美國西屋制動公司 (WAB) 2010 Q1 法說會逐字稿

Good morning and welcome to the Wabtec Corporation first-quarter 2010 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Mr. Tim Wesley. Please go ahead, sir.

Thanks, P.J. Good morning, everybody. Welcome to our first-quarter 2010 earnings conference call. Let me introduce you to the rest of our team members who are here, Al Neupaver, our President and CEO; Alvaro Garcia-Tunon, our CFO; and Pat Dugan our Corporate Controller. We will make our prepared remarks as usual and then be happy to take your questions. I do want to refer you to today's press release for the appropriate disclaimers on our forward-looking statements.

With that, I will turn it over to Al.

Thanks, Tim. Good morning. We are off to a good start this year. Our sales were at $364 million, the highest level since the first quarter of 2009. Earnings per share came in at $0.63. Our operating margin was strong at 14.1% of sales, and our backlog held steady at about $940 million.

This performance shows the strength of our diversified business model and that our strategic initiatives are paying off. We continue to benefit from the Wabtec Performance System, as you can see with those impressive margins.

Today we also updated our 2010 guidance for EPS. Based on our performance in the first quarter and our outlook for the rest of the year, our guidance is now $2.40 to $2.50, compared to $2.35 to $2.50. Sales now are expected to be up slightly for the year.

Clearly the overall economy has rebounded off the bottom. That is having a positive effect on the rail industry and on some of the segments of our business. So overall we are cautiously optimistic about the economy and our markets, while recognizing that it is still early in the year and there are still a lot of locomotive and rail cars parked. I want to emphasize that even as the economy continues to improve, we will maintain our cost discipline and focus on generating cash to invest in our growth opportunities.

Let's take a look at our markets. First the transit market. We still continue to see a stable transit market in North America, which is driven by federal funding and passenger ridership. The current federal spending bill has been extended through year-end. Transit can also be part of the jobs bill or second stimulus bill that's being discussed.

Over the next several years, we expect the new subway car orders from a number of agencies including Metra, LaMotta, Miami, New York City Transit, BART, and Amtrak. As well, we expect new commuter locomotive orders from MBTA, Metra, and Amtrak. We should win a good share of those orders.

Ridership is still good, but was affected by the economy. About two-thirds of the trips are work-related. Nationwide ridership was down about 3% last year but still exceeded 10 billion trips for the fourth straight year. Overall ridership is up more than 30% in the last 15 years, more than double the rate of population growth.

So far this year it is a mixed bag with some agencies seeing increases and others off slightly. The positive long-term trends in transit should continue to drive investment. Those are population growth and urbanization; long-term concerns about fuel prices; reduced dependence on foreign oil; and the fact that mass transit is environmentally friendly.

In the short-term, we are paying close attention to the budget issues of many of the transit agencies. No major impact on our business so far, but we could see some pressure on the aftermarket as these agencies look for ways to cut costs.

We also continue to make good progress with qualifying our components and braking systems in the European market. As we have discussed before, this is a large market where we only have a small share at this point. So overall for the transit market, Wabtec is in a good position to take advantage of the long-term strong commitment in the US and abroad to expand mass transit.

Switching now to the freight rail market. Rail traffic is rebounding solidly this year after a 15% drop in volume during 2009. Through mid-April, ton miles were up 4% and intermodal traffic was up 9%. Volume bottomed out in the second quarter of 2009 with average weekly ton miles of about 26.8 billion compared to about 31 billion in the first quarter of 2010.

This increase in traffic has lead to a similar rebound for our North American aftermarket business. Aftermarket was about 60% of our total freight sales in quarter one. The traffic increase is also causing the railroads to pull more parked cars and locomotives out of stowage, which will eventually help those OEM markets. About 390,000 cars or about 25% of the fleet remained parked, down from a peak of more than 0.5 million cars in the middle of last year. Good news, but still a lot of cars parked.

As expected, new railcar outlook remains weak, but there are some signs of life. In the first quarter, deliveries were at about 2500, lowest since the mid-80s, and about one-third of the year ago quarter. Orders were about 5000. This is the highest since the mid-2008 time frame, so the backlog rose slightly to almost 13,000. First time the backlog has increased in three years.

We are still expecting about 10,000 cars to be delivered this year, which is less than half of that in 2009, and we would be pleased if it turns out to be a conservative estimate, but it's too early in the year to make that call. We have not changed our expectations in the locomotive OEM market this year. About 400 is planned to be built this year, down from 700 last year.

On a positive note, our international freight markets have almost fully recovered to pre-recession volumes.

Our focus for 2010 will continue to be on growth and cash generation. Cash remains a priority. It provides the opportunity for us to invest in organic growth as well as acquisitions. We will stay focused on increasing free cash flow by managing our costs, driving down working capital, and controlling CapEx spending. We will continue to invest in strategic growth opportunities, global and market expansion, aftermarket expansion, new products and technologies, and acquisitions.

I would like to spend a minute on our most recent acquisition, which also happens to help us with our new product and technology strategy. As you know, positive train control continues to be a major growth opportunity for Wabtec. We are working with railroads and transit agencies to develop and implement systems for the onboard locomotive solution, which is really the brains of the system. Our current product and market position could result in incremental sales growth of $200 million to $400 million over the next four years, with a ramp up expected at some point next year.

Late in the first quarter, we acquired a company by the name of Xorail, the largest independent signal engineering company in the US. This was done in part to expand our PTC capability. Our main business is signal engineering and design with focus on the wayside and grade crossing. The business has no overlap with our existing business except for PTC.

In addition to design, Xorail also does construction and installation. That amounts to about 25% of their revenues. A majority of their sales are in the freight area, about 85%, and they have very little international presence. This will be an opportunity for us.

In addition, Xorail expands our train control capabilities. Signal engineering work is likely to increase as PTC is deployed and railroads upgrade existing equipment and systems to be compatible. We also see additional work needed to design and install PTC equipment and connect with existing systems.

The FRA says Wayside PTC spend will be about $2.5 billion for design, engineering, and installation over the next five years. We estimate that Xorail could compete for about 10% to 20% of that work. There are three or four other companies that will also compete for this business depending on the specifics of the project.

Wabtec can now offer a comprehensive train control solution with an onboard, back office, and wayside solution. Xorail has solid financials, double-digit growth prospects, margins similar to our freight group average, and the acquisition met our financial criteria.

With that, I would like to turn it over to Alvaro for comments on the financials.

Thanks, Al, and good morning, everyone. Sales for the quarter were $364 million. While this was 4% lower than last year, it was the highest level since then, a sign that we have hit bottom and are starting to bounce back.

Going by segments, transit group sales were about the same as last year. Freight group sales were down about 8%. This was mainly due to lower OEM deliveries of locomotive and freight cars in North America. However, the benefits of our business model is evident by the fact that railcar deliveries were off more than 65%, which is obviously much greater than the 4% -- I'm sorry -- 8% sales decrease in the freight segment.

Moving down the income statement, we continue to be focused on improving margins with particular attention on the operating margin. Gross margin improved by 150 basis points showing the benefits of restructuring and the operating margin was still strong at 14.1% even though we had lower sales than last year, when it was 14.7%.

SG&A was higher than the year ago quarter, but this was mainly due to the acquisitions of Unifin and Xorail and their related purchase price and counting. As we have discussed before, when you make an acquisition, it typically in the first year you have to take certain charges for the value of the profits inherent in their inventory and backlog and that can lead to some charges in the first year.

Also when you compare it to the first quarter last year, we had an asset sale in the first quarter which produced a gain of about $2 million and that reduced SG&A. The margin performance we believe reflects the good work of our operations to reduce costs as well as general cost reductions overall in the Company.

Interest expense was lower due to borrowing at lower interest rates in last year, in the first quarter last year. Borrowing amounts were relatively stable, as we will get into as we go forward, and the other expense was slightly higher, due mainly to a paper foreign exchange loss due to intercompany balances and the translation of those intercompany balances.

The effective tax rate was relatively stable at just under 35%. This is a little bit lower than the first quarter of '09 due to the higher percentage of non-US sales and lower tax rates abroad.

Just to run through a few numbers that we typically always announce for your benefit, in terms of working capital, receivables were $248 million. Inventories were $241 million. Payables were $122 million. Obviously for us cash generation is a significant component of our overall strategy and we continue to work to drive working capital down.

At the end of the quarter, we had cash of $179 million. This was mostly in our foreign units. Cash from operations was about $12 million in the quarter.

Debt at the end of the quarter was $419 million. This was up a little bit from December 31 due to the acquisition of Xorail. The balance at the end of December 31 was $392 million. We do still have plenty of capacity for investing in growth opportunities. Our debt net of cash is about 1 times EBITDA and we have substantial flexibility in our balance sheet, so the picture looks good there.

A few other miscellaneous items. Depreciation for the quarter was $6.5 million versus $7 million last year. Amortization was $1.9 million versus $2.3 million last year, and CapEx very stable in spite of the increased size, we are about $3.6 million versus $3.4 million last year.

In terms of backlog, as Al mentioned, the backlog is holding steady at about $940 million. The 12-month backlog, the backlog we expect to execute over the next 12 months, in total is $543 million versus $552 million in the prior quarter. Freight constitutes $149 million of that $543 million and transit constitutes $394 million of that $543 million.

The multiyear backlog, the total backlog, what we expect to execute over the next 12 months as well as after that, is $938 million. Freight is $233 million of that total, and transit is $705 million of that total.

With that, I will turn it over back to Al and his closing comments.

Thanks, Alvaro. Once again we had a good performance in the first quarter. Our transit business is holding at a high level. Freight traffic has rebounded to the point where it's only off about 6% to 8% from the peak levels in 2008. This is driving the improvement in our freight aftermarket business.

Except for our locomotive and freight car OEM markets, other segments of our diverse business model are quite positive.

I am very proud of our Wabtec team and how that team managed aggressively and proactively through the downturn. With the Wabtec Performance System providing an established culture of lean manufacturing and continuous improvement, we are well positioned to take advantage of the improving market conditions.

With that, we will be more than happy to answer your questions. Thank you.

(Operator Instructions) Arthur Hatfield, Morgan Keegan.

Al, you had mentioned in your prepared remarks comments about the possibility of seeing some pressure in the transit aftermarket as some of these transit agencies reevaluate their budgets. Did you see any of that in the first quarter? And can you -- if not, can you talk about when you may start to see some of that?

I believe we've seen some of it already, Art. We saw our aftermarket drop off in two of the business areas. Not significant, but enough to be noticed. And what you find is that they are probably working off their inventory and I think that as these transit authorities get under further pressure, they may even defer some of the activities that can be deferred.

But in total, you're not going to see a major impact because when it comes to the aftermarket, you have to really take care of the equipment and they don't have a lot of choice. But working off the inventory obviously is the first action that they would take.

Okay. Next, still on the transit area, you had mentioned several potential longer-term opportunities for new vehicle orders in the transit market. Any thoughts on any of those that you mentioned kind of like what the timing is, where you may see the process for those different opportunities develop?

Yes, the opportunities that I mentioned are ones that have been quoted or are in the quoting or the bidding phase. And some of the deliveries on these projects would be late 2010 into 2011. And they could run out to 2017.

When do you expect to start hearing the awarding of those contracts?

I would think that by mid-summer, early third quarter.

And then finally, if you could just walk us through kind of your thoughts on PTC, what you think the market opportunity is now with your new acquisition, what you think you can do in that market, and over the kind of the timeframe that you should see that impact on the business.

Okay, let's first talk about our existing market potential, which we've talked about before, but it is worth discussing again. We view that the potential for the onboard hardware and software system is between 200 and 400 over the next four to five years. And that is a conservative amount and only deals with the onboard computer. We also should have some opportunity related to the installation and the maintenance of that equipment.

We should also have -- we have an existing product for the back office or the dispatch as well and we should see incremental business through flow out as well. Most of those expenditures will not start, as I said, until probably well into 2011. Where most of the focus is on right now is on the wayside of the installation of PTC, and this is where Xorail is involved.

And the Xorail opportunity -- let me go through it a little slower than the prepared remarks. Basically what the FRA has said is that the PTC spend for design, engineering, and installation on the wayside is probably about $2.5 billion. Of that $2.5 billion, we think that Xorail would be able to compete about 10% to 20% of that. Okay? So you could do the multiplication.

Now for that amount of business, we would be competing with either three or four different competitors, GE, Invensys, Ansaldo, possibly Alstom. And the biggest competitor is the class one railroads themselves, who traditionally or historically have done a lot of this work inside and has really started farming this out over the last few years. That is really how Xorail got its genesis.

So you have, say, $250 million to $500 million divided by the four or five years gives you $50 million to $100 million per year over those number of years, and we expect to get a representative share of that amount. Were you able to follow that?

Yes. No, I got that, so you would get -- could you ballpark what you would hope that you could get of the $50 million to $100 million a year?

Well, we would like to see annually $10 million to $20 million of additional sales for that business unit.

Okay, excellent. That's all I've got. Thank you very much for your time, Al.

Steve Barger, KeyBanc Capital Markets.

Good morning. Just to follow up on your last comment there, if you were to see $10 million and $20 million per year in additional sales from Xorail on PTC, is that at a typical freight margin or what margin profile would you expect for that?

We've talked about a typical freight market margin.

Okay, I want to take a stab at guidance. Looking at the recent trend in freight volumes, as you noted, we are seeing sequential improvements. It seems like that's hopefully going to continue. You noted that transit is stable at a high level. You have good backlog visibility.

So given that backdrop, why won't you better than annualize the current result? If I just annualized this quarter you get $2.52, which is above the high end of the range. So where's the risk to the next three quarters in terms of coming in below the current result?

Okay, Steve, we're obviously excited about our opportunities and the improvement in the marketplace. If you look at our opportunities on a global basis, we have had the global markets that rebounded nicely. We are a small play or a small share in large markets in both Asia as well as Europe. We look at our new products and our technology. We are excited about those opportunities. We are actually starting to see improvement, as we've stated, in the aftermarket.

So we've got all that great things to be optimistic about, but yet we think it's prudent to be conservative at this point for a number of reasons. One, if it is not a sustained recovery. We hope it is. And secondly, the number of parked cars, whether it be locomotives or railcars, and the expected deliveries of both of those are almost half of what they were the year before.

So you've got some really great things ahead of you, but we have not seen the railcar or the locomotive build show any signs of returning necessarily in the next 12 months.

Right, but to be fair, you were already at trough run rates, right, based on your expectations for production?

Yes, I would say that's a fair statement.

Okay. So just recapping then, you prefer to take a conservative stance versus trying to make a forward-looking statement that some of those end markets might recover?

That's correct.

Okay, fair enough. I wanted to also dig into the number of cars that are parked and how they are coming out. Are you getting a positive bump from having some of those idle cars get refurbished? And how much of an opportunity is that, just kind of dealing with what may have been scavenged relative to any benefit you're seeing from a normal increase in freight loadings?

We are seeing definitely we have an opportunity as they bring the cars back out, especially the railcars, and we are seeing that. But if we really -- and I took a real good look at the ton miles, which we like to compare to our aftermarket business, and boy, it's tracking pretty close to ton miles right now.

So I can't quantify that extra pop, although we've really went out and we've quizzed our service centers. And yes, that's some of the product that is coming in there, but we are tracking pretty close to those ton miles.

We really bottomed out in the second quarter of '09. We saw the incremental improvement from 26.8 up to 31, and that's the kind of business improvement that we've seen with those businesses that are directly related to that. So I can't quantify that pop or whether maybe it's coming. Right now, it's following ton miles.

Can you remind us what your guidance suggests for ton mile increase year-over-year?

Our original guidance expected a -- it was 3% to 5% recovery if I remember correctly, and I'm getting some nodding heads that agree with me.

Okay, so that's a reasonable thing for us to track, just to think about how your year is progressing on the freight side.

Right.

One last question and I'll get back in line. How should we think about the SG&A spend in the coming three quarters in terms of absolute dollars? Is that going to be in line generally with the $45 million or so in 1Q?

Yes, I think in terms of -- for modeling purposes, you can use that number, Steve. There's always a few missing parts in SG&A and as you well know by now, we don't like to report a lot of exceptions and a lot of exclusions. We just like to go with the GAAP numbers and they are what they are. There's always a few moving parts, but I think in general for ongoing purposes, you could use what we had in the first quarter.

Great, thanks.

Scott Blumenthal, Emerald Advisers.

Good morning, everybody. Would you be able to share with us the revenue contribution from Xorail in the first quarter?

Yes, we had about $13 million. There's little echo here. I don't know if it's on your side, Scott, or us, but let's see if we can work through it. We had an improvement about $13 million from acquisitions. $11 million of that was Unifin and only $2 million of revenues was from Xorail.

Thank you. And I guess following up on Steve's questions and your comments there, Al, I guess we saw the inflection or the percentage contribution from freight to transit -- we saw that kind of flip at the end of Q3 '08 and historically we've been more freight-centric than transit-centric. How does that track with ton miles and can you give us an idea as to where we are in that -- I guess in that continuum you made?

Let me see if I can help you and again there's still an echo, so we will try to work through it. If you look at the balance between freight and transit, what you have if you compare the first quarter of last year are freight is actually down by about 8% from first quarter last year and we held steady in Transit. Now, what that was is this year we are 45% freight and 55% transit and last year first quarter was 47% freight, 52% transit.

But if you look at the fourth quarter, that's probably a little more telling because what you had is transit was down about 6% fourth quarter to first quarter and freight was up 12%. That split with 60/40 and right now we're 45/55. I would think if transit could hold steady at the high level and freight comes back, I think traditionally we will probably get back to a ratio more like the 60/40 freight to transit, depending on her ability to grow transit on the international basis. That's what drove a lot -- we had 55% of our transit business was international in the quarter.

Okay, that's helpful. And maybe you can help us then with your expectation as to when we might cross over to being a more freight-centric ,,

I couldn't even take a stab at that because I would hope that they both grow but I think really when it does -- is probably that inflection point is probably somewhere when the railcar build on the locomotive build takes off.

Okay, fair enough, thank you. One more, if I may. Alvaro, you as always did your terrific job giving us all those facts and figures (multiple speakers)

You know, I can read numbers from a sheet as well as the next guy.

Better.

Thank you. You are a gentleman.

Can you give us an idea as to the margin composition of the backlog currently? And after that maybe a comment or two about what you are seeing with regard to metal prices?

Okay, I'll take the second one first. What we are seeing with regard to metal prices I think is very similar to what other people are experiencing, which is that you are having increased demand by other countries primarily China, India, and that's driving prices back up.

The one thing we did learn and we left in effect is -- during the last metals increase is our surcharge mechanism. And nobody likes the rising prices, but we do think we do have a mechanism in place to minimize the damage. You know, what you always see from that is we don't mark up our surcharges, obviously. Whatever price increases is is what we pass through. So it has some slight effect on margins.

You are getting increased revenue from the increased cost, and they throw each other out. But we are seeing increasing metals prices. But right now what we think we are dealing with it okay.

With respect to margins in the backlog, that's kind of -- I would say in general they tend to be at the company averages. A lot of the backlog is for OE rather than aftermarket work, so they would maybe on average slightly lower. But in general if you are trying to model something out, I would do at the respective averages for each business segment.

Okay, I guess a follow-up on the metal thing, one last one. You have a quarter or so delay in capturing those surcharges. Is that how we should kind of look at that?

You know, it depends. Sometimes the industries are right on top of it and sometimes there can be a delay. Sometimes we are pretty effective at resisting the price increases on our end from our own suppliers. So I would say in general there may be a little bit of lag, but not that significant.

Okay, terrific. Thank you.

Kristine Kubacki, Avondale Partners.

Good morning. I know you talked about the aftermarket following gross ton miles, but it seems like in the last few weeks even since the quarter has ended that we're starting to hear about some of the older cars coming out of storage, maybe in some cases that have been sitting for over three years.

Would you expect that there would be pent up demand perhaps that maybe you didn't see with the cars that were first coming out of storage, but now with some cars that are sitting there for three years, is there a certain amount of preventative maintenance or things that would have to be done that would suggest that maybe you get maybe 2X or 1.5X kind of result from aftermarket with cars that have been sitting that long?

It's pretty hard to estimate what it is, but I tell you as you know, we are situated here next to the rails, rail track, and we've seen some rail cars go by here I don't even know if they are worthy to be put back in service. So I don't know if they were going to the scrap yard possibly, but I think there's an opportunity there. It's pretty hard to quantify and I really wouldn't expect 1.5 times of impact. I would think it would possibly be less than that.

Okay. Then in terms -- switching gears a little bit -- in terms of your workforce, have you -- what have you kind of brought back online in terms of employees and what is kind of your anticipation with a better freight market? Are you bringing back employees? Are you hiring yet? What are you planning to do in front of the PTC demand?

That's a great question, because we have been very focused on only bringing back the variable direct employees that are necessary to meet the customer demand. And we still have a pretty rigid request approval arrangement set for adding what we would consider salaried individuals. We have selectively added a few people, but the only additional manning that we really have had is through the acquisition arena. There has been no significant hiring and we will support the hiring as the businesses can support it.

Okay. Then I was just wondering on the international front, can you talk a little bit about China and what's going on there and what the contribution you expect over this next few years and then how your recent start-up in Brazil is going?

Okay, let's start with Brazil. The Brazil startup has gone extremely well. We are starting to actually offer more products. We have a plan to not only do the aftermarket business, but also take some other of our products down there, manufacture and sell into that market, and it has exceeded our expectations up to this point.

Now to China, the market is very strong there. We have situated ourselves in I think an improving basis. We have two freight JVs that are in operation and we have one transit JV that is an operation. We expect to see this year $60 million to $70 million of revenue and that has grown double digits for the last two years and will continue to grow double digits over the next couple of years without any problem at all. And we are working on a few other JVs right now.

Okay, very good. Thank you very much for your time.

Jim Lucas, Janney Montgomery Scott.

Good morning, guys. (inaudible) sitting in for Jim. I was wondering if you could tell me a little bit more about PTC and specifically your relationship with the class ones. I know that they had to file their plans with the FRA as of April 16. Are you in direct communication with them to find out how those plans were laid out or any updates there?

Yes, we were obviously involved in -- with the class ones as they made their proposals. As far as the review by the FRA, we are in no position to have any information, and I'm not sure that any feedback has been given up to this point. But we don't anticipate that being an issue. I think that everyone is being aggressive and have laid out some good plans for the implementation of PTC.

Is there any updates you can give on the product testing of the onboard system?

We have -- as you know, we've been commercialized on the BNSF for almost three, four years now and without any issues and we have pilots running without issues on the UP. And our development program with all the other railroads is moving along and no major issues that we are seeing at this point. A lot to be done though. There's a lot of work to be done, but there's no issues that we are aware of at this point.

Okay, then aside from the Xorail acquisition, are there still other M&A opportunities that you are looking at to try to get a little bit more of the PTC business that's out there in the next five years?

We really don't comment about our strategy related to acquisitions, although we do have an active pipeline of opportunities that we will continue to determine if it's a good strategic fit and meets with our financial criteria.

Can you say if you are planning to go after additional business, whether it be internal or through acquisitions, aside from the Xorail? Are you still planning to --?

Again, I don't think it's appropriate to talk about our strategy related to acquisitions. So any acquisition that makes strategic sense, as you know, it is our priority is related to -- we generate good cash, $150 million plus over the last three or four years, and our priorities are really -- number one is to grow internally. Number two is acquisitions, and so we have a keen eye for good acquisitions, whatever they may be.

Okay, then lastly I was just wondering if you could give any update. I may have missed it at the start of the call on (inaudible). Any progress there as far as bidding or making some headway in the European --?

Yes, we continue to make good progress on component sales and a few small system sales and qualifications. So it is going to take time, as we have said. It could be a few years before we really reap the benefits of our activity there.

Okay. Thanks a lot, guys.

Paul Bodnar, Longbow Research.

Good morning, guys. A couple of follow-up questions. One is just -- in the fourth quarter last year, what was the aftermarket percentage? I know you said it was 60% this quarter.

In the fourth quarter, the aftermarket for freight was 65% and for transit, it was 46%.

Okay, so just trying to see if you had that kind of sequential improvement along with ton mileage. Is there any additional inventory restocking to be done too that we should be looking for on that side of the aftermarket freight?

We didn't hear the question. Could you repeat it?

Is there -- inventory restocking kind of still ahead on the aftermarket freight side? And do you think you have already kind of done that in 3Q and 4Q of last year?

I think that there could be some inventory restocking as business picks back up because obviously the amount that you have on the shelf is directly related to the ton miles that you are using it at. So there is a build. I don't know whether or not they did do that build.

Okay, then this is just kind of a housekeeping question. What was the purchase accounting charges? I don't know if you said how much that was in the quarter in SG&A or for (multiple speakers)?

Alvaro can answer that.

Yes, the one for Xorail, what we again call purchase price accounting, which is not the continuing accounting charge from the step up in assets, but the one we expect to amortize over the year during the quarter, it was about $300,000. There was no meaningful --

Keep in mind, we only had that for two weeks.

Yes, so let me just -- what is -- I guess more not so much for this year but what is the ongoing expense we are going to have there thinking like 2011 for this acquisition as well as anything else (multiple speakers)

Basically if you are trying to model what I would do is I would model Xorail and Unifin at basically the freight margins. You're going to get some step up on both. What happens is they have to go through an appraisal process. The appraisals have to be approved and right now it's just an estimate. But if you are trying to model it, I would just model the sales that we mentioned previously and take it at those margins. Anything we say right now would just be a very preliminary estimate. It would be very rough.

Okay, this kind of goes back to what I think was asked about before. But in terms of steel price and the impact on margins and just rising raw material costs, given the -- I know obviously '08 to '09 we had a big step down in the price of raw materials. And anything you can answer in terms of Transit margins, how much that gave you a benefit kind of going from I think it was 12.3% to 15.8% from '08 to '09? Was that a big piece of that increase?

I don't think there was much increase in the transit area. Where we did see some margin improvement was really in the freight.

And see, what happens a lot with these transit contracts, Paul, is we try and lock in our pricing ahead of time. In other words, these transit contracts can take a number of years to execute. And one of the things we try and do is protect ourselves against price increases and price decreases. So we tend to lock it in, lock in the prices from suppliers.

So if raw material prices go down, maybe the supplier benefits. But if the price goes up, it's not to our detriment. And we prefer that security rather than trying to estimate what prices may do.

Okay, thanks.

We don't do that much on transit contracts. Hopefully. That's our goal is that you don't see too much one way or the other.

Okay, just basically the (inaudible). The last question, I guess -- I think this week or earlier this week -- or last week, I'm sorry --saw MTAs kind of revisiting their capital budget. They looked at making some cuts and adjustments to how they spend on new cars and refurbished cars. Any kind of further information you guys have on that that we don't that --? (multiple speakers)

The only thing -- I think it must have hit the press just yesterday and I did read it. It talked about their total budget was like $26 billion and they talked about cutting that by $2 billion. They talked about various projects and that's part of the issue is you see these municipalities running into operating budget issues.

The one thing they said that I like to see was the fact that they are going to focus on longer-term how do they save money through their capital spend through efficiency, safety, and productivity. And that's really what we're all about, so that's to us is positive. Although that's the kind of thing you are going to see is as these states and local municipalities figure out how they're going to deal with running these transit authorities.

All right. Thanks a lot, guys.

[Greg Halter], [Great Lakes Review].

Good morning, guys. Just quickly looks like everything else I had has been asked. But Alvaro, do you have a figure for your equity or approximation for the equity balance at the end of the quarter?

Yes, it was about -- let me -- I want to say 700. It's 800. It's about 799, 800, and debt to cap is about 34. And that was very steady. We had the 34% was the same at the year-end balance sheet as well.

All right, thanks a lot.

(Operator Instructions) We show further questions at the time. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Wesley for any closing remarks.

Okay. Thanks for joining us this morning and we will talk to you again in three months.

See you then. Thanks, everybody.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.