美國西屋制動公司 (WAB) 2009 Q2 法說會逐字稿

Welcome to the Wabtec Corporation second quarter 2009 earnings release conference call. As a reminder, all participants will be a listen-only mode, and there will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). For your information, today's conference is being recorded. At this time, I would like it the turn the call over to Mr Tim Wesley, Vice President of Investor Relations. You may begin.

Thanks, Jamie. Good morning, everybody. Welcome to our second quarter earnings conference call today. Just want to apologize briefly for slight delay in the start here. We were having trouble with the webcast, and we were hoping to get that fixed before we got started. We apologize for a little delay.

Let me introduce the rest of the Wabtec team who is here, President and CEO, Al Neupaver, CFO, Alvaro Garcia-Tunon, and our Corporate Controller, Pat Dugan. As usual, we will make our prepared remarks, and then we'll be happy to take your questions. We will make forward-looking statements during the call. So please review today's press release for the appropriate disclaimers. With that, Al Neupaver, our President and CEO.

Thanks, Tim. Good morning, everyone. What I will do is I am going to cover the second quarter results, talk about the current market conditions, including how we're responding to those conditions. We'll talk a little bit about our progress on our strategic growth initiatives as well. Then, Alvaro will cover the financials in more detail. I will come back on for summary and we'll answer your questions.

Given the state of the economy and especially the freight rail market, Wabtec posted good results in the second quarter. Our transit sales were up 4% but overall sales were down 14% due mainly to impact from the freight rail decline. $17 million that decline was due to FX. Second quarter earnings per share was $0.64. That included a tax benefit of $9.7 million and we had pre-tax expenses of $8.3 million primarily related to down sizing and consolidation activities. Cash from operations was really good at $44 million. This was a result of a number of things but improved working capital performance as well. Our backlog remained over $1 billion, which will help to provide a base for revenue in the future. We are pleased that we achieved the numbers in a weak global economy and a very weak US freight rail market. This shows the strength of our diversified business model and that our strategic initiatives are paying off and that we continue to benefit from the Wabtec performance system.

Let's talk about the current market conditions. First of all, the transit market. We continue to see a good transit market driven by federal funding and passenger ridership. The current federal spending bill expires December 30 of this year. The Obama administration wants to extend that bill for another 18 months and a current senate bill backs that proposal. However, the house strongly favors a new six-year bill with a substantial increase in funding. So that the transit agencies have the funding and the lead time they need to plan future investments. If nothing passes by September 30th, it is likely that the funding will be maintained at current levels until the new bill passes.

There has been a lot of talk about stimulus money and high speed rail. Money is starting to trickle into the transportation projects, about 20% of the funding has been awarded. We have seen some additional bus orders and locomotive orders as a result. The real transportation money has yet to be spent. The same with high speed rail. The government has to decide the location of the high speed rail lines before any project can begin. Clearly, Wabtec is in a good position to take advantage of what seems like a strong commitment in the US to expand the country's mass transit capabilities.

It will take some time for us to realize meaningful benefits. Ridership remains strong but has been slightly affected by the economy. Two-thirds of the trips taken are work related. Nationwide ridership is down only 1% in the first quarter despite the sluggish economy, lower gas prices and higher unemployment. Some cities are still seeing increases of 4 to 5%, Boston, Chicago, DC, Philadelphia, and LA. The positive long-term trends in transit should continue to drive growth and investment in this area. This is a compelling market based on population growth and urbanization, long-term concerns about fuel prices and the environment and reduced dependence on foreign oil. In addition to this good NAFTA market, Wabtec has ample growth opportunities in the international transit area, which have remained strong even in this economic turndown. We're currently a small player in large markets such as China and Europe but are working very hard to change that.

The freight rail market. For us, the freight rail market softened further in the second quarter and remains very weak due to the economy. North American rail traffic is off significantly and continues to decline throughout the second quarter. Although, we may have bottomed out in recent weeks, year-to-date ton miles are down 18%, loadings are up 19%, intermodal traffic is down 17%. These figures are worse than we had previously projected. Even coal traffic is off 8%, as electricity production in the US has fallen off due to the recession. We can't predict when traffic will pick up, and it depends mainly on the overall economy.

With traffic down the railroads have parked perhaps one third of their freight cars and locomotives, which has a negative impact on the OEM business, as well as, the aftermarket demand. The industry has not yet released its second quarter rail car numbers, but our estimates for the deliveries are about 6,000, and orders of only 2,000, versus 15,000 cars being delivered a year ago with 12,000 ordered. Second half deliveries will be weaker than the first. We have seen a similar slowdown in the locomotive OEM market, which occurred later in the cycle due to longer term contracts that were being fulfilled.

We are seeing some signs of recovery and have heard that some of the railroads are actually bringing a few rail cars out of moth ball. We have especially seen some recovery in the international freight markets, such as Australia. We do expect these markets to come back faster than the North American market. Overall, however, the conditions remain difficult. Due mainly to these market conditions and our second quarter results, we are updating our guidance for 2009. The initial guidance this year was for sales to be flat to slightly down with EPS between $2.45 and $2.75. Based on the following assumptions. Rail traffic down 5%, freight car production at around 30,000, NAFTA locomotive production around 1,200, and no further weakening in the economy.

Market conditions are in fact weaker than we anticipated. Rail traffic is down around 20%, freight car production for the year is estimated to be around 20,000, locomotive production will be about 700. The economy, most likely, will not recover in the second half, which most analysts had hoped for. As a result, we have updated our guidance. Sales now expected to be down around 10% for the year with earnings per share range of $2.35 to $2.55. Considering the steep decline in some of our key markets, we feel that our team has responded extremely well.

In fact, if you take a look at the first half revenues, they were down $62 million, while operating income is only down about $3 million, after you add back about $14 million of expenses that we have taken for downsizing consolidation action this year. In this environment, we are focused on applying our lean principles and managing what we can manage by reducing costs and driving down working capital to maximize cash. We have accelerated these efforts. With the actions taken year-to-date, we are targeting annualized cost savings of 35 to $40 million. The cost of these actions has been around $14 million with about $8 million of that taken in the second quarter.

The theme of these actions is the Wabtec performance system, which is based on lean principles and continuous improvement. Actions have included a workforce reduction from all levels of the Company, plant consolidation, increased emphasis on lean events and sourcing activities. The goal is to balance our continued investment in growth opportunities with the need to take prudent actions that reflect the economy and business realities we face. I believe, we're reaching and achieving that balance.

In this environment we're staying focused on two areas, strategic growth and cash generation. We continue to invest in strategic growth opportunities. New products such as positive train control, where our market position continues to strengthen, there has been a lot of activity in the PTC arena, and we are in the front and center. Global expansion, we're working on our third joint venture in China, and just opened an office in Munich to serve Europe. In the aftermarket area, we are finalizing a service platform in Brazil. As for acquisitions, we're being disciplined in a difficult market staying focused on building a more global and diverse foot printed.

The second focus, cash. Cash provides the opportunity to invest in acquisitions acquisitions and growth strategies, and we're renewing our efforts to increase free cash flow through cost reductions, driving down working capital, and squeezing CapEx. We reduced the debt by $11 million in the quarter and bought back $12 million worth of stock. At this time, I would like to turn it ore to Alvaro.

Thanks, Al. Good morning, everyone. Like Al said, it is a difficult environment out there, and we see that every day. However, we have very optimistic about the future, and our ability to grow long term. Al touched on a few of these electronic breaking, international growth, and we remain very optimistic that as the markets recover, we'll be able to exploit those opportunities and continue our long-term growth.

However, in the short-term, we do remain cautious about the future of the economy. We do face challenges really that are unprecedented in our industry and we're trying to react appropriately as we go along. In terms of specifics and getting more specific as to our financial results, sales were down 14% to about $334 million this quarter. About one third was increase was due purely to FX, not really an operating issue but just changes in FX. That had a minimal impact on our EBIT of about $1 million or so.

The transit group sales were actually up 4% reflecting the continued strength in that market, mainly due to increased sales of subway car components and the polly acquisition and the decrease, the net decrease down in the Freight Group. We did have higher sales from an acquisition of Standard Car and Truck, but this was more than offset by the negative effects of lower rail traffic and reduced demand for new freight cars and locomotives. The acquisitions for those of you that want to keep track added about $30 million in sales during the quarter, when you compare it to the prior year.

Margins, as you know, were very focused on margins, and margin improvement with particular attention on the operating margin. We feel we had a good performance this quarter in light of the decreasing markets. Operating margin for the quarter was 11% versus 14.3% last year. However, this includes a significant amount of restructuring expenses. Once you factor in the $8.3 million in restructuring, the operating margin was 13.5% again compared to 14.3%, which in light of the declining volume. We think that it is a respectable number. We're not happy with that. We're going to continue to try to improve but we think it is a good performance.

Other fluctuations from quarter to quarter, interest costs was higher because of the standard car and truck acquisition. The effective tax rate, obviously, much lower in this year's quarter with the tax benefit of $9.7 million. This was due to resolution of open items and open positions from prior years that either the statute closed or the audit for those prior years closed during the current period. You really can't forecast the items. You take them into account as the statute expires or like I said the audit. Working capital, we have made some progress on working capital. We think we can do more. Receivables were about $252 million, down $8 million from the prior quarter, inventories were $250 million, down about $4 million from the prior quarters. This is partly offset, the benefit of this was partly offset by payables at $117 million, down from $126 million. Basically, as you reduce your purchasing and as you reduce your expenses, your payables naturally follow, and so the payables aren't quite as high.

In terms of cash balance and cash generation at June 30, we had cash of $121 million, up from $98 million at March 31. Cash flow from operations was $44 million, I think Al previously referred to that number. We're about 13% of sales. So we are happy that we're generating an appropriate amount of cash, which we can use for debt repayment. Stock repurchases, we actually repurchased about $12 million worth of stock during the quarter, as well, as investment in our growth strategies. At June 30th we had total debt of $352 million versus $363 million at March 31st at the end of the first quarter. So we paid down about $11 million of debt during the quarter.

Really, considering our cash flow generation, our earnings, and our assets, the balance sheet is in great shape, and that does give us a considerable amount of flexibility, and an ability to grow in the future using our balance sheet. To go forward with a few plenary miscellaneous item, which we always read out during the call. Depreciation was $6.8 million during the quarter versus $7.5 million last year, amortization was $1.8 million versus $0.9 million last year, so $900,000 last year. The difference was due to the acquisitions and the increased amortization they generate and CapEx for this quarter was about $5.3 million, well within our estimate for the year.

In terms of backlog, I think Al referred briefly to this. The backlog does remain over $1 billion, which gives us substantial stability and ability to especially in the transit market gives us greater visibility into the future. The rolling twelve-month backlog, what we expect to execute during the next 12 months compared to last quarter in this quarter the 12 month backlog is $565 million in total versus $560 million at the end of the last quarter, so it grew slightly. The transit number, which is the much more significant one was $468 million versus $450 million last quarter, so that grew, and the freight decreased slightly $97 million versus $110 million last quarter. The multi-year, which is executable in the next 12 months, as well as in future months, like I said, just over $1 billion for both periods. In transit it time grew slightly. $825 million versus $800 million in the prior period, and in freight decreased slightly to about $179 million from $192 million. With that, I will turn it back over to Al and he can give you a quick summary and we'll do Q&A.

Thanks, Alvaro. Once again, we had a good performance in a very difficult environment. Like most companies, we continue to face very challenging market conditions and uncertainty due to the economy. We have updated our sales and earnings guidance as a result. Fortunate that we have the diverse business model that we have and that our transit business is very strong at this point. Now, more than half of our revenues.

The Wabtec performance system provides an established culture for lean manufacturing and continuous improvement and gives us the tools we need to reduce costs and generate cash. We have an experienced management team that is committed to managing pro actively and aggressively through these tough times. With that, we will be happy to answer your questions.

(Operator Instructions). Our first question is from Art Hatfield with Morgan Keegan. Please, go ahead with your question.

Good morning, everybody.

Good morning, Art.

Just a couple things. As we look at the numbers for the quarter, and Alvaro, I appreciate your talking about the adjustments on the operating margin numbers. I would assume that the 8.3 million in severance and other costs, was that primarily in the SG&A line?

No, actually primarily in cost of sales. And that's why when I kind of did the pro forma adding back the 8.3, I went all the way to operating margin. So as not to get confused between the cost of sales. But I would say probably 6 to 7 of that 8.3 is in cost of sales.

That's helpful. When I think about going down further in the tax lines a little bit hard to look at this quarter?

It is not for us. The tax lines were actually pretty easy to look at this quarter.

I guess, yes. Theoretically, yes. I am all for no taxes whatsoever. To kind of look at it more normalized, if we adjust for the severance costs and add back the tax benefit, for the severance costs and add back the tax benefit, what would the effect of tax rate have been in the quarter?

The severance costs are you know, deductible, and basically what have you to do is add back the effect of the clearing up the additional items, which was the 9.7 million. Once you do that, then the tax rate should be about 36, 36.5, about 36.2, I think, somewhere in that range which is our normal tax rate.

Right, right, I thought it may have been. I wanted to ask.

Absolutely.

That's helpful. Al, as we look out and it looks like with some of these key freight markets in the US. I mean, it is possible that we could see kind of build rates bottom out in the back half of this year. No telling when they will start to grow again, but we could see them fall off further from where they were at in Q2.

When you look out to '10, and I am not asking for you to pin you down to guidance, but if you think with trying to grow earnings next year, what do you think has to take place in the markets that you serve or what can you do internally to accomplish a goal like that?

I think, Art, if you look forward and I think we agree with you that we're going to see in the third and fourth quarter hopefully a bottoming out, there is not much more room for deliveries to go down. So that's going to bottom out, and we don't know when the recovery is going to be. So what we're doing is, I mentioned in the prepared remarks, we're really trying to focus on growth in other areas. We're building platforms in our international arena.

We're looking at ways in the freight market to expand some of the things we have to offer. So global expansion, and I am not only talking about freight now, I will talk just a few minutes about transit, we still think we have a lot of opportunities globally. We're just establishing a platform in Brazil. We only just last year established a joint venture in China. Our European acquisition at Poly gives us opportunity to look there at freight markets, and Australia, a growing presence there. The second part of freight is the new technology. We expect to see some more activity in the technology area, especially the positive train control area. So those are two driving factors for the freight markets. What we have to assume is that recovery may not be there and we're going to focus on what we can control and that's the other opportunity.

In transit, we think it is going to be stable at a high pace and hopefully, the stimulus money will start generating future contracts that we can take advantage of. That's the North America market. If you look at international basis, as I mentioned, we're such a small player in gigantic markets. Those markets, the specific market in Europe is five times the North America market, as it is in China. We're getting established in those areas and seeing a lot of activity. We're getting our products developed, so we can offer braking systems, not just components, and we're going to stay focused on that.

When you look at the kind of the international growth that you see, do you have the corporate management in place to effectively oversee that growth or as you expand geographically do you see needs to expand your management ranks?

I think there has been to see an expansion over time, and what we have done is we have tried to do it incrementally. What the Corporation does is establish a platform to operate out of either through an acquisition or Greenfield site. A good example of that is, years ago we established an aftermarket service business in Australia. Today, that particular business is a key to OEM aftermarket sales and a source of good growth for us. We're going to do the same thing in Brazil.

We established the manufacturing site in South Africa, which has led to growth in this particular area. In China it is a different approach. Every country really, every portion of the world has a different approach, and that's what we've focused on is getting those platforms in place that we could build from. As the opportunities grow, we incrementally add the management to do it.

Typically you have to start with a key manager in that particular part of the world, and that we have been very focused on getting good people up front that help lead the growth of the various products. We also try to share that platform. We do not go in there with just one product. We'll even offer transit and freight products out of that same platform, if it makes sense.

That is helpful. I guess I was kind of trying to understand would you have to grow the corporate staff to manage that or can you do that more on a country by country basis?

I think you can do it on a country by country basis. We have a pretty good international team here at corporate. I do not think that we have to add that much corporate. I do not think that we have to add that much corporate cost.

And just one last thing, and I will let somebody else go. Can you update us on standard current truck, where that is and kind of any benefits that you started to derive from that acquisition?

Yes. The integration is totally complete. It has been an excellent integration, Rick Mathes and the team have done a great job in becoming part of the Company. We see tremendous amount of opportunity for that particular business as we have really billed it into our OEM rail car business. Obviously, the timing of the acquisition was not great. However, the division is performing to our expectations based on the volume.

I will give you an example. Two of their small divisions were recently integrated into one of our operating plants out in Ohio. Those two divisions had about 50,000 square feet. By applying lean principles, we have got it in a 10,000 square foot new building. It would be a perfect example of lean manufacturing. We just made a recent visit to that plant and were totally impressed with what the capability was. They have half as many employees with the capacity to produce twice as much product. I think that's a good example of how we were able to integrate standard car truck.

So we're very pleased. It strategically has done everything we thought it would do, and it is going to be a lot of fun when the recovery comes.

Great. Thank you so much for your time.

Thank you, Art.

Our next question comes from Jim Lucas from Janney Montgomery Scott. Please, go ahead with your question.

Pronounced numerous ways.

Usually they have a hard time with my name. Usually, Jim Lucas is straight forward.

I have been called worse. That's for sure. First question here on the backlog, can you give us an update on where the options stand portion.

The options are not in the backlog, Jim.

Right.

We have about $125 million of options that we think will be headed our way.

Okay.

Mostly in the locomotive area.

How much of that would be dependent upon potential stimulus?

I don't think any of that. If any, just a little bit. Those options are already funded. Now what, we did see is a couple of agencies agencies were able to increase the number of options because they were able to get some stimulus money, and those were some of those projects --

Number of orders or options?

Number of orders.

Okay.

What I was meaning, we have seen some case where is they might have ordered X, and now they're ordering, it is not really the options X plus Y because they did get a little stimulus.

Exactly right.

Most of these options, they're with contracts that were executed awhile back, and so they're not dependent on stimulus money.

Okay. Following up on the geographical expansion part of the growth strategy longer term. I mean, you reference in prepared remarks about the transit market internationally being substantially larger than the US. POLI gives you a toe hold into getting into the breaking standard in Europe, and now entering into Brazil with the service center, and you talk about pulling some transit in with freight. As you look at the opportunities to expand the transit business, particularly meeting the breaking standards, Europe in particular, what else do you need to do at this point?

It is a matter right now of getting credibility in the marketplace, establishing an organization that is substantial, that can support our product. Do you have to go through testing, and some cases that testing could last up to two years, and many of our products right now are in that testing phase at different stages. It really is building the confidence of the car builders, as well as, the authorities over there, and that just takes time. We have a good product.

We were able to match the technology that we had at our North American transit division with the POLI organization, and now we are offering a full complete braking system. It has taken us a little over a year to get that into test, but we're moving along at a good pace. It is never fast enough but it is a process that will result in substantial business into the future.

Okay. And on the margin side, the gross margin number if you back out the restructuring nearing 30%, that's a pretty impressive number no matter how you cut it. Especially with the volume declines. But we see SG&A in terms of absolute dollars relatively flat year-over-year, and just wondering, has there been any sort of structural change in the cost structure with mix of gross margins being higher but SG&A being inherently higher. And as you come out of the downturn, whenever that may occur, what is the margin structure look like for this Company?

Let me -- I think you got at least two questions in there, Jim.

Right.

I will try to tackle them in order. In terms of SG&A, when you look at it flat year-over-year it is about 42 million both year-over-year, but one thing is between standard car and truck and POLI and this is after the reduction that is we put in place right now. So it would have been actually higher. That added about $5 million of SG&A, and the current period includes a million or two of restructuring as well.

So actually, when do you the comparison year to year, between those two factors, SG&A would have probably been about 6 to 7 higher, if we hadn't done our cuts. In terms of what it should be going forward, SG&A is always going to vary. We have a large number of items in there, medical costs, compensation for the entire management team, a number of different items, and it is always going to vary some. I would say as a run rate you can probably use somewhere around 40 give or take going forward.

Okay. And with regards to the gross margin aspect?

Gross margin depends very much on mix. You know, freight is our higher mix business, and that's the one that's been down. So when you talk about performance in the things that we're pleased with is we have been able to maintain margin in spite really of the mix working against us. Where we think the margin is going to be in the future, you know, it is tough. The only thing we can say is we're not happy with where we are, and we're going to improve them. That's a constant goal, and we're constantly working on that.

Finally, any updates on the capital allocation strategy? We saw you bought back some stock, but how are you thinking about the M&A environment these days?

We are seeing a lot less activity than a year ago obviously, and some of the things that you do see are more distressed. We're continuing to to be opportunistic. We'll be very disciplined in our approach, and as usual we're always working on something. There is less activity in that particular arena.

Okay. Great. Thank you very much.

Thank you.

Our next question comes from Kristine Kubacki from Avondale Partners.

Good morning. They got my last name right. That's amazing.

Right. Good job.

My question is with the extreme drop in equipment in the second quarter on the class one railroads, what was freight aftermarket down in the second quarter?

It was probably down around the 20%, Kristine.

Are you kind of making that the run rate for the rest of the year kind of assuming a flat assumption there?

We're assuming that we're bouncing on the bottom right now.

Okay. So you're not really forecasting in there with -- I took it as rather bullish comments on some of the equipment coming back onto the rails yesterday from the western railroads.

Yes, we saw that, and that was encouraging, but we are assuming we're bouncing on the bottom.

Okay. So clearly, not kind of baked into the guidance at this point?

Right.

Okay. And then I just want to clear up something. In terms of when you say stability in terms of the transit operations, are you looking at revenues to be kind of steady with the first quarter or are the first half of the year or are we kind of looking at kind of a year-over-year comparison and maybe just explain what stability means.

We're talking year-over-year, but you also have to realize there is large contracts that you complete one and then there is a little lull before another, large shipments in one quarter that isn't in the next, but it is year-on-year.

Okay. That's it for me. Thank you very much.

Okay, Kristine. Thank you.

Our next question comes from Steve Barger from Keybanc Capital.

Good morning.

Hi, Steve.

I want to follow up on the guidance question from before. If you're extrapolating out that recent 20% rail car loading rate, if you start to see sequential increases in the back half, which we have seen over the past couple of weeks, how much of a positive impact would that have on results or how should we think about the sensitivity of earnings to rail loadings on the freighted aftermarket side?

That's exactly in the guidance we have the range because you really can't predict. The one thing that we're hoping for is when you have this number of vehicles parked that once the economy turns and they start bringing this equipment out, hopefully, we'll see a little spike.

The first thing we're going to see is our aftermarket will pick up, and we may see a little spike there because there may be more work to be done. Especially, if any cannibalization was taking place, while it was in moth balls.

Right. It has been a couple of quarters now we've had hundreds of thousands of parked cars. Presumably there has been some scavenging there. Have you factored that into your thinking with respect to second half 2009 production?

All we are doing right now, the assumption is we're bouncing on the bottom.

If that sequential improvement in rail loadings were to continue and if transit stays flattish and we know the OE side of freight is very low level, so it is not going to get a lot worse, and you're going to get presumably traction from your cost activities, why would quarterly results be worse from here which is kind of what the guidance implies at the midpoint?

Worse than the first quarter?

The first quarter is exceptional but sequentially from 2Q.

I think it is pretty consistent, Steve, maybe you can follow back up with Tim after the call, but I think it is pretty consistent with the second quarter. You have to look at operating earnings.

Right.

And seasonality. We always do have a little bit of seasonality in the sense that in this year especially because of seasonality occurs during plant shutdowns. Normally scheduled plant shutdowns in a normal year. So there is always a little seasonality in the third quarter but I would say overall the third and fourth quarter. Once you factor in the special items we mentioned, are relatively consistent with the second.

Okay. So if anything, if you saw the rail car loadings start to get better, you would expect some potential upside or maybe towards the high-end of the range just based on the sensitivity of earnings to that specific part of the market?

We don't want to predict it. We would hope so. That's part of my daily prayer, rail car God.

All right. Thanks very much. I will get back in line.

Keep in mind it is one factor in the big matrix here. Okay?

Yes. I understand. Thanks.

Our next question comes from Paul Bodnar from Longbow Research.

Good morning.

Good morning, Paul.

Question on the transit market, as I am thinking about this over the next eighteen months in North America on rolling stock. We have had state and local budget pressure going on but on the positive side have you the stimulus money, some of that seems to be going to bus and station refurbs, flat federal spending and looks like MTA may be in a period of declining deliveries over the next eighteen months. Is that something I suspect to be a flattish market, down, up, what are your thoughts on what we're looking at here in the near term because long-term I would see it different.

There is probably 50 different projects that we're tracking right now, supply, and holding on, and that's a normal situation in transit. You will see some peaks and valleys in some of the projects. The last option was just awarded out of New York City just a few months ago. So that will be the last area there. Actually, for NBTA, there could be good activity for us because there is a possible tender coming out for new locomotives. So you really have to look at each one.

The other thing the Obama administration has done to help on the operating side is they have allowed -- they passed a law allowing the 10% of that stimulus money can go toward the operating budgets to relieve some of the that pressure. That's bad for rolling stock, but it is probably good they maintain their service because with good service that's how that rider ship is going to stay up there.

So it is down to like kind of almost a wait-and-see how it shakes out?

Well, it is a little more than that. I think a lot of the projects that are on the table are going to come to fruition. I think that the long-term trend in this market is compelling. By that, I think it is a very favorable market long term. I mentioned in the text that the house was recommending a new funding. To give you an example, what they're talking about, their proposal they're thinking about would almost double the amount of money that goes to transit. The current bill that's passed is about $10 billion a year.

What they're recommending is 20 billion over the next six years, each year. And they're also going to suggest that you get about $10 billion towards high speed rail. That amount of influx into that marketplace is only good for Wabtec. We're basically a North American supplier with content on equipment. Not every project they start, not every stimulus project has to do with Wabtec, but if the transit industry is growing, then we're going to grow with it.

Sounds like I guess a 12 to 24 month horizon before you start so see a benefit?

That's right. There is a lot of project that is are in the works now, but it takes time for some of those projects to come to fruition for us.

Last question, just UK refers business if you can talk about what's going on over there at this point?

What we're seeing in the U.K. is very similar to what we're seeing here. The freight markets are off drastically. The transit markets are good but somewhat depressed because of the recession, and almost mirrors, but it was a later decline than we saw here in the states.

They still had strength in the fourth quarter and even a little bit in the first quarter, and the second quarter they have kind of mirrored the time type of activity as we have here in North America. So that transit market still looks pretty steady?

Yes. Okay. Thanks a lot.

Thank you.

Our next question comes from Jason Rogers from Great Lakes Review.

Just wonder if you have a number for the equity for the quarter?

About 700 million.

Yes.

Do you want an exact number?

That's very close, right now on a preliminary basis it is 703. 700 is close.

Okay. And I think in the past you might have given a number for the percent of backlog that you expect to roll off over the next year.

Yes. I gave that earlier. Let me dig it out again real quick. The total backlog is just a million -- a little bit over a billion, and we expect to roll off over the next twelve months is 565 million. It is about 55%.

Okay. Thank you.

Thank you.

Our next question comes from Art Hatfield from Morgan Keegan.

Sorry for getting back in, guys. Just a follow-up, Alvaro, I noticed the expense line kind of dropped off precipitously from Q1, and if you explained it, I apologize for asking it again, but can you tell us what happened in Q2?

I am sorry, when you're talking about the expense line dropping off precipitously, are you talking about SG&A?

The interest expense line, yes.

We repaid some debt, and in a couple of our foreign locations, and we're actually getting slight this is all net of interest income and we're getting slightly higher interest income in a couple of foreign locations. That helped to offset.

So that kind the the Q2 number is kind of a closer place where that will be going?

Yes. If you're trying to model it, Art, we have $150 million of bonds.

Yes.

That we're paying six and 7/8ths on. And right now on our debt we're paying about 2.25, 2.50. We are pretty pleased with the interest rates that we have been able to negotiate on. On everything but 150 million, we're paying about 2.25, 2.50, and interest rates in general on our cash are about 1%. If you want to model it like that, I think that would get you in the ballpark.

I apologize.

No apologies needed.

No. No. Next time I will give you the line item. I apologize .Did you give us what the debt balance was for the year? You may have, but I don't think I wrote it down.

It is about right now we --

How much do we have in short-term, Pat?

30, so about 350.

350 in total?

Total debt and cash is 121.

Okay. So 350 backing out the 150 at 2.25.

The 350 includes 150.

Got it. Okay. Thank you so much.

Okay. Thanks.

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