美國西屋制動公司 (WAB) 2009 Q1 法說會逐字稿

Good morning and welcome to the Wabtec first-quarter 2009 earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for to you 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. Tim Wesley, Vice President of Investor Relations. Mr. Wesley, please begin.

Thanks, Camille. Good morning, everybody, and welcome to our first quarter earnings conference call this morning.

I would like to introduce the rest of the Wabtec team who is here. Our President and CEO, Al Neupaver; our CFO, Alvaro Garcia-Tunon; and our Corporate Controller, Pat Dugan. We will make our remarks as usual and then we will take your questions.

We will, of course, make some forward-looking statements during the call, so please review today's press release for the appropriate disclaimers.

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

Thanks, Tim. Good morning, everyone.

What I will do, as usual, is I will cover the results and our current market conditions, including on how we are responding to those conditions. Then I will talk a little bit about our progress related to our strategic growth initiatives. Alvaro will dive deeper into the financials, and then we will go into the Q&A.

Given the state of the economy and particularly the freight rail market, Wabtec performed solidly in the first quarter. Our sales were slightly lower than a quarter ago, down at $378 million, a decrease of around a percent. We had a good performance in a period of negative GDP, and with the North American rail freight market off by double digits. Our first-quarter EPS was $0.68; this is $0.02 better than the prior year quarter. Included in these results were one-time items, including the sale of a building and the purchase price accounting charges related to the Standard Car Truck acquisition. All in all, these basically offset each other. The backlog remained over $1 billion dollars for the 12th quarter in a row. I remind that you we achieved this performance in a weak global economy, and a very weak US freight rail market. This shows the strength of our diversified business model that our strategic initiatives are paying off, and we continue to benefit from the Wabtec Performance System.

Okay, now going to the markets a little bit. We will start with the transit market. We continue to see a strong transit market. This is being driven by Federal funding, including money from the stimulus package, and good passenger ridership. The Federal transit spending, before you take account for the stimulus dollars, should be up 6% in 2009 to a record $10.3 billion. The current spending bill will run through September 2009. Congress should start debating the new bill later this year.

The stimulus package should present additional opportunities, as state and local governments sort through their projects and future plans. This package set aside $8.4 billion for public transportation, and an additional $1.3 billion for Amtrak. And last week, the Obama Administration announced its plan for high-speed rail in the US, including an additional $5 billion in funding, about $1 billion dollars a year for the next five years; this is on top of the $8 billion already in the stimulus plan that is designated for high-speed rail. Although we know that this will take many years to develop, it's another long-term positive for the Company. Wabtec is in a good position to take advantage of this commitment to expand the country's mass transit capabilities.

When you look at ridership, ridership was up 2% in the fourth quarter of 2008 and was up 4% for the full year. The results so far this year are a bit mixed. We have statistics from January that show that subway ridership was down 4% in New York City; but yet in Chicago, rail ridership was up 5%. But what is important, there are positive long-term trends in transit that should consider to drive growth and investment. This is being driven by population growth and urbanization, the long-term concerns about fuel prices and our environment, and the desire to reduce our dependence on foreign oil.

Looking at the freight-rail market, freight-rail traffic is off significantly due to the economy. Year to date, tonne miles is down 16% and car loadings are off 17%. Coal represents about half of what railroads carry, and that is only off 5%, if you want to look for some bright spot in the rail -- freight rail market. Intermodal traffic is down 16%, and that is expected to continue at least through the summer months. As expected, railcar deliveries have slowed considerably. Although the first-quarter numbers have not been released yet, our best estimate for deliveries are around 6,000 cars and there were orders for only a few thousand. We had been expecting deliveries around 30,000 for the year, but now it looks like that number could be as low as 20,000. Remember that our exposure to the new car -- OEM car market is no more than 20% of our revenues. It is an important market for us, but not as big of a piece as it used to be.

We find the locomotive market also slowing, but not at the same rate. When you consider domestic and International orders for locomotives, we expect it to be down around 25% in 2009. This overall weakness will result in lower-than-expected sales for the Freight Group for the remainder of the year.

We are responding with further cost reduction actions at Corporate, and in the business units that are impacted. Companywide, we are now targeting annualized cost reductions of about $30 million, with related one-time costs of about $10 million, with about $4 million of that taken in 2008. Some of the actions include workforce reduction, in total that will be around 8% from all levels of the Company; plant consolidations, mainly in the Freight Group as a result of the Standard Car Truck acquisition; and we have an increased emphasis on lean and sourcing activities. Our goal is to balance our continued investment and growth opportunities with the need to take prudent actions that reflect the economic and business realities we face. We believe that we are achieving that balance.

Also today we affirmed our 2009 guidance, EPS of $2.45 to $2.75. We do expect sales to be slightly down for the year, based on weaker-than-expected freight market conditions. Our previous guidance was for sales to be flat to slightly down. We see the year still as a challenge in light of the market conditions and the continued uncertainty in the freight markets, but we think it is achievable as long as the freight market does not weaken further and the transit remains stable. Our focus is on growth and cash. In this poor economic environment, we need to focus on the ability to grow the business long-term and preserve our cash position.

We will continue to invest in strategic growth opportunities. For example, new products such as positive train control, where Wabtec is very well-positioned, with potential revenues of $200 million to $400 million over the next five to seven years. We continue to invest in global expansion. We just completed a second joint venture in China, this one for braking and related products. We are also exploring new opportunities in the aftermarket, as railroad and transit authorities consider outsourcing. And we'll be focused on acquisitions such as POLI and Standard Car Truck, which further differentiate our product line and boost our geographic coverage.

A little bit on the China JVs. We have now established a presence in China with two joint ventures, Huaxia and Shenyang. Huaxia is a majority-owned JV that manufactures friction projects. Shenyang is a 50/50 JV to manufacture braking equipment. These are both small investments, but they get us started in a market that is sure to grow in the future.

Our second focus is cash. Cash provides the opportunity to invest in these acquisitions and strategic alliances, as well as other growth strategies. We are renewing our efforts to increase free cash flow. We are able to generate this cash through cost reductions, driving down working capital, and squeezing the capital expenditures. During the quarter, we reduced our debt by $25 million and bought back $7 million worth of stock.

Now I will turn it over to Alvaro for a little deeper look at our financials.

Thank you, Al. Good morning, everyone. Welcome to the call.

As I think Al mentioned and -- and I'll note again, though, I think we felt we had a good performance this quarter in an increasingly difficult environment. I think we -- we think that the fact that we are up 3% year-over-year earnings-wise is not something we normally would brag about, but in this environment we think that is very positive. In spite of that, though, we do remain cautious about the future. We recognize that the markets out there are very, very difficult. All you have to do is pick up the paper every day and recognize that, and that is particularly true in the freight market and the general financial community.

Given that, to go over the specific results, sales were basically fat -- flat -- not too fat, mostly flat, about 1% lower than last year at $378 million. The transit group was up slightly year-over-year. This was due mostly to increased sales resulting from the POLI acquisition. The Freight Group sales were down about 6%, as higher sales from the acquisitions were more than offset by lower sales in -- in what we have described as -- as a not very good freight market. The margins, however, were positive. I think a recurring theme of these phone calls is -- is our emphasis on a margin -- of improving margins, and this is particularly true in this tough environment. For the quarter, operating margin was about 14.7% versus 14.1% last year, which we feel is a commendable performance.

A couple of one-timers, just for you all to take into account in evaluating the results in modeling going forward. Expenses -- we talked about purchase price accounting before, and what we call purchase price accounting is what I would say quick turnaround, generally a year or less, of noncash charges, mostly relating to writing up inventory, backlog and other intangibles in an acquisition. Our expenses included a one-time purchase price accounting charge for basically Standard Car & Truck, the POLI PPA is now complete, of about $3.4 million, and this was mostly all in cost of sales.

And then we also -- I think everyone is aware of our downsizing of our Canadian operations, as a result of which we sold one of the properties that we had in Canada, and we had a one-time gain from the sale of that property of $2.1 million, and that's in SG&A. So SG&A has been favorably impacted by $2.1 million as a result of this sale, and cost of sales negatively impacted by the PPA of Standard Car & Truck of $3.4 million.

In regards to other expense categories, I think all the other ones were relatively stable. Interest obviously is higher, due to the increased debt from the acquisitions. The effective tax rate is slightly lower, but again it is moving in the normal range as you would expect.

To get down to some of the actual working capital balances and backlog numbers, et cetera, et cetera, that we always disclose, working capital as compared to December 31, so compared to the end of last year, receivables were down -- I am sorry, receivables were $260 million, down $14 million from the prior balance sheet. Inventories were $253 million, down $11 million. So we -- we have tried to decrease working capital and have been successful somewhat, but we still think we can do better.

As a result of the reduced purchasing activities payables were $126 million, down from $163 million, so down almost $40 million, as we reduced, again, the purchases and other spending. Cash, at March 31 we had $98 million in cash; this was down from $142 million at December 31. Again, we are working down some of the liabilities. We paid off $25 million of our long-term debt, I think Al mentioned that, and we also used about $7 million to repurchase shares during these times at what we thought were very attractive prices.

A couple of other miscellaneous items. Depreciation, relatively stable, $7 million this quarter versus $6.4 million last year. AMORT is increasing slightly because, again, of acquisition activity. But this AMORT, I wouldn't call this a one-time item, this results from writing up various intangible assets as a result of an acquisition, but this will be an ongoing number, and I think for modeling purposes you can assume that it is going to be relatively stable. AMORT for this period was about $1.4 million versus $900,000 this year.

And CapEx stable, again, in this environment. We are watching our CapEx very carefully. It was $3.4 million this quarter versus $3.9 million last year. So in spite of the acquisitions, we are managing to maintain our discipline on CapEx.

In terms of backlog, Al referred that we are still over $1 billion; not by much, but we are still over the $1 billion number. The -- the total backlog is $1.01 billion versus $1.06 billion at 12/31/08. Now I am comparing it, again, to the just-completed prior quarter. Of this $1.01 billion, $818 million is in transit and $192 million is in freight. And then the rolling 12-month backlog, the part of this $1.01 billion that we expect to execute over the next 12 months is $560 million, and this compares to $566 million, again, at the end of the prior quarter, 12/31/08; so nothing -- no material change there to speak of. Out of that $560 million, $450 million is in transit and $110 million is in freight.

With that, I think -- I am sure we will have a few questions here and there, but that includes the financial part of this, and I will turn it over to Al for a quick summary.

Okay, so once again we had a solid performance in a very difficult environment. Like most companies, we continue to face very challenging market conditions and uncertainty due to the economy. We are fortunate that we have a diverse business model, and that our transit business, a little over half the company now, remains stable at a high level. The Wabtec Performance System provides an established culture in lean manufacturing and continuous improvement, and drives that margin improvement even in tough times. We have an experienced and dedicated team.

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

Thank you.

(Operator Instructions)

Our first question will come from Ryan McLean from Janney Montgomery Scott. Please go ahead.

Good morning. First question, I just want to know what the FX contribution was for the top line per segment?

The question is, is what impact did FX have on the top line?

Yes.

From the year ago quarter, it was $22 million negative.

And just wanted to talk a little bit about -- within transit funding, obviously Federal stimulus dollars are going to be -- going to start flowing more so than we have seen already, and I was just wondering if -- in the first quarter have we seen any of the transit customers maybe defer some of their spending while they are waiting for -- for the money to start flowing their way? Or was it -- normal -- did sales occur as they normally would?

We saw no deferment of any spending during the first quarter. And we actually have never -- not seen any of that even last year, Ryan. What you will find are the ongoing approved programs are moving ahead at a pretty good pace, and there is a tremendous amount of activity by most of our customers, transit authorities, governments, to get in projects that would allow them to be successful in getting some of the stimulus funding.

Okay. Shifting over to -- on the freight side of the business. You mentioned that you expect the locomotive build to be down 25% this year. I was wondering if you can go into it a little more detail of how that relates, you know, US versus International? We hear some --

Yes, Ryan, on the -- on the locomotive, we think that the domestic purchase could be down greater than 40%, 50% for the year, but there is still a lot of backlog related to some International purchases. In those cases, it may not be a full locomotive that is shipped, and statistics may be a bit confusing, but in our case, we would be setting up a -- some type of kitting of the products we would supply to these various projects, so it still becomes a locomotive build, and that is built into that -- when we talk about the 25% decline as we view it. So that -- that may not be consistent with what you would hear about North American locomotive builds.

Okay. Finally on the Standard Car Truck acquisition, I was just wondering if you could give any updates on -- as for the integration of the Company so far, you know, if there is any pluses or minuses versus what you expected when you closed the deal?

Well, I can tell that you the integration -- and I have been involved in a lot of acquisitions over my career, and I don't know if I have ever had a smoother integration, and that's really a compliment to Rick Mathes and the whole Standard Car Truck team. They had an excellent business that they managed extremely well, and a lot of things in place. So on the positive side that has really been a real plus, and we have also -- those synergies that we identified early along in the evaluation of the acquisition, they all look like they are achievable, and so that is a positive.

The negative obviously is that the market has not been kind in the rail market, and a good percentage of their business is tied to the OEM rail build. But our view of Standard Car Truck is a long-term view and a strategic view, and we feel that by [being] able to offer a broader range of products to the railcar builders, that strategically we will be in a much better position as this market rebounds. And long term, they have some great technology. They have got some great International businesses, and their model, their business model, is really one that allows us some things to learn from. So all in all, we couldn't be more pleased with the acquisition.

All right, thank you very much.

Thanks, Ryan.

Our next question will come from Art Hatfield from Morgan Keegan. Please go ahead.

Good morning. Thanks, guys. I will confirm what you all said from the outside, this was a great quarter, and congratulations on some good work, Al, Alvaro, and everybody else.

Thank you.

Al, just kind of your thought process on a couple of things. When you talked about the fact that your expectations for freight car builds had changed, and you think it's going to be as opposed to 30,000 closer to 20,000, why don't you change your guidance at that point in time, and if it is because you have got some other things in the hopper such as ability to cut costs elsewhere, can you give us some more specificity on what you can do in that area?

Yes, obviously when we put together the original assumptions and guidance of the business and we communicated those to you, things have deteriorated from that. So that car build does have an increased impact. If you look at a drop of 10,000 cars or so, which will have an impact on the sales side, and obviously we are indicating that now related to those assumptions. Some of the things that we were able to do in the first quarter is that -- to offset that reduction in sale and the contribution margin impact of that is that we were able to be much more aggressive and successful in some of our cost reduction efforts.

I will give you an example. Last year -- as you know, we have what we call a lean approach, our Wabtec Performance System. Last year -- if you looked at a month, we do maybe 30 to 40 Kaizen events each month. This quarter, we were able to do on average 60 Kaizens, which means that every operation in Wabtec did at least two Kaizens per month. And that increased activity, although you know a Kaizen doesn't necessarily have to result in hundreds of thousands of dollars in improvement, it does result in efficiencies and productivity improvements; and incrementally, that kind of approach helps you, you know, get the margin improvement that you are seeing.

Now, obviously, there is a lot of factors that go into the performance in addition to our effort on the Wabtec Performance System. We have also really pushed outsourcing product. Rather than being vertically integrated, we've moved a lot of product as you know from high-cost facilities to lower-cost platforms we have, like Mexico or even China. We have also really focused on -- as the raw materials pricing has come down, we have negotiated a lot harder on -- on our purchases, and where possible, we have tried to utilize as much pricing leverages that we could.

So all in all, we will see lower sales, but we think that our improved margin improvement, especially in the transit area where there has been a lot of questions over the past year can we increase margins in a transit area, and we think we can continue to increase those margins, and we were successful in doing so a bit in the first quarter. But there is still a lot of factors. You know, with a mix change next quarter, will there be other one-time issues to come up? Always will be. So I -- thing that on balance, we feel that this -- a firm guidance is we are comfortable with it.

Right. Thank you. That's all I've got today.

Okay. Thanks, Ryan.

The next question will come from Scott Blumenthal from Emerald Advisers. Please go ahead.

Thank you. Good morning, gentlemen. Thank you for a great quarter.

Thanks, Scott.

Al or Alvaro, can you give us some insight into trend -- into the transit margins, which I guess we've learned are historically lower than the freight margins. How close are we to parity there or have we achieved that?

As you know, Scott, we do not give that information out until it is finalized in the -- what would be the Q, so what I did say, and I will repeat, is that, you know, we have been tremendously focused on those margins because we knew that transit was going to be a bigger portion of our business going forward, and we had good success in the quarter in improving those margins in a number of the divisions, and we will continue to stay focused on that, and we don't really have a goal.

A lot of times we are asked what's your goal; our goal is to continuously improve. Obviously volume has -- helps on the way up and hurts on the way down. So would you imagine that that the freight margins would be somewhat eroded, where the transit margins would have help from the -- just the volume, but those other items that I talked about are all incrementally contributing as well. Is that as political as I can be?

That is pretty good, Al, thank you. How much of this -- so I guess from here, we can kind of assume that the transit margins are improving and obviously volumes are helping there, but can you attribute any of this to the mix of what you are delivering or, you know, possibly your ability to negotiate better transit contracts during a -- during kind of a robust booking season last year or the year before?

There is one factor that helps us -- I am sorry for the echo, is anybody hearing that echo? Are you hearing that, Scott?

Just a little.

There is one factor, and that is that a lot of the transit projects we had in the backlog -- that we've had for a while, obviously as -- the learning curve of producing those particular products over time allows us to really apply productivity improvements. When you look at our Performance System, it is really about not just accepting a necessary margin on a project, but to continually apply measures in order to increase that margin over time, and some of these projects last -- you know, toward the back end of them, we do get the advance of that experience.

Okay. Alvaro, can you -- could you give us a gauge, I guess, based upon the current guidance, as to where you expect debt at the end of the year?

I would say obviously it all depends on what one of our -- one of our big emphases this year is working capital reduction and cash generation. We feel that in declining markets you should at least be able to accomplish that. We have done it in the past, and we don't see any reason why we can't do it right now. Generally, we have a target. I think our overall target when we set the budget of operating cash flow was about $125 million, $130 million. We would like to exceed that target by year end, but that's our target right now.

Now how much of that would we use for debt reduction? You know, we could use some of that for acquisitions, we could use some of that for stock repurchases, we could use some of that for debt reduction. It really depends on the circumstances that present themselves throughout the year, but in general that is our cash target, which we hope to exceed, to be perfectly honest. If we have management out there listening, I will throw that gauntlet out to our managers as well. But, again, it all depends how we use that cash on the circumstances that occur through the year.

Okay. At this point currently, your priorities for the use of that would be?

I think Al intimated this, but obviously what we want to do is continue our growth strategy. We do want to continue to invest in our growth -- in our various growth strategies as we go forward. That includes CapEx, that includes internal growth projects, that would include acquisitions. But, again, it does include stock buybacks and, in terms of debt right now, we are at about one-time EBITDA of cash, and we feel that is a very, very manageable position.

So I would say we would invest in -- in the over factors first, for example, if a particularly good acquisition presents itself, we would invest in that. And probably debt reduction, we use excess cash for that.

Okay. That is really helpful. And one more, if I may. Al, how much of last month's New York City subway order do you expect to kind of get through the pipeline, if any?

Most of that is going to be delivered in 2010, 2011.

Okay. Terrific. Thank you.

All right, thank you, Scott.

Our next question will come from Kristine Kubacki from Avondale Partners. Please go ahead.

Good morning.

Good morning, Kristine.

Great quarter. I can't say that about my hockey team, but on with my question. With the recent joint ventures that you announced, can you talk about any issues as you ramp up there, and are you approaching any other areas there, transit in China?

I don't -- there are no issues as far as ramping up. We have really been working on these for quite a while. We finally got to the point on the Shenyang joint venture that the Company is actually operating. We had really signed agreements last Fall, but by the time it went through all the government, you know, procedures and approvals, it just took a while. And the JV is actually operating now and we have a GM in place, and it seems to be going smooth.

The one thing about that particular joint venture is their market -- we were just over there last week, and their market is slow as well. They have a number of railcars and locomotives parked. The only difference is they seem to be continuing to order railcars even as they have them parked, so the business seems to be moving forward. But they do have a freight slowdown, and as you know, they have a tremendous amount of stimulus money themselves in the infrastructure for both transit and freight planned.

The friction joint venture is operating extremely well. We have a lot of opportunity for growth. This is the -- Huaxia was a company that our BECORIT division had worked with for a number of years, and had supplied product into that market, so this was just a further progression of taking this business forward. Both of these are not large right now, but we really look forward to growth in the future. We are working on JVs in the transit area right now, but I don't have have anything I can report on.

Okay. In terms of transit in the -- in the U.S., I have to tell you the statistics are a little bit confusing, as ridership continues to be pretty healthy but operating budgets are under duress. Can you highlight the impacts in short and long-term on your transit business?

I think it is really something that the local transit authorities and our governments are going to have to resolve. As -- you all have seen the tremendous interest in transit because of the reasons I talked about in the prepared text. It is a very hot item. It is a very important item, and one of the things that really could hamper the particular growth in the transit area is the fact that the operating budgets are under stress everywhere. And a lot of this has been caused by the recession, yet the ridership is there. And hopefully they can resolve it, because the real concern that I personally have is that I can see where if the service declines, then people will get discouraged with it and the ridership will -- will go down.

The nice thing so far is if you look at the price of -- of fuel, when it declined, you -- you would have thought that ridership would go down proportionately, and that is not what happened. So I think the service is critical to maintain that ridership, and our job is to continue to supply and offer the technology to help them do that.

Are you seeing any impacts on the aftermarket business in transit specifically? And then as you -- as you -- as the focus on capital spending by Federal funds is increasing, and you are seeing those dollars start to flow, will that have a one-to-one kind of impact as that install base gets bigger on your transit aftermarket?

We haven't seen any impact on the transit market. It is still -- that capital really hasn't started flowing yet. You know, we have seen a few projects that are a result of this, but the flow is -- there is really a lot of positioning right now for projects and the money, that we do see.

Okay. Any impact on the aftermarket though from transit --

No, we are not seeing it right now.

Okay. My last question would -- with your decision to repurchase shares in the quarter, can I infer that was a result of or reflects a lack of attractive acquisitions, and are you expecting any maybe some distressed sellers to enter the market the longer this freight downturn continues?

Well, in regards to the first question, I would say absolutely not. I mean I think we -- actually I did the math earlier. If you look in the press release, I think we bought 290,000 shares for $7 million, and that's an actual average price of -- it is under $25. So that is obviously very attractive. And -- and I don't know if you were aware of this but we probably had an active ongoing share repurchase program for over -- I would say a year, probably closer to two years. And the one benefit we have, given our capital structure and given our ability to generate cash, is that we can really do both, that we can maintain an active share repurchase program and repurchase shares, particularly to offset dilution from the issuance and exercise of stock options, and still leave plenty of flexibility for acquisitions. Like I said earlier, our -- our debt-to-EBITDA is about one or even a little bit less, and we have plenty available under our line of credit. So I still think we have substantial flexibility for acquisitions.

Thank you very much. Great quarter.

Thank you.

The next question will come from Greg Halter from Great Lakes Review. Please go ahead.

Yes, good morning.

Good morning, Greg.

I didn't hear a figure provided on the equity or estimated equity number at 3/31. Did you provide that?

You mean our estimated shareholders equity?

Yes.

Again, our balance sheet is subject to reclass, so when we give you a number, we are happy to give you a number, but just be aware that it is subject to -- to adjustment until we issue the Q, but shareholders equity should be in the range of $660 million.

6-6-0. Okay. How much did Standard Car Truck add to your backlog?

Let's see if -- I have backlog data here. I think overall not too significantly, but -- give me two seconds to look it up here. It looks like it is about $12 million -- You got to add the other $15.

It's about $15 million.

Okay, so relatively minimal.

Relatively minimal. Again, the freight units tend to have relatively minimal backlog. That is typically done through POs and other relatively quick ordering mechanisms. Most of the backlog historically, and certainly true right now, will be in transit.

One thing -- I was going to mention this earlier, I didn't want to interrupt Al. Those of you who have visited us in Wilmerding know that we are right next to a freight rail line, and you will get occasional background noise from the freight trains that can disrupt the conference call. That's right now -- to be honest, that is a welcome sign and we like that, but -- I apologize for the occasional background noise here.

And have you seen any cancellations in the backlog and on the transit side specifically?

When we book backlog, it is basically firm backlog, you know, it is a binding obligation. So you rarely see cancellations in our backlog. You will see deferrals, and it is typically true with transit contracts, you know, passenger transit cars are a relatively complex system, and one or two vendors can throw off the timing. So you will see deferrals but rarely will you see a cancellation.

Okay. And the same question but on revenue on how much Standard Car and POLI added to your revenue in the quarter?

Sure.

I can give you that. Together, acquisitions added $39 million, $33 million Standard Car Truck, $6 million or $7 million for POLI.

Okay, great. And I think, Alvaro, you talked about the tax rate. Should we assume it should be around 36% for the full year?

I think this year was probably -- what happens is -- not to get into too technical of a discussion, but we had to adopt an accounting standard called FIN 48, again about a year and-a-half to two years ago, and this can add some volatility. It's a very conservative, basically, bit of accounting regulation, and that can add some volatility to your tax rate. I think probably this quarter we were probably a little under what we normally expect. I would say for the tax for the year, you can do it somewhere around 36.5%. But it's going to be somewhere between 36% to 37% depending on how issues can turn out, but basically we would expect it somewhere in that range.

Okay. And one last quick one. Your other income was about $400,000 versus other expense last year of about $400,000, for about an $800,000 swing. Any commentary relative to that?

Not really. That is typically not a very significant item. Probably the most significant element of that line item is paper -- and it is paper, it is noncash, foreign exchange gains and losses arising from intercompany balances. And what we try and do, to be honest, is minimize that by paying off the intercompany balances as quickly as possible, but obviously the cross-border transactions occur, and while you try to minimize it you will have minor gains and losses there occasionally, but its nothing significant.

Okay. Thank you. Congrats again on a good quarter, coming from a city with a good basketball team in Cleveland.

Ah, there you go.

(Laughter)

Thanks.

We were a little disappointed we didn't get to the final four but we'll take it.

I think he was talking about Cleveland.

Oh, I thought he was talking about --

Our next question will come from Steve Barger from KeyBanc Capital Markets. Please go ahead.

Good morning.

Good morning, Steve.

I heard the revenue contribution from Standard Car Truck, but can you talk about where the margins came in for that company? And -- or maybe just talk about kind of directionally relative to the legacy freight business?

We don't necessarily give out specific margins on, you know, on any particular division. I can tell that you it's running very close to what would you expect from our other freight businesses. It's -- it was a little lower at the acquisition. We were able to improve some of the margins related to the synergies, but it is not anywhere -- extreme in either direction. The only impact is that -- and that's all before purchase price accounting, and some of the charges we are taking. So we are -- we are very pleased where we are at with it.

Okay. And can you talk about -- I think you had mentioned you used pricing leverage where you could, but did you have positive pricing in the quarter on either freight or transit or negative, or can you just talk about pricing in general?

I think it was generally neutral. We had a lot of pressure to reduce, and there were a few incidences where we had some ability to increase. Most of those were contractual.

Okay. So when I think about the margin expansion that you got, which was impressive, and you talked about outsourcing, pushing the low-cost areas, bringing raw materials down, what was really the big driver there in terms of cost reduction?

That's really a lot of factors, and there's no one thing. I think the key to continuous improvement in the lean philosophy is you just do a lot of little things. I was talking about the Kaizens. In some Kaizens, we visit -- we try to visit every operation, and when we go there, they are going to give -- they have to give a presentation on two Kaizens that they did in the last month. And amazingly enough, some of these Kaizens only result in a few thousand dollars savings, others are larger. So it's a lot of little things that continually add up over time, and that is the same with all of our approaches.

Okay. But -- so given the things that are in your control, is there anything that occurred in the quarter that shouldn't be sustainable?

Well, we obviously won't sell -- we can't sell buildings every quarter.

No, I am talking -- right. In terms -- you got the margin expansion on the operating line didn't come from selling a building. So I am talking about from the pure blocking and tackling, and the benefit that you got on the -- in terms of the 60 bps of operating margin expansion year-over-year.

Steve, just one thing not to interrupt, but I do -- I don't want to create a misimpression here. The gain from -- and this is the way the accountants, you know, basically do it. The gain from the sale of the building was a reduction of SG&A. So the gain from that was -- did benefit our operating margin.

Now offsetting that was the cost that is going to go away from, again, what we refer to as purchase price accounting or PPA on -- from Standard Car Truck, which is cost of sales, but I just want want to leave the impression that the sale of the building was an other or something like that, because it is an SG&A.

Okay. Were those two things generally a push?

That's generally a push, and there were some other one-times, and that is what we are saying, there is no one-time. Now your real question is the sustainability --

Right.

-- of margins, and I think you have to study history a little bit, and you will see that from quarter to quarter margins do fluctuate depending on the closing of a project, and we have a lot of large transit projects, the mix of our product. So -- and I think if you look at last year's margin trend, you will see that the first quarter, I think, might have been our best quarter, or close to it. Pat will verify that, but as we are sitting here, it does fluctuate, especially between transit and freight. So you have to look at it, you know, over the long run.

What we try to do is show the trend that we are continually improving that operating income over a longer period of time, and that is what we are focused on. Now are we going to be able to deliver 14.8, or whatever the number was, consistently and continuing to improve on it? It has got to be on average, there's a lot of factors involved in it. We think that we have a good control of our business, and we want to continuously improve. But there are fluctuations and a lot of factors that go into it. Was I right, Pat?

That was the best operating margin, first quarter.

Okay. Great. Kind of switching gears for a second. China recently placed an order for 100 high-speed locomotives. Obviously there is a lot of good, positive talk about high-speed rail. Can you talk about maybe your content per car or locomotive on a high-speed system, when those start to come through?

There is a lot of definition to high-speed that you have to start with. When we talk about high speed in the US, there has been a lot of reference to 110 miles per hour. When you talk about high speed in Europe and other parts of the world, you are talking about 300 kilometers or I think it is 187 miles per hour or more. The acquisition of [POLI] and European technology is really designed to address that high-speed market. And we have product that, you know, is on those particular, you know, rolling stock now. When you look at a speed of 110 miles per hour, that is -- our locomotive that we build out in Boise can be converted or made to reach that. So that's the extreme that we are talking about, and I don't think it is clear now. I know there is some talk that they want the super high-speed versus the 110 in some places, but I am not sure that is clear yet.

The answer to your question is any expansion of transit or freight business in the world helps us, and we are going to be part of it. And that has really been our thrust thrust with some of our acquisitions, to get better position to compete in Europe, because the European technology, as we have talked about before, is the technology that is primarily going to Asia, along with the Japanese technology that we have been working with. So that's been our focus, and will continue to be.

All right, thanks very much. Thanks. Nice job, gentlemen.

Thanks.

Our next question will come from Todd Maiden from BB&T Capital Markets. Please go ahead.

Thank you. Hey, guys, nice quarter. I just wanted to hone in --

Did you change your name to Tom or is it still Todd?

No, it is Tom now.

(Laughter)

I just wanted to hone in a little bit on acquisitions. I know typically you give us a little bit of color quarter to quarter on what the pipeline looks like, and we talked around it a little bit on this call, pretty much covered everything else I wanted to talk about, but wanted to hone in on this a little bit. In the past you have kind of tipped us off to various things, you know certainly the JVs in China and that sort of stuff.

Last quarter you mentioned the pipeline was -- was, you know, not that robust, and you didn't really think that multiples of evaluations were in line. Has that continued? Is that what you are seeing still? And are you thinking it will probably be more the JV route than -- rather than outright acquisitions? Any color you can give me there?

The activity related to acquisitions is, in our case, we are seeing less activity. That's -- that's a fact. However, we are evaluating and continue to evaluate acquisitions, and we are going to be opportunistic. At this particular time, doing acquisitions are extremely hard because everything is a moving target, as I think everyone on this phone realizes because some of the businesses -- no business is stable in this kind of economy. So that said, we are still aggressively pursuing opportunities. We have some opportunities we are evaluating, and we will continue to be opportunistic going forward, especially with those that are extremely strategic, like Standard Car Truck and the POLI acquisition and Ricon.

Okay. Any thought about moving maybe outside of freight or transit? You know, you have the heat exchanger business, I mean if you saw something like that, where you felt like it would tuck in pretty nicely, that maybe wasn't really part of the bulk of your business, is that something you would do?

We would have to have, obviously, the core competency to -- to do it without distraction -- distracting the management. And we do have about 10% of our businesses outside of the rail. We think that, you know, that could possibly grow as long as it is not a distraction. Right now being in the rail business, at least the transit rail business, is a good business to be in. Not so much the freights, but we look at it long-term, and we think that having some of our businesses on some of our competencies, our core competencies and adjacencies make sense, and we will continue to look at that and, again, we will continue to be opportunistic.

All right. Great. Thanks a lot. Again, nice quarter guys.

Thanks, Todd.

My apologies, Todd.

Our next question will come from Shawn Boyd, excuse me, from Westcliff Capital Management.

That's all right. I just got a couple follow-ups here, if I could. On your organic growth in freight, we mentioned $39 million from acquisitions. What is the actual year-over-year change, just the organic growth in freight revenues?

After adjusting for everything, we're probably down 20%.

That includes the FX --

The FX impact and the acquisitions. Probably 20%.

Again, we do -- just not to create -- is we will take each individual operating unit, and we probably have about 25 to 30 different operating units, and we will segregate their sales between transit and sales. The $39 million you quoted was for both POLI, which is transit, and Standard Car Truck, which is freight. So if you are doing a freight to transit distinction, the acquisition effect was about $32 million. Again it is a minor amount, but it sounds like you are trying to model something, so at least you get it right.

Understood. I appreciate that, so $32 million and $7 million from POLI, okay. Also to think about that in freight and looking that that 12-month backlog, we have had two quarters now of pretty good step-downs to this $110 million level on the 12-month backlog on freight. Where -- let's think forward a little bit, how far out -- how far have you seen that dropping, and how far out in time is it? A quarter, a couple of quarters? Can you help us on both of those?

I tell you, I will be very honest. Freight is not a backlog-driven business, and when we look at the strength of our freight business, there are certain factors we look at. We look at car loadings, we look at revenue tonne miles, we look at car build, we look at other aftermarket activity, but freight backlog to us -- you know we disclose it because it is something that I think you guys like to keep track of, but it is not anything that I would rely on to indicate the strength or the weakness of the freight market.

Okay. So it's more important as a --

As I am looking at -- the way we look at it, if you want to look at the strength of the freight market, take a look at traffic, which, again, is revenue tonne miles, and car loading. Take a look at car builds. Try and gauge how many, if any, cars are parked, et cetera, et cetera. Those are really indicative of what the future market is going to be like in freight rather than backlog.

I think if you were to try to analyze the backlog, the one thing you would notice is that the percentage in the 12-month category, a year ago it would have been 70/30 to transit to freight, and now it is 80/20. So you see the impact of a lower market.

Right. Okay. That's helpful. One other question is on transit. The guidance that you have given today, I'm wondering within transit, how much of that is based on -- kind of alluding to your earlier point about freight not being backlog-driven. Is some of that guidance also not backlog-driven, is it reliant upon terms versus book to business and transit?

I mean, there is a certain element of the transit business that is not backlog-driven. I will give you two -- mostly aftermarket. For example, brake shoes, that is not backlog-driven, and friction is a meaningful portion of our entire business when they order parts, when they order repair services, or overhaul the parts, et cetera, et cetera, you know, for us that is a key portion of our business. That doesn't tend to be backlog-driven. But, again, the key to that is that in most jurisdictions, ridership is tabled up, and, you know, they need to keep the cars in good repair to service that ridership.

Okay. But what I am wondering here in terms of the drivers in transit, you mentioned up-front ridership and you also mentioned the Federal transit spending up pre-stimulus, up substantially, up 6% this year and then the stimulus spend. In your guidance for '09 on transit, are you basing that on existing ridership and the existing budget on Federal transit? Or is there any additional --

Our guidance is based -- our guidance is based on the transit market remaining at its level it's at.

Okay. Okay. Thank you.

Thank you.

Our next question will come from Steve [Narin] from Matrix Capital Group. Please go ahead.

Thank you, gentlemen. I was wondering if you can go back to the backlog fees that you gave us earlier, and tell us what the transit and freight backlog was at this time last year?

Last year --

Last year, let's see, typically what people are looking for is how in the prior quarter.

Actually, I have to leave the room to give that you information. I can tell that you last year that it was about a billion -- this is -- don't take these as exact, about $1 billion and this was my reference to 70/30 versus 80/20, because I did look at this before I came in, and it was -- 70% of the billion was transit and 30% of the first 12 months was freight. And the first 12 months was basically the same, which is about 55%. So if you look at the 12-month, in the next rolling 12-month, about the same level, the only difference was that 70% of this was transit and 30% was freight. Now it is 80/20. Steve, this is Tim Wesley. If you want to give me a call after the call, I can get the numbers exactly.

That would be great. Also can you give us a pro forma number on the first quarter on the top line with Standard Car from last year? Just to kind of compare apples and apples?

Some of -- yeah, some of that -- go ahead, pat.

Well, there is an 8K out there that does a pro forma financial. It may not necessarily do it as of the quarter, but we have disclosed year information that would have SCT rolled into it.

But not for the quarter.

Not for the quarter.

No.

But I -- on that one to be honest, I would like to leave everyone, you know -- the backlog information I don't think is that material, to be honest, it's not that critical. But when you are talking about 8Ks and disclosures, I would like to just refer everyone to the 8K and leave that as -- as the basic form of reference.

Okay. Also you mentioned that the locomotive market, you expected -- of course we have all heard about locomotives sitting on the sidelines, that it could be down as much as 50% in the United States. Yet you said you only expect for your total business to be down 25%. What percentage is overseas and how much do you think that is going to grow?

These are orders that are being filled out of the backlog, so I said 40%, not 50%.

You said 40%/50% I think.

Yes. So I mean the 25% is where we see it. So there is quite a bit of orders right now that are going International that we are going to see. I don't -- I don't know -- I don't really understand your -- what specifically are you asking?

I think one way to answer it is basically the annual output of locomotives is somewhere plus or minus a few hundred, is plus or minus 1,300. So if you want to take 25% of that 1,300, and say those are International this year rather than domestic last year, I think might put you on the track to answer your question.

Got you. Okay, thank you very much.

You are welcome. Thank you.

Our next question will come from Bentley Offutt from Offutt from Offutt Securities. Please go ahead.

Very good. Thank you. Good morning, Al, and good morning, Alvaro.

Good morning.

The question relating -- I think Al said earlier that the estimate now is that the positive train control over the next 5 to 7 years will be somewhere between $200 million to $400 million. And I was wondering, is this a stretching out of the opportunity that you see because of the current problems within the freight rail industry, or is this pretty much in line with what your thinking has been?

It is pretty much what our thinking has been. What we have seen is that the class 1, because of the economy, have not been ordering the capital-type equipment that we would have liked to have seen right now. And the reason why they are delayed is not because of lack of commitment to positive train control, is that there is a few things that have to come clear.

One is there is still a tremendous amount of work around interoperability, and the key to that is the communication -- the hand-held communication system that has not been finalized. Also is that the FRA has not come out with all the requirements that are going to pertain the positive train control system. Until those particular requirements are out and understood, there is a little bit of reluctancy to go too far. But that is all going to happen this year. We don't expect a lot of revenues to flow this year because of this, but I think 2010 and beyond you will start seeing it ramp up nicely.

That sounds good. And ACP, has there been anything going on as far as that particular opportunity?

It is still being -- you know, there's trial programs of our product on a -- on what we call a unit train from the Powder River Basin down to Alabama, and they are still analyzing the data, and there are pilots in a few of the other railroads going on as well, so there is still a bit of analyzing it. I think that, again, the economy has probably hurt the implementation. We see this as a longer-term technology being accepted because of the cost, and there is a lot of things that need to be ironed out of who pays for it, who gets the benefit out of it. The benefit is there, but can the benefits be obtained partially by other methods. So I think that's a much longer -- it is a bigger opportunity, but it's a much longer one.

Are there any opportunities that you see -- going back to positive train control. When we were -- when -- I guess it was a couple of years ago, when we had the program that we were in Gaithersburg at your facility there, and you were talking about accessory-type businesses, other than just putting the information into the locomotive, but other opportunities related to communication, equipment, et cetera. Is there -- is there -- do you see an opportunity there for Wabtec?

Yeah, we do, and we have expanded our product offerings. We now are involved in dispatch systems. So other communication items we -- we view it as opportunity, but we want to make sure that we have the right technology and the product, and a lot of the interfaces with our positive control system does give us growth opportunities.

Very good, thank you.

Thank you. At this time, I would like to turn the call back over to Al Neupaver.

Okay. Well, if there are no other questions, we will talk to you again a quarter. Thank you.

Thanks, everyone.

Thank you. That does conclude today's conference call. Thank you for attending. You may now disconnect.