers. Sales were 20% higher than the prior year quarter and hit a record $390 million. Three quarters of this sale, which we think is more impressive, three-quarters of the sale increase came from organic growth, with an incremental $15 million coming from the Ricon acquisition, which closed in early June last year.

The Transit Group led the way in the sales growth with a strong increase due to several factors -- car refurbishment projects in the UK. Some of you that were with us for our analyst meeting there saw our UK operation and the growth it's experiencing. Friction products, particularly in Europe. Transit car components in North America. And the Ricon acquisition, which is in the transit field, as I mentioned earlier. This is the type of broad based growth that we aim for, and we like to see.

But the growth was not just limited to the Transit Group. The Freight Group sales were also higher than the year ago quarter. We believe there's a very good performance, as OE deliveries have actually been down year-over-year, and we've been able to offset this lower demand for OE freight car components with growth in other areas, such as heat exchangers in the power gen market, we classified heat exchangers in the Freight Group, and international sales, in general.

Margins, again, one of the areas of our key focus is to drive margins higher, operating margins, in particular. For the quarter our operating margin was 14.3% versus 14.1% last year. As a percent of sales operating expenses were lower at 13.5% versus 13.8% last year, indicating the strength of our operating leverage.

We think that is a good performance, given the sales growth in transit and the addition of expenses from the Ricon acquisition. Obviously, the margin improvement is also due to our efforts to lower costs through sourcing and lean manufacturing, and increased volume, which provides operating leverage, as I mentioned earlier.

Now, to give you some numbers. Overall, one of the areas that I think we've mentioned in prior phone calls, we really wanted to stress with working capital reduction, and I'm pleased to be able to say that we've made some progress in this area.

Last quarter, working capital, not including cash, was about $216 million. This quarter, in spite of the increased sales, working capital was about $191 million, so a significant reduction there. Receivables decreased by $2 million. Inventories were about $10 million higher, but payables increased by $13 million offsetting some of that increase. Again, we think this is a good performance, but this is a key area when you're a lean Company, as we are, and we think we can do better.

Cash wise, at quarter end, we had $242 million in cash, up from $175 million at March 31. Cash during the period derived from operations was $64 million, but keep in mind that just after the end of the period, we spent about $80 million on the acquisition of POLI, that I referred to earlier.

The balance sheet does remain in great shape. Obviously, we have plenty of capacity to invest in our growth strategies and acquisitions. As a matter of fact, if you've been keeping count, you'll notice that since 2005 we've made five acquisitions, and we've financed all of them with internally generated cash flow, which we think is a very meaningful accomplishment.

To give you some of the numbers that we typically give during the phone call, depreciation for the period was $6.2 million versus $6.1 million last year. Amortization stable at $912,000 versus $992,000 last year, and CapEx at a very modest level of about $4 million this period versus $4.9 million last year.

Another number that we -- that you all are interested in, and we like to disclose is the backlog number, which again indicates another positive indicator for the future. The rolling 12-month backlog, this is the backlog that'll be executed over the next 12 months, was up 18% and the total backlog remained over a billion, even with the record sales quarter.

The total 12-month backlog was $690 million versus $582 million at the quarter ended 3-31-08, so that's the first quarter of '08, not last year, and it's up over $100 million. The segments of this, of the $690 million, $178 million was in freight, versus $180 million in the first quarter. And, again, the freight is not a backlog driven business, so it's not as significant. And transit, of the $690 million, $512 million is in transit versus $402 million in the first quarter, indicating a continued growth in transit.

The multiyear backlog, in other words, the total backlog, regardless of when it's going to be executed, grew from $1.1 billion last quarter to $1.2 billion this quarter. Of the $1.2 billion, $221 million is in fright, and $940 million is in transit.

And, with that, I think that concludes my remarks, and I'll turn it back over to Al.

Thanks, Alvaro.

Once again, we had a strong performance, with a record $0.69, record sales, and a growing backlog. Most of our end markets continue to be positive, which gives us the confidence to increase our sales and earnings guidance, although we are keeping an eye on the U.S. economy.

The diversity of our business model, freight and transit, aftermarket, and OEM, NAFTA, and international are serving the Company well. The Wabtec Performance System provides an established culture of lean manufacturing and continuous improvement. We have an experienced and dedicated management team.

And, with that, we'll be happy to answer your questions.

(OPERATOR INSTRUCTIONS.)

Our first question comes from Wendy Caplan of Wachovia. Please go ahead.

Good morning.

Good morning, Wendy.

Good morning, Wendy.

A couple of questions about international growth. Can you remind us, Al or Alvaro, how much of the business today is international versus U.S.? And give us the year ago comp, just so I have it handy? And, also, talk about how the international business grew this quarter and versus the U.S.?

Okay. International sales this quarter was a little over 40%. If you look at first quarter of '08 it was about 44%, and the second quarter of '07 was at 39%, so we've, as a percentage of business, it's really held pretty steady. We think there's a tremendous amount of opportunity, though, in the international arenas, being driven in both freight and transit markets. The freight market really is being driven a lot by the countries that are doing a lot of mining and need freight capability and our technology.

The transit market, we're, as I said, during the remarks, we're a very small player in a very large market, and we feel that there's a lot of opportunity for growth there, and one of the reasons that we are excited about our strategic acquisition of POLI.

Before I ask about POLI, could you just tell us what the international business grew in the quarter, and domestic, as well, please?

Okay. By group, or do you -- overall, Wendy?

Overall is fine. But you can do group, if you want to give me that?

Okay. Do you have that Pat?

Yes, actually, Wendy, you said you had -- we have it here, we just need to add a couple of numbers. You said you had a second question, if you can give us one second we'll add it up, and then we'll do it at the conclusion of your question, how's that?

That would be fine, Alvaro. Thanks.

My other question was about POLI. If you could speak to us about why you think -- what kind of opportunities POLI represents?

Okay. There's a tremendous amount of strategic rationale for the acquisition. It really expands our product line into your -- with what is called a "UIC approval" of their products, and that is a major hurdle that we have to overcome in order to participate in that market. This way we do not have to develop these products on our own and then wait several years to get them approved. They're key products, they're brake disks for high-speed applications and other UIC approved brake valves and tread brakes. These are products that we do not offer today.

Now, POLI, although it's third in the marketplace as far as market share, behind [Conoran Fab LA], we believe that over time we can increase that share when combined with our technology and marketing capabilities we have in our Transit Group. It's going to take a few years to do that, and given the long cycle nature of transit, but it will be faster than if we were trying to develop our own products and in those markets.

POLI, it should add modestly to our revenues in the second half. The EPS impact in '08 will be minimal because of purchase price accounting. We still expect it to be, and it will be accretive in the first 12 months.

I think the exciting part about POLI is the fact that this European market is about five times that the market size of the U.S., and it continues to expand because a lot of that technology right now, the European technology is being exported to Asia and that, again, will open that market up somewhat to us. And, not only that, they also have freight products, and we have not been much of a player in the freight market in Europe.

So, all in all, we're really excited about the opportunity, and I think that it is a strategic acquisition and we look forward to growth into the future, but it'll take a little bit of time to really get the fruits of that acquisition.

And to answer your question, Wendy, quarter -- year-over-year, last year international sales were roughly about 125, and this quarter they're roughly about 150, 155, somewhere in that neighborhood. Ricon added to that, Ricon had a significant presence in the UK. I'd say probably maybe about $5 million to $10 million of that is Ricon and the rest is organic.

Okay. Thank you very much.

Sure. Thank you.

You're welcome.

Thank you. Our next question comes from Kristine Kubacki of Avondale Partners. Please go ahead.

Good morning, gentlemen, how are you?

Good.

Good morning, Kristine.

Hi, Kristine.

I just wanted to ask about if you could provide some outlook on going one step further on the acquisition question, on potential acquisitions in terms of pipeline, and the overall attractiveness of those potential acquisitions?

Our pipeline, obviously, is full and we're very active right now. We've got a lot of activity in different parts of the world. We really can't comment on specific acquisition targets that we have, nor their attractiveness.

But I will remind you that we're looking for acquisitions that are strategic to our business, number one. We're looking for acquisitions that have certain hurdles from a financial standpoint. We think that the multiple, the upper limit of that multiple, dependent on how strategic it is, could be seven to eight times the EBITDA. We're looking for acquisitions that are accretive in the first 12 months. Obviously, we have to have -- our hurdle will be greater than our return on capital. And, lastly, we take a look at it from an economic profit standpoint and try to make sure that it's adding value to the Corporation.

We are very active, and I wish I could offer you more information about that activity, but it will be forthcoming.

But your outlook hasn't slowed down in any way?

No, by no means.

Okay. And then I was just -- if you could give us a sense, I mean the operating margin picked up again in the quarter, I was wondering if you could -- I know you'll file this in the Q, but is there any sense you can give us on the operating margin trends? Is transit continuing to close the gap with freight operating margin?

Transit margins, as we said, we're going to be focused on that, and it will show continuous improvement. It'll be a small increment, but it will show improvement over year and over quarter. And freight margins, we -- again, there, we're looking for improvement, obviously, it's a little harder to improve on the level that we have in the freight area.

Okay. And then one final question, I was wondering on raw material pressure is obviously a focus for everyone at this point. How do you see it going forward and impacting Wabtec and how are you trying to deal with it?

Obviously, raw materials is a concern. As you know, commodities have really peaked in the last few months and continue to be at very high levels. The demand for these commodities on a worldwide basis, as we see the industrialization of China is causing a very difficult market situation.

I think that, in general, Wabtec, we have lived through the tough times back in the '02 to '04 area, where there was a similar spike, and I think that we learned our lesson, and that in general we find and we go around and ask this question as we talk to each of the Divisions, you know, how are they protected?

And we look at it from a number of ways. One is to make sure that we have surcharges or escalators based on our increase. If -- we also if that's too difficult in the case of a contract, we look for other means in order to make sure that we have that particular raw material covered.

I can't say that we're 100% covered on some of these increases because there's always one change in a commodity that you didn't think about, but in general we feel that we have covered ourselves fairly well when it comes to raw material escalation.

Okay. Very good. Thank you very much.

Thank you, Kristine.

Thank you. Our next question comes from Art Hatfield of Morgan Keegan. Please go ahead.

Thank you. Hey, morning, everybody.

Hi, Art.

Hi, Art.

Hey, Alvaro, can you tell us how -- what the organic growth rate for revenue was in the second quarter?

Yes, revenues went up quarter-over-quarter by about $65 million, about three-quarters of that, so let me do the $65 million -- about $45 million, $45 million of that was organic, Art, and the rest came from acquisition.

Okay. Did you have any positive or negative impact from foreign exchange?

We had, I would say, a slight favorable impact from FX. Obviously, the dollar is not at its strongest point. Somewhere between $5 million to $7 million of revenues benefitted from the weakening dollar.

That's from last year.

From last year, yes.

And is that -- the $5 million to $7 million, would that all fall in like that organic number, or is part of that (inaudible)?

Technically, it's in the organic number, Art.

Most of it is in the organic.

Right, (inaudible).

No, that's fine.

You know, one thing I should say, though, its affect on EBIT is relatively negligible.

Okay.

Right now, we're fortunate in that we -- just because of the way our operations are set-up, we have cost centers in certain countries, and then put P&L centers in other countries. We're in the fortunate position that we don't have to do a whole heck a lot of hedging, because we have a natural hedge, because of the nature of the operations tend to offset each other. So its affect on EBIT was negligible.

Is that a result of planning you did? I remember, what was it, five, six years ago when the Canadian dollar went against you, you really got hurt there. Is that impact today a result of planning and changes that you made from--?

I would basically say it's a result of excellent planning by the CFO, yes. I'll take all the credit for it. No ...

We all know that this happened before Al got there.

There's two components of it, so you're absolutely right. Part of it is a deliberate effort on our part, as we saw the dollar weakening, obviously, our cost centers in Canada became less competitive, and we have shifted some of our costs from Canada to lower source countries.

Okay.

And that was a result of deliberate planning. The fact that we're in a natural hedge position right now is the way the -- that's one thing we watch basically every month, and we look to see how the currencies are moving, and that's not anything that we can say is a result of our planning. What we try and do is anticipate what's going to happen with the markets as best that we can, plan accordingly, and if we think we need to hedge, we'll hedge. But right now, like I said, we're in a natural position.

Okay. I know you guys don't -- have not given guidance for next year. I know you're not ready to talk about it, but unfortunately we have to put estimates out there.

And I want to think about a hypothetical, for instance, if you look -- as I look out to 2009 and I try and make assessments as to what the freight car market may look like, just kind of broadly speaking, Al, what does that market need to look like for you to be able to grow earnings 10% or better next year? Can you do that if the market is flat? Can you do that if, say, freight car builds drop to the 40,000 level next year?

Let's first take a look at the freight markets, you know, I think that what we've seen, Art, is obviously when we talk about freight markets, we're talking about primarily railcar build.

Right.

And, as you know, only about 20% of our business is really tied to railcar build, so what we've been able to do is manage our freight business by really focusing on our strategic initiatives, you know, international markets, the after market, you know, acquisitions, market expansion. And we've been able to more than offset the decline that, you know, you'll see from the previous year. I mean the previous year drop in railcar builds in '07, we were talking about deliveries of I think 63,000 cars, and we're talking about low 50s this year.

Right.

And in '06 it was 74,000. So we've been able to manage our freight business and look at other areas to grow it, and we would like to be able to continue to do that into '09, and we see no reason.

As far as what that railcar build is going to be, you know, probably your guess is as good as mine or any of the experts, but I don't see that particular number particularly going up. I think it would drift down, if anything.

More importantly is the ton miles and utilization of our freight line, and even in a recessionary period, as we're in right now, it's a good business to be in. The freight markets, the ton miles is up 1.6%. When you look at what it costs to move a product, just between a truck and a train -- there's an advertisement, and I've read this a number of places, CFX actually has the advertisement -- you can move a ton of freight, 436 miles on a gallon of diesel fuel. I mean that's compelling when you think about the utilization of the freight line.

So I think we're -- it's a good market to be in, and I think the price of oil is not about to be retracting any time soon, so I think that market is a good market. If we look at transit, we know that we're in about halfway, a little more than halfway through the spending bill, just here in North America, and that bill continues through September 2009. And the spending will continue on, and they'll come out with another bill. And, again, ridership is up, and it's being driven by the price of oil, and that's a good market.

You look at the opportunity globally that we have internationally those markets and transit are so much larger, and I talked a little bit about the freight market.

Can we continue to improve? You know, our goal has always been to have double digits earnings through the business cycle on average, and we know that we're tied to some cyclic products, and it's really it's the burden that we have to really prepare for that and be planning for '09 and 2010 right now. We just went through our strategic planning processes, and each of those businesses are required to take a look at that and come up with a plan, and that's how we're approaching it at this point.

I think that -- I hope I've answered your questions?

Yes. No, so you've gone through the strategic planning process. I mean do you care to give us guidance for next year?

Yes, I would love to but [Tim] won't let me.

All kidding aside, I guess, yes, what I'm hearing from you then is that you don't necessarily feel handcuffed to that business. It was it is, it's cyclical, but you feel comfortable in your ability to plan for that inevitable downturn, which we've seen the last couple of years, and you've successfully done that. But even if we see further downturn in that business, you feel good about your ability to at least give it -- have a good opportunity to still grow earnings despite that?

I think you face the brutal facts of the business you're in and then we plan around it. Does that mean that we're always going to be able to overcome any of the turns, I can't say that with any (inaudible).

No, I understand that, but you just don't feel completely handcuffed to that -- that line of business, and--?

We used the phrase early along, you know, we were not going to ride the rails.

Right.

And we're going to make, you know, we're going to control our future as best we can. It's a good business to be in right now, the rail business.

Do you see any other opportunities outside the rail business, as things have softened? And maybe there's some areas in the industrial community where maybe some smaller mom-and-pop type operations don't have access to capital anymore, where they can just maintain their business or even grow it? Do you see opportunities to move in areas where some voids may be?

We've expanded our Corporate Development Group to where now we have four dedicated people in that particular area. Two years ago we had zero, and some of that effort is being afforded at exploring exactly what you're saying, is looking for alternatives, adjacencies, in the marketplace. We continue to evaluate opportunities. We're going to be selective. We're going to take our time, and we're going to make sure they're a good addition to the Wabtec Team.

Just one last one, the stock has done extremely well. You guys have shown a very, very strong capability to grow. I think given what you put together the last few years, I don't know that we would have seen this kind of earnings generation given the downturn that we've seen in the last couple of years. If you still have the same makeup as you had the last cycle, has the Board or has the Company been approached about possibly selling the Company? Has anybody shown any interest in Wabtec?

We really can't even -- I can't even comment.

You can't fault me for trying, though.

Art, you've tried about three different ways to get at the same things, we shouldn't. Actually, to one of your earlier questions, I was going to add, right now, when I first joined Wabtec I think probably OE was about 55% of our sales.

Right.

I think right now OE is about 40% of our sales.

Just for this quarter.

Just for this quarter, I think aftermarket was 59%, and the OE was 41%. So I would suggest that if you're trying to gauge, you know, if you're trying to get a measure for where Wabtec is going to go, I think revenue ton miles and car loadings are just as critical, really even more so than just freight car builds.

Right.

And ton miles tend to be relatively steady.

Right.

Because we have shifted a large portion of -- not shifted, but what we've done is we've grown the aftermarket, and we continue to grow the aftermarket, and that's a key area of emphasis. You know, within freight we have things, like friction, so that are totally dependent on traffic, repairs, services, parts, all those are totally dependent on traffic. And I would suggest that really a better indicator than freight car builds is ton miles and car loadings because of the impact to our aftermarket.

Thanks. Yes, I know one of these days you'll answer one of my questions.

Long after we're retired.

Thank you.

Thanks a lot, Art.

Thank you. Our next question comes from John Barnes of BB&T Capital Markets. Please go ahead.

Hey, good morning, guys.

Good morning, John.

Can you talk about the contracts that you have in place now and your backlog? Do you have a feel for, you know, what percentage of those are fixed price and of those, if you do have fixed price, are you having any success at trying to renegotiate steel coverage provisions of some kind, or is that what you were talking about just having to -- to do other things to negate the higher cost of steel?

In review of the contracts, and we've really gone through these, some of the older ones that probably date back, you know, some of these contracts were probably '04, you know, late '03, '04, some of the transit contracts. Some of those, there is some slight exposure. A lot of those times we really tied up our suppliers, but they really have been pressing us hard so there's this pull and tug all over the place.

The new contracts, we are very conscious of the issues related to material inflations, and if we don't have an absolute surcharge we have some type of collar that we put on the percentage change of each of the commodities that would require a renegotiation of the price, so we've been pretty disciplined in that.

We do have some legacy contracts that we live with. In those cases we do other things. We look at opportunistic buying, and maybe we have to carry some inventory to cover it, but we know the exposure, and we limit the exposure that we have.

All right. And as you break it down, the fixed contracts, the fixed price contracts that you do have in place, do they tend to be more on the transit side than the freight side?

Definitely, our backlog in freight is just -- it doesn't really go much beyond 12 months. There's a few, but not much. I think in total if you look at freight, of the total backlog I think close to 90% is less than 12 -- or greater than 12 -- or less than 12 months, 90% less than 12, it'd be the 90%. So it's almost all in transit. And in those cases, you know, a lot of those cases materials is not a large percentage of the final price, as well, so it's not a huge exposure.

Okay. And then with the rising commodity prices, I know the funding is still out there, there's still money to be spent on infrastructure and that type of thing, but have you seen any of your customer base begin to pull back orders a little bit or bid activity a little bit, just in the, you know, with the thought, hey, we can't get as much for our dollar today as we could a year ago, maybe we're better off waiting? Or is this the type of asset that you really can't wait on, and so you really haven't seen that the commodity price increase really affect your sales and marketing effort?

Yes, it really hasn't had much affect, but there's a little more to the story. If you look at transit businesses, 80% of the funding is federal funding, and that particular funding is really on infrastructure and capital expenditures, generally, and then you have to match with 20% from local funding.

Where the transit authorities are really being pinched is on the operating cost, because of the rise in fuel cost and some of the labor cost that they have. And what you've actually seen is that the Congress is starting to try to help them out. I think that, oh, within I think the month of June you saw one of the House Committees approve, I think it might have even been close to a billion dollars a year for the next two years to help them on the operating cost of the business, and that's where they're really getting cramped, and you read a lot about they could be providing more services but they don't have the money to do it. Our particular product is really tied to that 80% federal funding that's used for infrastructure, rolling stock, locomotives, and that type of thing. Okay?

Yes. And then on the acquisition front, a couple quarters ago when you guys were asked about acquisitions, for a couple of quarters there you just said, "Hey, there's nothing we can do right now. Valuation multiples are just too high."

You know, now you've done one, and can you give us an idea, have multiples come in enough that you've got a pretty full pipeline of potential acquisition opportunities? Was this one that just, you know, kind of popped up, it was more of an anomaly? And where do you stand in terms of can, you know, are you ready to pull the trigger if the purchase price is right and are you ready to pull the trigger on multiple acquisitions? Can you integrate multiple acquisitions at one time?

Yes. Our activity, if you go -- I mean we went almost a year without a acquisition, and during that timeframe we had a lot of activity, and we've really set the groundwork for a lot of opportunities in some of the international platforms that we think are important, and we continue to work in that area.

We do not -- we really can't comment on the specifics of any activity, but we remain busy. We feel that we're ready to be opportunistic, when we feel that we have the right acquisitions on the table in front of us. And we will be cautious. We're going to take our time. We're going to make sure we understand it, but I think acquisitions has been and will continue to be an important part of our growth strategy.

Okay. Very good. Thanks for your time, guys. Nice quarter.

Thanks. Thank you, John.

Thank you. Our next question comes from Paul Bodnar of Longbow Research. Please go ahead.

Yes, good morning, gentlemen. Thanks. One quick question. I guess last time you had updated us ECP and ETMS, and just kind of what sales looks like in the quarter. I know it's a long process, but any kind of further update on that?

It is a long process. I had a full head of hair when we started.

Black hair.

Black hair. ECP is working, that's electronic controlled pneumatic braking, that's an important opportunity for us. What you have is you have two pilot programs with a third pilot program, with another railroad coming on in the next month or so. These pilot programs are being -- they're trying to prove out the technology to make sure that they get the fuel savings and they get the efficiencies and the cycle times that they need.

The opportunity for electronic controlled pneumatic braking is primarily on what they call unit trains, that go back and forth from the same two places, and that makes up 20%, 25% of the fleet out there, so it's a huge opportunity, when you consider about $4,000 per car in order to upgrade, and there's about 1.3 billion cars. So you can see the opportunity.

We expect that opportunity to start rolling out. The test will run, pilot programs will run another 12 months at minimum, and from that time on there'll be a gradual rollout of that technology if it's proven as we expect it to be.

As far as electronic or positive train control, we have our pilot, which was proven and product safety plan approved at BNSF. They are in a commercialization phase of the program for an overlay system. We're working with two other major railroads on a vital ETMS system, and those pilots we should actually have equipment up and running in early 2009. It'll take a good year to submit what is called, again, the product safety plan to the FRA. Once it's submitted and approved then commercialization should follow that.

That will be a slower and a smaller -- it will take much more time but it, in addition, it's a little bit of a smaller market. It's more in the $400 million area if it was implemented across half the locomotives out there. Where the ECP is about a billion dollar market opportunity with another player being involved, and that's New York Air Brake.

Okay. And I guess also on ECP, I mean internationally I mean how's that going. I believe you have ECP in Australia, and also in South Africa?

Yes, they're running really well. The Australian ECP has been out there since 2004. The train, there's one train running in South Africa, and will be -- that's running without any problem, at all, and they're seeing the benefits in both locations.

Any further opportunities along those lines?

I think in those countries, especially the mining countries, where they use the unit trains, again, point A to point B. The problem gets in is when you have to mix cars, you can't do it, it's all got -- the whole train has to be ECP or not ECP. And, as you know, freight cars could be pulled by different companies across the country, so it's these unit trains that I think will be first targeted with this technology.

And then, also, the back half of the year on margins, I mean obviously there's a run-up in raw material prices. I mean can we expect them to hold with the current rate or from the current quarter at 14.3% operating margin there? Or would you expect that to pull back some?

Yes, we always get fluctuations quarter to quarter, but keep in mind, I mean continuous improvement is what we really count on here. We're not looking for the big bang, we're looking to improve our sales week-on-week, day-on-day, month-on-month, quarter-on-quarter.

Okay. Thanks a lot.

Thank you.

Thank you. Our next question is from Steve Barger of KeyBanc Capital Markets. Please go ahead.

Good morning.

Good morning, Steve.

Good morning, Steve.

You said the $45 million of the $65 million increase in revenue was organic, can you talk about price versus volume?

I would think that we got very little of that as price, you know, a small percentage, single digit, if less.

Okay. Are you internally talking about raising prices to capture costs, or you're not seeing the need to do that yet?

I think price -- normally we're able to do it with commodity increases, which are the surcharges, and but we don't consider that a price increase, we're just covering our cost. Normally it affects your margins because you don't get the incremental margin on it.

Right.

Where we have products that are much more differentiated than other products, obviously, pricing is important, and we will continue to be very aggressive in getting pricing where we can.

Okay. When thinking about the 10% freight growth, did that come more from freight car components themselves, or locomotive parts, or heat exchangers? Can you talk about where the real strength was in the quarter?

Yes, there was some strength in primarily aftermarkets, international markets, and heat exchangers, so all three, probably an equal contributor to that growth.

Okay. And are you seeing any pull forward from customers who might be anticipating higher prices? Are they worried about input costs and trying to--?

I think they're all worried about cost, and I think especially in the railcar area, where I think it was publicly announced there was some fixed cost contracts that make it very difficult. So I -- as I said earlier, this is, you know, you're being pulled in both directions. You're trying to recover, and it depends on how much leverage that end buyer has, the purchaser, has on you, so I'm seeing a lot of pull from all directions when it comes to commodity pricing.

Okay. One last question, over the past couple of years you've typically had a little bit higher EPS in the back half than in the front. This year the guidance is for $1.30 about in the back half versus $1.35. Should we read anything into that or can you talk about any specific concerns you're seeing by product line or region in the back half?

I don't think you ought to read into that, at all, other than typically we see some seasonality in the third quarter. We have plant shutdowns. We're more international than we were in the past. I think that has an impact. We've also seen that increase in business, the volume increase, and each -- the next two quarters get increasingly more difficult as a comparison basis. So I don't think you ought to read anything into those numbers.

All right. Very good. Thank you.

Thank you.

Thank you. Our next question comes from Scott Blumenthal of Emerald Advisors.

Good morning, gentlemen. Congratulations on the quarter.

Thanks, Scott.

Good morning, Scott.

Have you seen, you know, we're not used to, as North Americans, $4.00 a gallon gas prices. Have you seen a market pick-up in interest for more fuel efficient locomotives as of recently?

Yes, without a doubt. I mean I think every class one right now is working on programs that help. That's part of the -- you know, we talk about Wabtec being one of the few companies in the world that could really change the technology of the industry when it comes to efficiency productivity. That's exactly what ECP and ETMS actually give you that opportunity to do so.

So we're really pushing hard to get our technology and implement it, and part of that technology, especially the positive train control is that that onboard computer when tied with some kind of auto pilot or gas optimizer or fuel optimizer, it could result in some major benefits.

Also, keep in mind, that from a standpoint of our own locomotive business, our thrust on our commuter locomotive has been fuel efficiencies, and that was things that we were pushing four or five years ago. And the introduction to our low emissions locomotive used in the yard is obviously more fuel efficient. I think the fuel efficiency on our commuter locomotive was 35% improvement over previous commuter locomotives.

So do you -- have you been able to, Al, or is the thrust to ...

One other thing, Scott, I was just thinking of it, to answer that question. I also read a statistic that I couldn't go out and verify this, but this was stated by the -- Ed Hamburger of the AAR, that if you move just 10% of the freight from trucks to freight rail, we would save 1 billion gallons of fuel in a year. So that -- I mean that's the kind of, I think, statistics that really excite you about the rail industry.

So is ...

Go ahead, I apologize for interrupting you.

Oh, no. That's okay. That's helpful. Is there an initiative then at Wabtec to package all of these fuel efficient and low emission offerings into one kind of a green offering and market that to rails? I mean you talked about positive train control, have talked about ETMS. We've got low emissions locomotives. I mean if you put all of these things together there is a very compelling package to offer, total package to offer to rails, not only in efficiency and cost savings, but then the environment.

There's no question. And, you know, we have an open position in marketing here, Scott, so.

And it's not a far commute for me either.

There you go, boy.

But, no, these are some of the discussions we've had during our strategic planning session, but it was amazing how different Divisions come in with this green approach, and some of the thoughts that you really talked about. And I think putting it all together as a package, is -- it's a unique and it's a good idea. Thank you.

Scott, just to add, just as a trivial, but just to give you an indication of where we're going, when we were doing the strategic plans for our friction unit, they're even talking about a green brake shoe that is totally recyclable and decomposable. And they think that's something that would have appeal to really the railroads worldwide. So I think everybody is moving in that direction, and we're not going to be left behind. We think we can participate in that.

Okay. And I guess my last one -- thanks, Alvaro -- is the weak dollar, are you starting to see or have you seen interest from other geographies, locales, that you wouldn't normally have seen looking for products that are priced in dollars and maybe wanting to source the U.S. based goods, where they traditionally wouldn't have been interested?

Yes, obviously, it makes us more competitive on our export product, and we've seen that almost globally, so it has a -- it has had somewhat of a positive affect on our international business.

And, again, the key for some of our products is you have to be approved before you can sell, you have to be approved and homologated by either the specific rail unit or the governing authority of that territory, and that's really one of the advantages of POLI. You know, we do get products that have been approved, and now we can start supplying some of that content through even lower source countries. So the POLI acquisition fits right in with being able to do what you just said.

Okay. Well, thank you, and congratulations, again.

Thanks, Scott.

Thanks, Scott.

Thank you. (OPERATOR INSTRUCTIONS.) Gentlemen, we have no further questions at this time.

Okay. Thanks a lot.

Thanks, Andrea.

Bye-bye.

This concludes today's Wabtec conference call. Thank you very much for participating. You may now disconnect.