美國西屋制動公司 (WAB) 2008 Q4 法說會逐字稿

Hello and welcome to the Wabtec fourth-quarter 2008 earnings conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at that time. (Operator Instructions). Please note, this conference is being recorded. Now I would like to turn the conference over to Mr. Timothy Wesley. Mr. Wesley, you may begin.

Thanks, Ted. Good morning, everybody. Welcome to our fourth-quarter earnings conference call today. I'd like to introduce the rest of the Wabtec team who's here, our President and CEO, Al Neupaver; our CFO, Alvaro Garcia-Tunon; and our Corporate Controller, Pat Dugan. We'll make some prepared remarks as usual and then we'll be happy to take your questions. We will of course make some forward-looking statements during the call, so we ask that you 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'm going to cover is the results from our fourth quarter and the full year and we'll look at some current market conditions including our response to these conditions. We'll talk about the progress we've made on our strategic initiatives. Alvaro will go a little deeper into our financial numbers, and then I'll summarize and go into the Q&A.

The Company performed well in the fourth quarter and for the year. We had strong sales increase about 11% to a record $405 million. For the year we hit $1.58 billion in revenues; that was a 16% increase. Our earnings per share in the fourth quarter was $0.64; that was 10% higher than the year ago quarter. For the year we had $2.67, a 20% increase over '07. The backlog remained over $1 billion at the end of the year even with record sales; that's the 11th quarter in a row we've maintained over a $1 billion backlog.

We had a great cash flow from operations in the fourth quarter of $82 million and for the year we were able to generate cash of $159 million. Keep in mind that this performance was achieved in a weakening global economy and a very weak US freight market. I think that this shows the strength of our diversified business model, that our strategic initiatives are paying off, and that we continue to benefit from the Wabtec Performance System.

What I'd like to do is go into the market conditions right now and for the first time since I've been here I'm going to start with transit, since it was more than 50% of our sales in the quarter and the year. We continue to see a strong transit market driven by passenger ridership and federal funding. This includes future money from the stimulus package. Federal transit spending was up 6% in 2009 to a record $10.3 billion. The current spending bill runs through September '09. Congress will start debating a new bill later this year.

Additive to this spending bill is the stimulus package that should present additional opportunities. I'll talk a little bit more about that in a few minutes.

Ridership continues to increase across the US even as the price of fuel has come down. It was up 6.5% in the third quarter, the largest quarterly increase in 25 years, setting records in some cities. We understand that that trend continued into the fourth quarter. Positive long-term trends in transit should continue to drive growth in investment.

This is a compelling market being driven by population growth, urbanization, long-term concerns about fuel prices, and availability, as well as the environment. International transit markets are much larger than that in the US and our market shares are very small at this time. So we expect faster growth in these overseas markets.

Let's talk a little bit about the stimulus package. Of the $789 billion, up to $20 billion could impact the transit market -- $8.4 billion for public transportation; $8.0 billion for high-speed rail; they've allocated $1.3 billion just for Amtrak; and there's 100 -- $1.5 billion, again $1.5 billion, for discretionary intermodal projects, possibly freight and passenger rail. We should see opportunities from each of these buckets.

Three-quarters of this money must be spent by September 2010. [Faber] will be granted the projects that can be started quickly. Wabtec could benefit as transit authorities exercise option orders and/or accelerate projects, but remember there has always been and will continue to be a long lead time in the transit market.

A not so good story is the freight rail market. Rail traffic is off significantly due to the economy. Year to date ton miles are down 15% and car loadings are off 16%. The declines did moderate in the most recent weeks, so we'll take that as the first bit of good news in a while, but too soon to call a trend. Most people seem to think that traffic will be down as much as 5% this year as comparisons do get easier in the second half of the year.

As expected, rail car deliveries have slowed considerably. There was delivery of about 60,000 railcars in 2008. Most people estimate that in 2009 it will show at least a reduction of 50%. It may get worse before it gets better and we can't predict when it will start to recover. Remember that our exposure to the new car rail car market is about 20% of sales. It's an important market for us but not as big a piece as it was a few years ago.

The locomotive market is also slowing, but not at the same rate. About 1,500 locomotives were built in 2008; it's expected to be 25% lower in 2009. We have responded to these market conditions with cost reductions in several of our business units and at the corporate headquarters -- companywide annualized cost reductions of about $25 million with related one-time costs of $8 million, half of which were taken in 2008.

These actions include a workforce reduction of about 5% from all levels of the Company; plant consolidations, mainly in the Freight Group, as a result of the Standard Car Truck acquisition; and there's an increased emphasis on lean and sourcing activities. Our goal is to take prudent actions that reflect the economic and business realities we face while continuing to invest in growth opportunity and I believe that we're achieving that balance.

Also today we affirm our 2009 guidance for earnings-per-share of between $2.45 and $2.75. This is challenging in light of the market conditions and the continued economic uncertainty. I'd like to review our major assumptions, which are critical to this guidance -- the global economy does not weaken further; our transit market remains stable with no negative impact from state and local budget issues; freight ton miles down about 5% for the year; the freight car build at about half of last year's 60,000; the locomotive build down about 25% from last year; and no major changes from current foreign exchange rates.

In this environment we're going to be focusing on two things, growth and cash. We will continue to invest in strategic growth opportunities. New products such as positive train control where momentum is building and Wabtec is very well positioned, potential revenues of $200 million to $400 million over the next five years. We're going to stay focused on global expansion. We just completed a JV in China for friction products and are working on another one for braking and other freight products.

There will be new opportunities in the aftermarket as railroads and transit authorities look to outsource. We'll be looking for acquisitions similar to the Poli and Standard Car Truck would further differentiate our product lines and boost our geographic coverage. In December we completed the Standard Car Truck acquisition, a leading manufacturer of train car locomotive components. About 30% of their sales are aftermarket and about 15% outside of NAFTA.

This is a very strategic acquisition that eventually leads to our ability to provide a complete railcar undercarriage. Our combined knowledge of in train braking forces and design capabilities give us the opportunity to advance stabilization technology for the industry. Improved stabilization means less damage to the lading. The integration is going extremely well with our focus on achieving synergies from the acquisitions.

The second focus is cash is king. Cash provides the opportunity to invest in acquisitions and growth strategies and we're renewing our efforts to increase free cash generation. This year we generated $159 million in cash from operations; that was after hitting $143 million in 2007 and $151 million in 2006. What I'd like to do now is ask Alvaro, our cash king, to dig in a little deeper into our financials.

Thanks, Al, and good morning, everyone. Like Al said, we feel we had a good quarter in what we know is an increasingly difficult environment. We do realize that your main concern regards the future, but right now we remain cautiously optimistic, recognizing that we face challenges with the current freight market and general uncertainty in the economy.

But at least for the moment, to review the financial highlights of the prior quarter. Sales were about 11% higher than last year and hit a record $405 million. About a third of this came from acquisitions; the balance came from organic growth. For the year about $65 million of growth came from acquisitions, primarily Standard Car Truck, Poli, and Ricon which we bought about a year and a half ago. So organic growth represented about two-thirds of the total growth in 2008.

Going back to the fourth quarter, the Transit Group led the way with a strong increase due mainly to increased sales of transit car components in North America and the Poli acquisition. Freight Group sales however were also higher than the year-ago quarter as acquisitions and higher sales from services and electronics more than offset lower sales of components for new freight cars.

Margins, as you know we're always focused on driving margins higher with particular attention on the operating margin. Mix can have a very significant effect on gross margin, so we tend to focus on operating margin. We think the results for the quarter reflected a good performance considering that mix changed toward transit. For the quarter margins were about 12.4%, versus 12.5% last year.

As a percent of sales, operating expenses were slightly lower though at 13.7% versus 13.9% of sales. We do have -- we've discussed this in prior phone calls and it does impact the margins and the overall expenses, what we call PPA, charges for SCT and Poli in the quarter. These are short-term paper write-offs of acquisition costs mainly related to inventory and backlog. For the quarter these total about $4 million or about 1% of sales. That total split roughly evenly between cost of sales and G&A and we expect about a slightly higher amount for '09, it's about $5 million to $5.5 million.

The other major items of the income statement -- interest was higher due to the increased debt incurred for the Standard Car & Truck acquisition. Tax is essentially the same as the prior quarter, pretty much consistent with prior experience. And that pretty much wraps up the income statement. I think apart from the acquisitions it was very -- a very straightforward quarter and in line with prior quarters.

To turn to the balance sheet, working capital compared to our September 30 balances, receivables were about $274 million. They were down about $25 million from the prior quarter, against September 30, and if you include Standard Car & Truck balances, they were actually down $52 million. So we did a good job concentrating on receivables and we continue to focus on receivables.

Inventories were $264 million, about $41 million higher than the prior quarter, but this was entirely due to Standard Car & Truck. If not for Standard Car & Truck they would have remained flat. Payables were $163 million, up about $8 million. There's always room for improvement in working capital, but we thought we did a good job in wrapping up the year. And like Al says, that's a key component of generating cash for us.

Speaking of cash, at year-end we had $142 million in cash, this was down from $187 million at September 30 because we used some of those balances for the Standard Car & Truck acquisitions. Cash for the quarter from operations was about $82 million and, like Al said earlier, about $159 million for the year.

To give you a few numbers, I'll just read off the numbers which we always do during the call -- depreciation was $6.2 million versus $6.4 million last year; amort was about $1.6 million this quarter versus $1.5 million last year; and CapEx was about $7.2 million versus $7.5 million last year.

In terms of backlog, Al referred to backlog briefly. It remains over $1 billion in spite of the record sales during the quarter and it's remained over $1 billion for 11 straight quarters, which is I think for us a key to our stability going forward. The rolling 12-month backlog compared to September 30, so this is a backlog that we expect to execute over the next 12 months, it totaled $567 million versus $627 million at 9/30, so it's down slightly by about $60 million. And this is mostly due to freight.

In freight, it was $191 at 9/30, now it's $149 million. And transit decreased just slightly, about $436 million as of September 30 and now it stands at about $417 million. The multiyear backlog, that's the total backlog which includes the 12-month numbers, stands in total about $1.06 billion versus $1.15 billion at 9/30. Freight again down slightly, not as much as you'd expect, $224 million at September 30; now it's about $198 million. Transit was at $922 million; now it's $865 million.

Hopefully that covers all the numbers that we cover specifically in the call, and with that I'll turn it back to Al for a quick summary.

Okay, once again we had a strong performance with a $0.64 quarter, record sales, and a strong backlog. Like most companies, we face a very challenging market and continued uncertainty due to the economy. It's very fortunate that we have a diverse business model and our transit business, about half of our company now, remains stable at a high level. The Wabtec Performance System provides an established culture of lean manufacturing and continuous improvement. We have an experienced and dedicated management team. With that, we'll be happy to answer your questions.

(Operator Instructions). Jim Lucas, Janney Montgomery Scott.

Thanks, good morning, guys. Al, could you give us an update with the inclusion of Standard of what Wabtec's content is per railcar and per locomotive? I'm just trying to get anecdotally how much content you gain because someday they'll start building again, but I just want to gain a better understanding there.

Okay, right now when you look at an on-share adjusted number, we have about $5,000 -- that's just with the current Wabtec products, without Standard Car Truck, about $5,000 per car. Adding Standard Car Truck in on an on-shared basis, you would multiply that probably -- you would have another $5,000 per railcar. On a share basis, their share is lower than ours and I would guess that the number would probably be in the $4,000 to $5,000 per car when you do a share adjusted basis.

Okay. And on the locomotive?

On the locomotive, it varies. If we got all the things that we make on a locomotive, it's a very high number, it's $150,000. And their locomotive business is not that strong. It may add another $4,000 or $5,000 to that.

Okay, and it was helpful walking through the assumptions and what went into your guidance and one of the things about Wabtec is that -- the cost and cash focus that is deeply ingrained in the Company. What variables are you looking at internally that you would have to ratchet up another round of cost cutting given the uncertainty that lingers out there today.

Wabtec is in a strange situation when you've got basically half your business that is maintaining and then the other half -- obviously the market conditions are pretty challenging on the freight side. So division by division, what we continue to do is try to continue to forecast the changes. Where normally in normal conditions you'd do it once a month; we've probably had three or four iterations, especially in the freight area, over just the last five or six weeks.

And if we see any change from the assumptions or an issue that's out there, we react with some type of restructuring plan or recovery plan in order to make up for it. We start with trying to find other revenues, but we're not afraid to take the actions we need to do to really protect the business.

And we've actually -- this cost reduction program is something that we've really been doing over the last three years. It's not something that we have one major program. We continue to focus on it on a division by division basis, moving our product to lower-cost manufacturing platforms or outsourcing if necessary. So it's been a continuous program to do that, and that's what the whole Wabtec performance lean culture is about, as you know, Jim.

Okay, and finally, could you give us an update on the penetration of the international transit markets and any additional commentary about what you're seeing in the M&A environment?

Okay, first question related to the international transit markets. We've been really focused on the two largest markets, which is the European market and the Asian markets. And the penetration, it's going to take time. We knew this when we acquired Poli. If we had gone after these markets with a greenfield type of approach, we could be talking about five to seven years. We think that we could expedite that entry.

We've set up an office in Europe now in the Munich area. We've got the team in place. We're making sure that our technology that we acquired from Poli along with our technology that we have in our transit components group in Spartanburg. We're focusing the development on entering that market and we're making progress. It's going to take time though and that's the same thing with Asia.

Okay.

Your second question, what was that, Jim?

On the acquisition environment.

Okay, M&A environment. We're seeing some flow in the pipeline. It is down, noticeably down. And what you're finding is that the targets that we're looking at, they're moving targets because their business is changing. So valuations on businesses get to be very, very difficult in this environment. So it's a tough area. We still have -- our pipeline is flowing and we're going to continue to focus on that and be opportunistic with the economic conditions in the entire globe.

Okay, thank you.

Wendy Caplan, Wachovia.

Thank you, good morning. You mentioned, Al, in your presentation about your customers outsourcing some of their aftermarket. Can you give us -- remind us some of the history of that in terms of in other economic downturns, what have we seen from our customers in terms of their outsourcing of service components?

I think that what happens is we all get pressed to reduce our cost and an alternative to having a fixed cost when you're vertically integrated is compared to outsourcing it is an opportunity. And we really stress that point. And I'm not saying that that's how we approached our business. A few years ago we were very vertically integrated and we felt that any time you're in a cyclic business and things turn down, those are fixed costs, where if you're outsourcing you're able to treat it more as a variable cost.

And I think some of the Class One's as well as the transit authorities see that and we've seen an increased interest in that area. One of the negative aspects of it is right now that -- especially in the freight area, is the fact that they actually have a number of vehicles parked, rail cars as well as locomotives, which means that those particular railcar or locomotives that might need some type of aftermarket attention or service are really being parked instead of -- giving us an opportunity to do that work. So there is a negative part of that as well that I felt that I should mention.

Thank you, and can you --? Some of us have visited your trip last year, the UK refurbishment business. Can you give us some sense of how that's performing at this point?

Sure, our Wabtec Rail Limited in the UK actually had a good backlog coming into the year and is performing quite well. The only impact that we're seeing is basically the exchange rates as we convert back to dollars. But their business, when you look at their volume, is actually holding up, so we're happy that that's the situation there in the UK.

Okay, thanks. And finally and then I'll pass it along, thanks for going through the stimulus plan in terms of the pieces of it. And can you help us understand how much of Wabtec-related product is currently, as they say, shovel-ready and what your transit people, who have certainly been through years of dealing with this market, are saying in terms of their excitement level or lack thereof on these programs that could be generated by the stimulus program.

Yes, the stimulus program, as I mentioned, I think gives us -- each of those buckets give us an opportunity. I think that where we find that we're really ready to go is especially on these projects that have options. If you look at locomotives, we've got a number of -- we have about $200 million of options that are still out there that have not been exercised. We just announced that GO Transit exercised about $85 million of their options. That was 20 locomotives.

So that's where you're going to first see any kind of gain or activity is that these options are going to get moved. Because as you know, the stimulus package is designed to get money into the economy as fast as it can. We're hoping that also some of these options get extended. By that I mean they're asking for greater numbers of the same type of product. Because otherwise if you had to go and redesign the product, you're talking about years before not only the product has to be designed, you've got to get a bid out. You've got to rationalize who receives that bid and then start the production.

So those longtime programs are probably not going to be impacted that much by the stimulus. It's going to be those products that we already have designs and are ready to go.

And given the purpose of all the stimulus, as you said, to get the cash out there, would we anticipate that much of what is ordered will be existing products?

I would think that's what's going to happen, Wendy. I think most of it's going to be existing. Where that doesn't exist so much is in the high-speed rail. When you get that, I think it's $8 billion, associated with high-speed rail development, that development, which we'll be part of, but obviously there's no high-speed rails in the US right now, although they exist in other parts of the world. So that's the one area where I think it's longer term.

Thank you very much.

John Barnes, BB&T Capital Markets.

Thanks. Good morning, guys. Could you remind us what the value of the current options that you have associated with your backlog is?

It's about $200 million right now, so we had -- it was $300 million last month and we exercised the option or Toronto exercised the option for $85 million, 20 locomotives.

All right, could you give us a little bit of an idea on -- as you look at your guidance for 2009, what kind of freight car kind of OEM number are you using in that guidance? And the reason I ask this is it just seems like a couple of the forecasting agencies have just kind of gradually been whittling this number to nothing and I'm just curious as to what you're using for it.

Yes, what we've done in the assumptions is we're assuming that obviously the deliveries were about 60,000 in 2008 and our assumption for the -- our guidance range is that it would go down by about 50%, so you're in basically the 30,000 build rate. I've seen numbers around there, I've seen some a little lower, I've seen some a little higher and it is a moving target. That's why we felt it was really important to provide everyone the assumptions that we've made, at least the macro assumptions that we've made with this guidance.

And is that 30,000 range, is that kind of the midpoint of your guidance or is it the lower end, higher end?

You know, it's tough because when you look at the number of assumptions I gave, you've got to assume all the other ones are going to be right in the middle as well to answer that question, John. So it's a tough question because I think I listed six different macro assumptions.

Okay, all right.

One thing, the backlog for rail cars now is about 31,000. Now Trinity took about 10,000 out of the backlog this last quarter. Now in that 30,000, it's hard to tell the quality of that backlog at this point. So that becomes a whole other variable.

All right, very good. I'm sorry if I missed this earlier, but acquisition revenue during the quarter?

During the quarter, acquisitions amounted to about $20 million revenues and for the year about $65 million. Both of them are about 30%. How you get to 30% of the last quarter is FX was negative about $20 million. So our -- the actual growth from our base business was still about 60% of the growth in the quarter.

Okay, understanding that when you came to the agreement with Standard Car Truck for the acquisition that since then the world has changed significantly and I understand that. But as you look at Standard today, is there any potential for an impairment already, just given where the OEM market has kind of fallen off to?

And then the existing management that was in place there, are they being retained on any kind of earn-out or something like that, where you could actually see maybe a little bit of a benefit? Because I would imagine targets that were set would be probably pretty difficult to hit in this environment.

Yes, there is no risk of impairment whatsoever. The Standard Car Truck, when we acquired the business, we're always looking at recurring profitability, EBITDA, and the long-term strategic potential of the business. As I stated, the integration is going extremely well and they're performing quite well. We know the content per car. We know their market share and they've also stepped up as far as the acquisition target that we had for synergies. We've got all of those moving in the right direction right now.

The management team that all came along with the acquisition has been nothing short of fantastic. Actually Rick Mathes who ran the business for a number of years for the family, he's now a group executive running the whole railcar business for us. He and his team have done a great job. Where we've had any kind of duplicate opportunities, whether it be from Wabtec's standpoint or Standard Car Truck's standpoint, we've tried to eliminate all those duplicate people.

So I think the integration is going well. It's a great addition to Wabtec and I think that strategically it was a great move for us.

Last question and I'll turn it over. As you look at -- obviously there have been a couple of articles in the Wall Street Journal lately just talking about the number of rail cars that the Class Ones have in storage at this point and the railcar -- or the railroads, as they announced earnings in the quarter, talked to I think the number in aggregate is about 120,000 units at this point.

Have you heard of any instances where the rails are beginning to cannibalize their stored cars for parts? And what kind of pressure would that put on -- potentially put on your parts and service business? And if it doesn't occur now does it just merely prolong the inevitable that you've got to maintain the equipment and it just bumps it out a little bit?

Yes, some statistics that we've actually heard was that almost 25% of the cars are parked at any one time, which is about twice as much as they normally have parked, and locomotives very similar. Now we went out and asked that question and as of right now we don't know of much cannibalization that's going on. Any type of cannibalization would have an impact on our business. But I have a feeling that the effort, the time and the labor to do it, there isn't a tremendous -- a lot of benefit.

And I think that the Class One's are still very healthy and what we're seeing is the commitment on their part for trying to maintain their capital spend even during these tough times. So it will have a small impact. I don't think it will have a major one.

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

Steve Barger, KeyBanc Capital Markets.

Good morning, guys. I wanted to go back to your macro assumptions for a minute. Of the four or six that you mentioned, which one has the most impact on results if it's worse than you expect? Where's the sensitivity to your analysis?

Yes, the sensitivity is -- let me go through them. Obviously the economy is everything, I mean that's what drives everything. But the impact on profitability probably happens most when you look at the things that impact our volume, which is the rail car build and ton miles and locomotives build.

When you look at FX, we basically have a natural -- we hope we have a natural hedge, it doesn't always work perfectly, but most of our costs are associated where our revenue is generated. So that doesn't have as much impact. But anything that's economy-driven, the rail car build, the ton miles will affect our aftermarket. The locomotive build will impact the OEM and aftermarket as well. And we're counting on the transit markets holding. We have the backlog and pretty good visibility on that as well.

Okay. And can you tell us what your revenue assumptions are for Standard Car Truck in 2009? What will that add to the top line?

What I can say is that when you look at the revenues, and it follows basically the guidance, from our acquisitions and growth initiatives are basically offsetting the negative impact from car build, the FX impact -- the FX alone, the average foreign exchange rate could have an impact, if it would stay at the spot rate today, of almost $60 million of revenues and a small amount of profit impact.

We also have an impact of material surcharges. As you know, we are very cautious and careful about making sure that our raw material escalations over last few years were recovered. Now that the material price has come down, we've had to get back those surcharges. That impacts revenue but does not impact profitability. And you have the impact on revenue negative of aftermarket and loco. So those two -- if we were able to see the fruition of those assumptions, we would think we could get a balance between the two.

Right, well I think Standard Car Truck was about $225 million top line trailing 12 months. Is that close?

That was --

Yes, that's close.

Okay, so if you assume that that's going to be down a fairly significant amount because of its exposure to the freight markets, if it adds $150 million or whatever to revenue in 2009, then a commensurate amount has to come out of the legacy transit or freight business to get to your overall revenue guidance of flat to slightly down. So is that decline in the legacy business ex FX likely more skewed to the higher-margin freight business?

Yes, I believe it is, Steve.

So coming back to the guidance, broadly speaking if you've got flat to down revenue and let's call it a mid-$0.20 headwind from the interest expense, and then you're getting a push on margins from lower freight, can you just kind of walk us through what the margin expansion levers are there that you can get to flat EPS year-over-year at the midpoint of the range?

Yes, if you look at the revenue gains that we see, again I'll go through this slowly for you, but from the acquisitions and growth initiatives, that growth from there will basically offset the declines. Now part of the negative also related to profit is that there are certain purchase price accounting charges that we're going to see from Standard Car Truck, so that will have a negative impact on the revenues, although we're going to get a gain -- I mean on the profit where we get again on the revenues. Okay, the other negative is the interest charge on the revenues. Now the plus is that we would get contribution margin from all of that business.

But Standard Car Truck is lower margin than the legacy freight business?

It was lower than the normal freight business, but equivalent to our base business margins. And remember, I talked about synergies, okay?

Yes.

We told you that -- on the plus side of profit we talked to you about the cost reductions. That was mentioned in the presentation, right? $25 million. Now on the negative side, you've got revenue down because of car build. FX, you have revenue coming down, but the profits are only slightly impacted because of the natural hedge and where we have our sales and cost at, revenue and cost. Material surcharges is the pass-through.

And then the base business, when you look at locomotive aftermarket declines, you would have a contribution margin impact on your profitability. That's the components that make up our plan. And based on those assumptions is how we base and come up with the range of our guidance.

Okay, very good. I'll jump back in line.

Paul Bodnar, Longbow Research.

Yes, if I could just get a little more color on the aftermarket piece of the business on the freight side. And obviously it looks like you're looking for down 5% on revenue ton miles and those two somewhat tend to track each other. But what kind of -- obviously one of you is a multiple of that -- do you expect this to decline this year or just some guidance on direction where you think that will head.

Good question, Paul. The concern is that the way it's tracking so far this year, but most people feel that the comparisons are going to get better. So far we're talking about 15%, not the 5% that we have in our assumption. When you look at ton miles, that's a pretty good indication of what happens with our aftermarket business. The only wild card there is the amount of cars that are parked. When you have cars parked that don't get repaired on time because there's no need.

So we would actually see our aftermarket could be a little worse than the actual ton mile decline. But we're also working -- everything we're doing in this business is focusing on growth initiatives. And one area, a specific initiative of ours is the aftermarket, and we look to expand our offerings. We look to do -- have increased capability. We look for geographic footprints to improve that aftermarket portion of our business. So we're really focused on growth in that particular area as one specific strategy of ours.

How dependent then would you say guidance is based on getting growth from those initiatives? If that doesn't pan out, I mean do you end up falling towards the lower end of the range? What's your --

Obviously if we don't -- if those assumptions aren't maintained and we would be -- we wouldn't hit our range of guidance. I mean, those are our assumptions. I'm not sure I understood the question.

Yes, but again, there are probably 15 to 20, 30 moving parts in our guidance, and to say geez, that's what we gave a broad range because there are so many moving parts in the guidance. And obviously if we don't hit one aspect of those it's going to impact our overall results, but then results elsewhere could be more favorable. You know, the transit market could be higher. The international markets could be higher. We could make more penetration in international.

So again, obviously if we don't hit one of the targets we set, it's going to impact our results. But Al listed the five or six most important ones, but really there's probably 25 or 30 key components to our guidance that you have to take into consideration. There's all sorts of cost elements and other different factors.

Okay, and then kind of a follow-up too on the freight side with margins. Is there any way you could just walk through or broadly -- I know you may not walk-through and say details, original equipment, freight cars, where that falls in the margin. But if you could just say if that's kind of what's above and what's below your average margin in that group and kind of -- can you walk through some of (multiple speakers) of that?

Our margins between OEM and aftermarket in the freight area are not that much different. Both of those product areas have pretty good market margins.

And that's true of both the locomotive and the cars?

Yes.

Okay, and then on the transit funding right now, I mean how much of this is a shift in terms of projects that you thought would have got paid for out of state budgets, but due to shortfalls now are falling into this bill and how much do you think is really going to be incremental new business out there that you wouldn't have seen before?

I think it's a good question and I can't answer it. I would hope that there are requirements in the grants that don't allow the states just to say okay, instead of our portion being paid by the state, we're just going to use the federal funding. I think time will tell. I think obviously there may be some of that where state and local don't have the ability to fund the capital program. But I think last time we talked a little bit about that.

When we look at capital funding, the local has to come up -- in general on average they've been around 15% where federal is 43%. But in the stimulus package, federal could go up to 80% of the project. So I think it already has built in the fact that state and local will not have to come up with as much, but -- so I think time will tell there. I don't have that answer.

Okay, thanks a lot.

Greg Halter, the Great Lakes review.

Good morning, thank you for taking these questions. I know you had some -- you had the acquisition of Standard Car Truck and the amortization you had in the quarter. But I just wonder if you could comment on what that amortization rate will be on a quarterly basis going forward.

You're talking about the purchase price adjustment, the PPA or amortization of goodwill?

Amortization of goodwill.

How much is that probably for '09, Pat, just to make sure that I give the right number?

'09 and -- the amortization of goodwill would be around $4 million for the year.

I was going to say about $1 million, but I wanted to make sure. One thing that -- I want to caution you quite a bit on this. Basically when you do your purchase accounting, you have a year to basically look back and adjust basically your purchase price allocation. So when we give you a number right now it will probably change, but right now that's the number that we're looking at. From the -- and again, this would be amortization of intangibles, it would not be what we call purchase price accounting, which is more related to inventory and customer list backlog, which gets through a lot quicker. Actually inventory and backlog.

And that $4 million you just provided is for Standard Car Truck. That would compare to the $5.1 million you had for the full year on the line item amortization expense on the income statement?

That's correct.

Okay, so it's an additional $4 million to that figure?

Correct.

Approximately $4 million.

Right, and it will probably change. If I didn't say that before, let me be redundant.

Okay. In the PPA you talked about the $4 million, was that just in the fourth quarter?

Yes, it was just in the fourth quarter.

And that was obviously run through the income statement?

That was run right through the income statement.

Some of that came still from -- I think we still had some from -- a little bit from (multiple speakers).

A little bit from Poli, mostly (multiple speakers) Standard Car Truck.

Okay, all right, that's very helpful. And relative to your debt, can you comment on what the rate --?

I'm sorry, I don't mean to cut you off, but just again, and we probably have -- and again, this is subject to change because the purchase price allocations can change. But in terms of PPA for Standard Car & Truck we probably have another $5.5 million that will flow through in probably the first couple quarters of '09.

Okay, that is helpful too.

Yes, because it sounds like you're trying to build your model, just to get the numbers right.

And on your desk and you comment on the rates that you're paying and whether or not the debt is on a fixed or floating basis currently?

Sure, that's easy. Right now we have about -- not about, $150 million of bonds that are at 6-7/8. They mature in about four years and that's fixed. And then we have about -- at year-end anyway we had about $235 million of variable bank debt. And that's 175 basis points over LIBOR.

Okay, and in your income statement you had other income this quarter, the fourth quarter of about -- well, I think it was a $1.7 million positive swing over last year.

Correct.

Can you comment on that?

Sure, that -- most of that, though, the large, large majority of that is paper FX on -- for example, intracompany receivables. When you have an intercompany receivable it's different from your functional currency. You have to make -- basically it's a paper FX gain or loss. We try and minimize those as best as we can and you can see that if you see our year-to-date balances in that other income expense where we're basically down to zero, I think for the year as a whole it's about 300.

So that's most of it, it's paper FX. Again, we try and minimize it. You'll see that for the year it balances out, but for the quarter we did have a small gain.

Okay, great. And you gave the FX for the quarter, I think you said negative $20 million. What was it for the full year '08?

It was only $2 million.

Negative?

Yes.

And that's on sales. For EBIT it was basically breakeven. Very small shifts one way or the other, not material.

All right. And a couple other quickies here. On your balance sheet, do you have the equity figure as well as total assets?

Let's see -- again, this is subject to change. We do have a preliminary number. Total assets, which would include obviously Standard Car & Truck, are a little bit in excess of $1.5 billion. It's about $1.508 billion and equity is about $645 million roughly.

And relative to your pension plan, were there any adjustments in the fourth quarter or do you expect any? And what would you expect your pension expense to be for '09?

Our pension expense for '09 is probably going to be negatively impacted from what we would have expected and this is in our model, but we would have been roughly about $2 million. When we originally started budgeting -- that's why I said earlier in response to another question there's a lot of moving parts to this plan. When we first did the budget we thought it was going to be because of the smoothing out effect and because discount rates had gone up, we thought we'd probably breakeven.

By the time we finalized the budget we realized that we were probably going to have to incur another $2 million worth of pension expense obviously because the balances have gone down. And the same thing happened to basically the pension assets obviously, they're invested in common stocks and bonds and they've gone down.

Okay. And one last one. What are your thoughts/expectations on capital spending for 2009?

Pretty stable. I think this year -- we're not sharply decreasing capital spending. Al mentioned earlier that the keys to this year are growth and cash is king and obviously CapEx is part of the cash is king equation, but we don't want to cut off our nose to spite our face. They will probably be stable at somewhere between $25 million to $30 million, which is in line with our past practices once you add in Standard Car Truck.

Okay, that includes SCT in there?

Yes.

Okay, great. Thank you.

Kristine Kubacki, Avondale Partners.

Good morning. Just a couple questions. One, on your strategy for uses of cash in '09, you're talking about cash is king, which is prudent. I wanted to -- do you have a view that you'll maybe pay down debt or are you going to hold onto it in case the acquisitions become more attractive in '09?

As we always do at each of the Board meetings and even between the meetings we talk about what's the proper utilization of what cash we have and our strong balance sheet. We feel the first priority is always to --the best type of growth is internal growth. We continue to look for acquisitions. We'll continue -- we have about $70 million left on our stock buyback program and we'll look at other options as well. But it's that list of priorities that we'll be looking at. Alvaro, do you want to add anything to that?

Yes, the only other thing I would add, Kristine, is what we have is we have a combination revolver and term credit loan. The revolver is $300 million and we've used very little of that. So regardless of what we do, we'll always have that $300 million. The term loan was $200 million. We actually made a small payment on that one. It was about $7.5 million in January, a required payment on that.

And what we'll do is as we accumulate cash we'll evaluate the uses of that, whether we should eliminate the term loan. We will -- we do have an active stock repurchase program and that will be part of it. And we just evaluate as we go along. But obviously in these times maintaining financial flexibility is key.

Okay, and you're comfortable then with your debt levels at this point and even upward from here a little bit?

Yes, we did the calculation the other day. Debt to EBITDA is one time, basically just a fraction over one time. So we think that's pretty conservative right now. We're okay with that.

Okay. And then a quick question on raw material costs. It was my understanding that even with surcharges you weren't able to absolutely cover those costs and even though I understand as you give back those surcharges you're going to see a little impact on the revenue side, but shouldn't we expect a little bit of tailwind in terms of -- if raw materials continue to come down here on the profit side in '09.

It will, but there's a timing issue. Generally when -- there's not too many of our suppliers who are anxiously giving up their new founded profitability, so it really takes a lot of effort on our part in purchasing and negotiations. But you are correct, eventually we should see some -- especially those ones that weren't covered. But we had -- I think we spoke before about this. We had a very large portion of our raw materials recovered on surcharges and when they come down the impact revenues but not the profitability. It actually helps the margins.

Okay. And then a question on the stimulus, as you're talking to your transit customers, the transit authorities, I know the timeline of projects is still a little uncertain, but I know that it's been our thesis is well about the contract with open options. But do you get a sense from them that maybe they're going to be more bus-focused for more rail-focused at this point or is it too early to tell?

I think it's a little early to tell. One thing that I think everyone is scrambling right now to see -- to get in line and get their money, so it's pretty hard to tell.

Okay, and then on the last question, on positive train control, with the current economic environment, do you see any delays by the railroads maybe pushing this out a little bit to 2010 or 2011 to get started or any unforeseen delays there?

There are three aspects right now. When we looked at the year, we really expected to see more activity, but obviously the economy has an impact. But there's other impacts right now that our pilot programs and the development programs going full speed ahead and we're really making some good progress there.

But there are two developments that need to happen in order for us to start seeing some hardware orders. And one of them is that the railroads, the Class One's are working on interoperability and the real center of that interoperability is a hand-held radio system that's a 220 megahertz system, and that's being developed right now so that's you could have this interoperability by MeteorComm, which is a division of BNSF.

The second thing is that the FRA is still working on fine tuning the regulations related to the positive train control. Our particular system, we don't anticipate any problems with either one of those and our system already meets all the regulations. But the FRA was coming out with new regulations especially as it relates to the interoperability.

So the economy in those two developments, which everyone is working hard on right now, we'll probably see a less hardware revenue than we would have anticipated, but the program is moving ahead full steam.

Okay, very good. Thank you for your time.

Mark Dishop, the Boston Company.

I just had a question about your guidance. You have freight ton miles down 5% for the year is your assumption and you said that normally your revenue in that area kind of tracks to that, except now there's all these parked cars.

So I just wanted to talk about that a little bit. What's -- a couple of questions on that. First of all what percent of your maintenance revenue or whatever you call it, aftermarket, is from railcars in the freight area as opposed to -- and what part is from locomotives and what parts from transit?

Okay, we can look at -- if you look at the full year freight, our aftermarket business was about 53%, so OEM was obviously the 47% and transit was 52% and 48%. When you look at aftermarket related to railcar and locomotive, I think it really fluctuates quite a bit, but I would think that we're probably about the same, probably half and half, probably 50% or so.

Railcar and locomotive is half of the aftermarket?

Yes, I would think half is related to railcar and half is related to locomotive. But boy, that fluctuates month-to-month in different programs. There may be a particular upgrade on a railcar part that would dominate more of the aftermarket or vice versa, or we may get quite a few of locomotives through our overhaul. Those are big numbers, so there are big swings in that and I don't think that there's a good statistic that could be used.

I don't think I quite got it. So half is railcars, half is locomotives, is that within the freight part?

Yes, that's within the freight.

And freight you said is about -- did you say freight is about half of the aftermarket?

I think what he's trying to say, Mark, is if you look at our disclosure at freight revenues, about 52% of that is aftermarket. And then of that 52%, very roughly because again you got a lot of moving parts in there, but of that 52%, half his locomotive and half is freight.

Okay, 52% of freight revenue is aftermarket, okay. Thank you. And then, so you also mentioned that maybe you'd be a little bit worse this year because when some of your customers are kind of parking the cars that need service and not fixing them, so that kind of wanted to talk about that little bit. If -- how often do you normally do maintenance on a freight car? Is it every year? Is it every five years?

Well, to give you an example, it depends on the wear on the freight car and every component has different rules. There are certain rules set up by the AAR that require periodic testing. One of the things that they have to do is if they take a railcar and travel right now 1,500 miles, 1,000 to 1,500, they have to stop and test the actual brake. And if it fails, it needs to be repaired.

They also have a duration where so many years they have to bring it in and have it overhauled. And locomotives have a different time period, different components have different time periods. But it's generally controlled by regulations as to when it has to be brought in for an absolute repair.

Okay, so my point is --

To add one more thing -- be careful because when we talk about aftermarket we're talking a lot more than just repairs on freight cars. For example, we're talking friction products and those are just the disc brake pads and brake pads. And those are just normal wear and tear items, they're not subject to inspection. We're talking about things like electronics like in the train devices, which are sold directly to the railroads and not to the freight car manufacturer, so we would classify those as aftermarket.

So it's not just a repair of a freight car itself. It really is much broader than that (multiple speakers) segment we talk about an overhaul of locomotives was aftermarket. So that's a lot in there.

So what percent of the aftermarket in this area is kind of brake pads and stuff and what percent is something else?

You know, we don't have that finely broken down, to be honest, with this call. Maybe if you give Tim a call later we can try and dig up some numbers for you.

I just mean is like the regular -- are you going to replace stuff constantly anyway a big deal or are brake pads really only replaced every couple years anyway?

It depends on the wear. It could go from six months to maybe a year, a year and a half, but it's -- it depends on the wear.

Okay, the point was -- I just wondered when you said you could be a little worse this year because of parked cars, if cars don't need service constantly, is it possible that your customers kind of just keep switching out the cars? Like when it needs any maintenance, they'll just park it. You kind of said that's happening and then they'll take a car that doesn't need maintenance and use it and if you only need maintenance every couple years anyway, maybe you don't have hardly any maintenance revenue on the freight side for at least a year.

It's very hard to completely understand it. Remember there's probably 10 different types of railcars and each of them have different requirements, so it's just not that easy to make an impact. We've actually taken a look at, depending on the number of cars that are parked, what that impact is on our business. We've tried to use those in our estimates. So it's a very complex situation. I don't think you really break it down and give you a statistic because that's going to make you feel comfortable.

Okay, but in your assumption you are assuming just a little bit less than 5%?

Right, that's exactly right.

Okay, and do you have any experience numbers in the recent month or two as to whether it's substantially worse than the 15% that (multiple speakers)?

Not yet, we haven't been able to really -- we have an estimate of what we think the impact will be, but we have not been able to validate that yet.

In the last month or so, has that been much worse than the 15% or is it about the same?

Our aftermarket in the last few weeks have really held up so far.

Okay, great. Well, thanks so much.

Chad, I think we're --

Right. We show no further questions at this time, so I'd like to turn it back over to you for any closing remarks.

We'll talk to you again in a couple of months with the first-quarter results.

Thanks, everybody.

Thanks.

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