美國西屋制動公司 (WAB) 2010 Q2 法說會逐字稿

Good morning and welcome to the Wabtec Corporation's second quarter 2010 earnings conference call. All participants will be in listen-only mode for the presentation, but there will be an opportunity for you to ask questions. Instructions will follow at that time. At this time, I like to turn the conference over to Mr. Tim Wesley. Please go ahead, Mr. Wesley.

Thanks, Steve. Good morning, everybody. Welcome to our second quarter 2010 earnings conference call. I will introduce you to the rest of our team members who are here are President and CEO, Al Neupaver, CFO, Alvaro Garcia-Tunon, and our Corporate Controller, Pat Dugan. Will make her prepared remarks, as usual, and then be happy to take your questions. Of course, want to refer you to today's press release for the appropriate disclaimers on our forward-looking statements. I also want to point out that we will be referring to some non-GAAP performance measures. So, we encourage you to review the reconciliation table that in today's press release. With that, I'll turn it over to Al.

Good morning, everyone. I don't know if all of you heard the music, I just want to make sure you knew that, that is not the Wabtec's theme song. Today, we reported a strong quarter and improved outlook. Sales were $374 million. That was 12% higher than a year ago quarter and 3% increase over the first quarter. Earnings per share was at $0.65. This is the highest in more than a year. This compares to an adjusted non-GAAP number of $0.55 and that's what Tim was referencing there in the year ago quarter. Our operating margin was strong at 13.3% of sales. We increased our guidance for the year and we made good progress on our growth strategies. This demonstrates the strength of our diversified business model, and that our strategic initiatives are part paying off, and that we continue to benefit from the Wabtec performance system.

Today, we increased our 2010 earnings per share guidance, based on our performance in the first half and our outlook for the rest of the year, to $2.45 to $2.55. This compares the $2.40 to $2.50 was previously our guidance. Sales are still expected be slightly up for the year, with growth in freight, more than offsetting a decrease in trend. The overall economy seems to have rebounded, which is having a positive effect on the freight rail industry. But, this recovery remains sluggish with unemployment still high and budget issues at the federal state and local levels. So, it's prudent to remain cautious about our outlook. I want to emphasize, that regardless of the economy, we will stick to our long health philosophy and discipline when it comes the cost and focus on generating cash to invest in growth opportunities.

Let's talk a little bit about the freight rail market. Rail traffic has rebounded solidly this year, after a 15% drop in 2009 through mid-July, ton miles were up 9% and intermodal traffic was up 13%. Volume bottomed out, in the second quarter of 2009, with an average weekly ton mile of about $26.8 billion. This compares to $32 billion ton miles that was recorded on average in the second quarter of this year. This traffic increase has led to a similar rebound of our North American freight aftermarket business. This business, our freight aftermarket business, is up 28% compared to the second quarter of 2009. Traffic increase has led the railroads to pull more parked cars and locomotives out of stowage, which will eventually help the freight OEM markets. About 365,000 cars, however, are still in stowage or parked. That's about 25% of the fleet. That's down from a peak of more than 0.5 million cars in the middle of last year.

The new rail car outlook is improving, but still, well below historical norms. The second quarter deliveries were about 2,900 and the orders were 4,900. Slightly less than first quarter, but double the year ago quarter, for orders. The backlog rose to about 15,000. That's the highest we've seen in three quarters. We expect the locomotive OEM deals to be about 400 this year. Our international freight markets have almost fully recovered the pre-recession volumes. In general, conditions are improving in the freight markets and our results reflect that.

The transit market. Our overall outlook remains strong with many growth opportunities. In the short-term, as we cautioned during the first quarter call, we are seeing some effect of the budget issues at our transit agency customers. These issues are affecting short-term aftermarket demand and delaying some of the OEM projects. We believe, this is a short-term situation judging from the robust proposal activity out there, both domestic and international. But, we will continue to monitor market conditions closely and respond accordingly.

The long-term outlook in the US, and around the world, is strong for transit markets with good funding levels and ridership expecting to increase, again, as employment and the economy recovers. Current federal spending bill has been extended through year-end, while a permanent bill is being negotiated. The House is asking for 2011 spending of about $11.3 billion in transit. That's a 5% increase from this year. Ridership was down 2.7% in the first quarter, however in March, it actually increased 1.3% for the first time in several months. In cities such as Chicago, New York and LA saw increases. The pace of orders is steady, with new projects awarded at New York City transit, LaMotta, which is in Washington DC, and Amtrak. Over the next several years, we expect additional orders from Metra, which is in Chicago, Miami, New York City transit, BART in San Francisco, and Amtrak. And new commuter locomotive orders from Metra and Amtrak. As you probably, saw we were selected to build locomotives for MBTA, the Boston commuter railroad. This is about a $114 million order, which won't be included in our backlog until we sign the contract.

We also continued to make good progress with qualifying our components and braking systems in the European markets. As we have discussed, this is a large market where we only have a small share at this point. This will, however, take time to develop. We also have made an entrance into the China mass transit market, with the signing of a JV Golden Bridge. This JV will support the transit coupler market in China. Though Wabtec is in good position to take advantage of the long term, strong commitment in the US and abroad to expand mass transit, and we will manage aggressively through any short-term issues, we remain focused on growth and cash. Cash remains a priority. This provides the opportunity to invest in organic growth and acquisitions. We will stay focused on increasing free cash flow by managing costs. Driving down working capital and controlling our capital spending. We will also continue to invest in our strategic growth opportunities.

Global and market expansion, aftermarket expansion, new products and technology, and acquisitions. I'd like to spend a few minutes on each of these. Global and market expansion, for the second quarter in a row, our sales outside the US were almost 50%, reflecting the progress we're making in developing our international markets. We received our first order for Bus stores in Australia and India. And as I mentioned we completed our third JV in China, and won an order for Transit Cutlers, of about $7 million. In the aftermarket expansion area, our overall aftermarket sales were 50% -- 53% of our total, a growth of 8% compared to a year ago quarter and 3% greater than the first quarter. Our service center in Brazil is already looking to expand to include additional components, such as compressor and brake valves. We are also seeing other organic growth due to rail traffic increasing in cars and locomotives coming out of stowage.

In new products, positive train control is a major growth opportunity for Wabtec, and we continue to work with railroads and transit agencies, to develop and implement systems for the onboard locomotive solutions ,which is really the brains of the system. Our current product and market position could result in incremental sales growth of $250 million to $500 million over the next four years, with the ramp-up expected at some point next year. We've made good progress in getting our systems and components qualified in the European transit market, and just a matter of time until we begin to win system orders. We've also been busy on acquisitions. We are very pleased with the integration of Xorail, which we required in mid-March. Xorail has expanded our capabilities into the signaling engineering design and construction and adds to how our train control operates.

We signed an agreement to acquire G&B Specialties and Bach-Simpson from Global Railways Industries. These two businesses will complement our existing businesses nicely. G&B provides a variety of signal and track products and Bach-Simpson designs and manufactures electronic instrumentation. With that, I'll turn it over to Alvaro to talk a little more in depth about our financial performance.

Great. Thanks Al, and good morning everyone. We had a good performance in the quarter, and really are optimistic of our market position, which is why we improved our outlook for the year. For the quarter, sales were $374 million or about 12% higher than last year. This is the highest total since the first quarter of '09. Of this increase about half was organic, with the rest coming from acquisitions that Al mentioned. Freight group sales, which is I think a good sign for optimism, the sales were up by 40% with more than half of that coming from organic growth. We also saw growth, in the aftermarket, due to increase in rail traffic and with more rolling stock coming out of storage. Transit group sales, on the other hand, were slightly lower than last year. This is mainly due to the completion of the R160 order, in New York, which we discussed previously, and for some of the reasons regarding state funding, that Al had mentioned.

In terms of margins, we're continuously focused on driving margins higher, with particular attention on the operating margin. For the quarter, operating margin was 13.3% versus 11% last year. On the other hand, once you make an adjustment that we talked about with the comparative purposes to last year, operating margin were 13.5% last year. So, we're slightly down based on these levels. SG&A slightly higher than the year ago quarter. I'm sorry, it's a little bit higher than the year ago quarter, mainly due to the acquisition of Unifin and Xorail and the related purchase price accounting for those units. There was a settlement of a product liability lawsuit for about $1 million, $1.5 million, which we included in this quarter and somewhat increased accruals for incentive compensation based on the companies increase improved performance.

On the interest line, interest expenses little higher due to higher debt levels compared to '09, the second quarter of '09. Other income was a little bit higher. We always have some paper effects in other income. Sometimes it's a loss, sometimes it's a gain. Typically, it's not material and this quarter, it was a gain. The effective tax rate was about 33%. It was higher than the second quarter last year, which included a tax benefit of $9.7 million, which we refer to in the press release and earlier as well.

In terms of working capital compared to March 31, receivables were about $205 million and this is up $27 million from the prior quarter. This is mostly due to the timing of progress payments related to long-term transit contracts. To be quite frank, I think we have some work to do in receivables, and working capital in general, and we expect to hopefully accomplish that over the next quarter to generate additional cash. Inventories were $239 million, down $2 million. So, in terms of inventory levels, making some progress. Payables were $124 million, basically flat, just up $2 million from the prior quarter. Cash, at quarter end, we had about $167 million in cash. This was down from a $179 million at the end of the prior quarter, but we paid down about $12 million in debt.

Cash generated from operations was about $17 million in the quarter. In terms of debt, debt stood at $408 million at the end of the quarter, compared to $419 million at the end of the prior quarter, and as I mentioned, we paid some down on the term note during the quarter. This still leaves us plenty of capacity for investing in growth opportunities. The financing climate out there, I think, is generally favorable, especially for us, and we're not capital constrained at all.

In terms of some of the other numbers that we typically give you during the call, depreciation was $6.6 million during the quarter versus $6.8 million last year. Amortization was $2.1 million this quarter, about the same as last year. CapEx modest level of $3.4 million versus $5.3 million last year. That's one of the beneficial Wabtec performance systems, we tend to be very light on CapEx.

In terms of backlog, backlog was down slightly, but it does not include the recent MBTA order which Al mentioned, which was about a $114 million. After we sign the contract, which we expect to sign it, I think, very shortly, that would put us back over the $1 billion mark. Right now, we're at $921 million.

The rolling 12-month backlog, compared to last quarter, I'll just read off the numbers. The total, and again, this is the backlog we expect to execute over the next 12 months, the total is $522 million versus $543 million in the prior quarter, transit is $348 million versus $394, and freight is $174 million versus $149 million. So, freights gone up by about $25 million.

In total, the multi-year backlog, this includes the 12-month backlog as well as what we expect to execute after the 12-month period, the total is $921 million versus $938 million last quarter. But again, but once we sign MBTA that will put us back over the million dollar, -- the billion dollar level. Transit is $665 million versus $705 million at the end of last quarter, a modest decrease, and freight is up $256 million to $233 million. I think that pretty much concludes the numbers part of the discussion. With that I'll turn it back over to Al.

Thanks, Alvaro. Once again, we had a good performance in the second quarter, and for the first half of the year, and we're cautiously optimistic about the rest of 2010. Longer-term, we couldn't be more pleased with our strategic progress and the growth opportunities we see. We are really excited about our future growth opportunities. We continue to benefit from our diverse business model and the Wabtec performance system, which gives us the tools we need to generate the cash and reduce cost. We have an experienced dedicated management team, that has managed aggressively through the tough times, and continues to drive progress on our growth initiatives. With that, we'll be happy to answer your questions.

(Operator Instructions) Our first question comes from Ed Wolfe of Wolfe Trahan & Co.

Hi. Good morning, Guys, it's Scott Group in for Ed. First, wanted to talk a little bit about positive train control. Is there anything for PTC currently in the backlog, and if not, when do you think it does show up in the backlog?

Let's talk in generalities and then I'll answer your backlog question. I'll answer that first. There is very little PTC in the backlog. We do have some contract with Xorail from the signaling design in engineering standpoint, but actual hardware orders are not in the backlog. We do have development programs going on with each of the railroads. We're making great progress on the development of the PTC system right now. That development will probably continue to probably later this year, well into the third quarter, at which we will go into the testing phase. At the completion of that testing phase, then it will move into a product safety plan approval from the FRA, the Federal Railroad Association. Some of the things that are being worked out with the class one railroads are inner-operability, that is their ability to drive their trains on other peoples railroads and be able to communicate and that work is also going on right now. So, there's progress being made, however, as far as our backlog is concerned, there's not much backlog in there for that particular technology at this point.

Okay, that's helpful. I think I heard you talk about $250 to $500 million in revenue that you think is from PTC and that's in line with what you said from the past. Can you just refresh me, does that include opportunities with Xorail or do you think that brings you up above that $250 million to $500 million range?

That $250 million to $500 does include Xorail. We figured that Xorail added about $50 million to $100 million to our stated opportunity, in the past, for the onboard computer and that's always been in the $200 million to $400 million range. I want to make sure you understand that there's a lot of other expenditures going to be associated with positive train control, some of which, we have product and interests in trying to develop. That is not included in those numbers and as that program rolls out, as does our development of those products, like on the dispatch systems, were trying to tie these systems together between the onboard computer and our capabilities in engineering design for the signaling side with Xorail. That could create other opportunities for us.

Okay that's helpful. Can you give us the breakout of transit versus freight operating margins in the quarter?

We typically do not give those out. They will be in the (inaudible) and that should be out early August. Okay.

Okay. Directionally though, can you talk about where, was there some pressure on the transit margins now that the big subway car contract with New York has finished and with respect to that contract, can you talk about the timing for a new bid with the MTA for subway cars in New York?

I really can't comment on the trends of those margins. You can look at our past performance, and I can tell you that where a company is very focused on continuous improvement and there's a lot of things that impact margins quarter-to-quarter, but over the long run, our goal is to continually improve and grow our margins, which we been successful in the past in doing so. As far as new orders from the New York City's systems, there is two contracts. One has already been granted to the car builder, and that is a smaller car number I think. It's only 26 or 28 cars with some options and that's called R188. A larger car order, we're working on the design, and that is called R179. That should follow shortly. They're doing a lot of work right now on the specifications. That will be a larger car order, probably in the range of hundreds of cars, versus the smaller R188.

And what's the timing for that going out to bid?

We're not 100% sure, but it definitely, is probably, at least 12 months if not a little bit longer off.

Okay, and the last, just two quick ones. First, on the acquisition side, it's been three acquisitions over the past two quarters. Just want to get your sense, is the focus now on integrating those deals or are you still out there looking for additional acquisitions?

We continue to have a very active pipeline and continue to look for acquisitions. It's important part of our growth strategy. Typically, we have a Corporate Development Team, that what we try to do is have a seamless handoff from the execution of the contract and the acquisition. We hand it off to the Integration team, that has been part of the Due-Diligence team, and that's usually our operating folks that take control of that. So, they're the ones that are actually doing the integration and we've got the Corporate Development Team out there digging up more opportunities.

Okay. Then the tax rate of 33% was a little lower than we thought? Can you give some guidance going forward, and thanks for the time, guys?

I think, going forward, we'll probably be somewhere around the 35% to 36% range. Probably somewhere in the middle, say somewhere around 35.5%.

Great. Thanks, guys.

Thank you.

The next question goes from Jim Lucas with Janney Montgomery Scott.

Thanks. Good morning, guys.

Good morning, Jim.

First question. Alvaro, could you, -- could we go back and talk a moment about SG&A? You talk about a few things in the bucket there, but that was a bigger jump than we've seen on the SG&A line in awhile, and was hoping you might be able to bridge a little bit more further what exactly that year-over-year jump came from.

Sure. Year-over-year, what might be more relevant, I don't know, you tell me Jim, is actually run rate from last quarter to this quarter? I can talk about either. But, I thought, basically you guys probably, -- guys and gals, excuse me, for modeling purposes and I'll be happy to do it from either quarter. From last quarter, we were about $44.5 million, $44.6 million in SG&A. Acquisitions added about $4 million to the SG&A line. $1 million of that was, some expenses that one of our acquisitions used to re-class in cost of sales, and actually under our accounting, we put those under SG&A. But about $4 million of the increase is due to acquisition of Xorail and Unifin. Incentive comp'd is up about $1.2 million. To be honest, we'd been under accruing incentive comp a little bit, just pending results that you saw were the increased guidance, were pretty solid and we increased the incentive comp, like I said, by about $1.2 million. Then we had a settlement of a lawsuit, it was a product liability lawsuit in one of our units, that we thought it was more prudent to settle. This is more of a one-time item, but again, that's why I always caution you with SG&A. There's always something in SG&A, either a good guy or bad guy and this quarter turned out to be a bad guy, and that was for about $1.5 million. It was a lawsuit in Texas, which is a plaintiff friendly state, which we thought it was prudent to go ahead and settle. I think, if you add all that up, that get's you to about the $51 million that we had this quarter.

Okay, that's very helpful. Thank you. Switching gears, you gave a little bit, actually, you gave a lot of color of what's going on on the transit side and freight, the mix issue, after market doing a lot better here. Could you talk a little bit about what you're seeing in the pricing environment, both freight and transit right now, and any update of how you're thinking about potential inflation impact the second half of the year?

I think anytime that volumes are down, especially in the freight market, there is some aggressiveness on everyone's part to try to get some volume back into their shops, so there is that pressure, however, we been very disciplined and will continue to be disciplined. In the transit area you always have, especially on the contracts where it's a closed bid, there's always been a pressure there to try to obtain the orders. So, I don't think anything's really changed in that arena at all. When you look at inflation and how we're handling it, what we've tried to do is, again, have a discipline within the corporation where we have agreements where there's a surcharge, where there isn't a surcharge then we have to have the supply, that needs to be guaranteed at a certain price. So, we've, even while all the prices have been down on the raw materials side, we've tried to continue to make sure our contracts were favorable from a standpoint of inflation and handling surcharges related to them, Jim.

Okay. But, nothing out of the ordinary that you're seeing out there during this point.

Not at this point. I think the one commodity that probably has risen more than the others has been rubber, and I think, that's maybe driven by the automotive business. But, that's kind of leveled off, as of late.

Okay, . In your prepared remarks, you referred to a couple of times about the progress you're making on getting qualified on European systems and was just wondering if you give us a little bit more color on exactly what kind of progress you've made there and what's still to come

We continue to sell components and we've actually had some small system orders, a few systems in Europe. To give you some idea about the opportunity, over the last 12 months we have bid on in excess of $300 million worth of business and we didn't win any of the contracts, but not all of them have been let yet. There's still a good portion of that where we're still competing to try to win some system business. As I stated before, and I stated again today, it's just going to take time. We'll break through that door.

Okay, and finally, with your third JV in China, can you talk a little bit more about what your opportunities are currently in longer-term for the market in China?

Yes. We've grown that business nicely, over the last two years, to where our sales in China are between $60 million and $70 million. We expect that to grow a great pace over the next couple years and we would anticipate to have more than $100 million worth of sales in only a few years. We think that there is a nice window of opportunity that we need to take advantage of. So, we've been pushing hard getting in a place, in the position we're in right now. We have a few more JV's that we're working on that would really broaden the product offering that we could make and position us better. It is a great market. It is growing rapidly and I think the time to really be in there is now, because it is only a window of opportunity as far as we view it.

Okay, great. Thank you very much.

Thank you, Jim.

Thank you. The next question come from Kristine Kubacki of Avondale Partners.

Christine, are you there?

Good morning.

Good morning, Kristine.

Took a minute there. I am still here. A few questions. You talk about the transit aftermarket softness in North America as short-term in nature, I was wondering if you could give us some insight, or what kind of insight do you have, in the inventories or slowdown and maintenance? I guess, I'm trying to figure out is this a two quarter phenomenon? Is this four quarter phenomenon? Do we need to get past the highway bill or -- what does short-term mean?

What is happening at the authorities, obviously, there budgets have been cut. They're cutting service and they're cutting ridership. As you cut ridership, and service out there has an impact on the wear-and-tear of their systems, and there is a decline proportional to that. We also feel that because they are so tight on cash, they're very careful with their inventories, so they run that down. Those are the two things we'd have to see. We do not know, or have a good feeling, for where their inventories are at. Although, we are seeing a little bit of light there. On the aftermarket side, from replenishing some inventory, but I can't say that's a trend right now. The ridership stabilize, and actually show an improvement, is a positive thing for the aftermarket in the transit area. However, I have to caution you, that this doesn't solve the big problem. The big problem is, is the government needs to come up with a way of funding the transit system in this country. That needs to happen, and I think, that long-term what the transit people want to see, is a long-term bill that supports the transit funding with increased spending over that period and I think once that's in place, that would go a long way in getting transit to where it needs to be. As everyone knows, transit is a politically correct market and it really solves a lot of the country's problems and it's a compelling industry that we really feel good about, in its long-term potential, not only in North America, but around the world.

Do you have any guess as to say if there's been some federal push to kind of take over the safety oversight? Are you following that closely and do you think that would be an increase in the amount of maintenance, or getting into a state of good repair, I guess is a question of where the funding would come from?

I have to tell you, Kristine, I have not followed that closely. I really don't know much about the impact.

Okay, fair enough. Moving on to Europe, I know you mentioned about some of it trying to grow your market share there, but just looking at the market from a macro perspective, obviously there's been a lot going on economically over there, have you seen anything related to the transit systems over there about them pulling back in any spending there as a result of their economic woes so to speak?

No. We've seen no reduced spending or activity in the transit area from the economic problems in a few of the countries there. Their business really held up even during the recession.

Okay. Anything to suggest that that wouldn't continue to be the case?

None, that we have, no.

Okay. My last question is we've been hearing some of the railroads have been making some pretty bullish commentary and even talking about adding locomotives next year, which is a bit earlier than I would have anticipated. What is your sense, from talking to the railroads here in North America what their direction of locomotive purchases are for next year, versus this year, and rail car additions for next year or replacements?

It's hard to predict. I think, the railroads like us want to be cautiously optimistic about the future and if they could continue to grow that volume in ton miles, I think, that they will continue to take what they have parked back into use and would lead to OEM orders into the future. I've heard the same discussions that you heard, that there's some talk about that. I think they're going to be very cautious. I think they've done a great job of improving their velocity and efficiencies and they'll want to continue to do that.

Okay. Thank you.

The next question comes from Steve Barter of KeyBank Capital Market.

Good morning, guys. I think, overall, you sound pretty confident about conditions and how your performance is shaking out. You've done a couple of acquisitions with should be accretive. Gross margins have been great in the first half. But, if you look at the mid-point of your guidance, it suggests lower EPS in the back half than what you put up in the front half. So, my question is, are there any specific factors you see coming up that make you think earnings might fall below $1.28 in the second half or you're just be conservative?

I'm going to give you the quick and easy answer. We're being prudent and conservative, because I don't think, anyone feels that this economy is robust and in order for the great markets to continue, the economy has to continue to rebound. And the transit side, as I spoke to it, this whole funding issue needs to be resolved, I think to lift the cloud from, especially, North America.

As you've gone through July so far, as it relates to the freight side of your business, have you seen any moderation or are things continuing to get better? Right now are you generally, -- you said cautiously optimistic, but do you see anything that makes you overly concerned right now?

Nothings overly concerned, although, ton mile seemed to plateau a little bit into the second quarter.

Okay.

On a week-to-week basis if you look at it.

Right. Got it. Okay. Moving on to some of the commentary earlier on the PTC side, I know it's hard to frame up, but given some of your new acquisitions, what's the market size of some of the other opportunities that you might have, that you're engineering towards right now? Any color there?

Again, the railroads talk about spending between $5 million and $10 billion on PTC. And if you look at that and you know what is been spent already, what you're going to see is that opportunity, -- I think this year with CSX had close to $200 million budgeted and another railroad had $170 million, depending on the size it varies in numbers. Those numbers add up to maybe $600 million to $800 million a year, $1 billion a year for the next four years. So, their numbers are not too far off. You're looking at $3 billion to $5 billion, maybe more. We cannot, we do not participate in that entire market, and there's a lot of competitors out there in the various marketplaces. We have not fully quantified that other opportunity. So, there is opportunity there, we'll get some share of it, but we've not quantified it at this point.

Just to help us frame up the potential opportunity, could it potentially double the $250 million to $500 million you are talking about? Is it a function of that size? Just any broad commentary on what is potential, potentially available?

I can tell you that doubling, would be, that would be far-fetched. But, getting a percentage of that in other areas is a possibility. So, I'm being very vague only because we haven't developed a product and those orders are not out there, right now, and I don't want to lead people on that it's going to be a major doubling of those $500 million type of thing until we have better visibility of those opportunities.

That's understandable. Just my last question then, as you think about those opportunities in the context of the acquisitions you've done, is it reasonable to think that the margin profile would be at corporate average or maybe where your freight margins are or just what's the potential?

I think that depending on the product, I think they'll be all over the place. So, in general, we feel that we could at least be as good as we're doing and hopefully do a little better. Because, we have sunk a lot of cost into this technology and, hopefully, the future margins would be better, so we get the return on our investment.

Sure. Alright. Thanks. I'll get back in line.

Okay. Thanks.

Thanks. The next question comes from Paul Bodnar of Longbow.

Hi, this is Allison Wolf calling in for Paul Bodnar.

Hi, Allison.

Hi. How are you?

Good.

Good. Most of my questions have already been asked, but I do have a question about what you were commenting on the European (inaudible) environment and you said over the last 12 months it was over $300 million in bids and that you have not won any. First of all, how many have not been awarded? Out of that $300 million?

Probably, about 30% to 40% have not been awarded yet.

And would you consider, the $300 million a typical, annual rate of bids for that market or do you think it's a little light? Should it be higher?

We haven't been playing in that market that long. But, the study suggests that that's a pretty good clip that it's running at.

Okay, and then in terms of the impact,

Keep in mind, that we didn't bid on all the opportunities. Those are the ones that we bid on.

Okay, right. So, the $300 million you see as sort of a good run rate for the foreseeable future? For next year? Year after?

Correct.

In terms of the impact of the decline of the euro, how do you see that impacting your penetration into this market?

We acquired a company by the name of Poley a few years ago, and that is our European platform. Our cost is in euro's, so we really don't feel that there's a major issue there. Some of the technology and some of our products may come to the US, but the majority of the product will be made at our European site. And we also have a low-cost platform in Macedonia.

Okay. Alright. Thank you, very much.

Thank you.

Thank you and the next question comes from Tom Albrecht of BB&T.

Hi, Al, Tim and everyone else. A couple of questions here. You have this really strong revenue growth in the freight segment, 40%. If I just plug in a 40% growth rate for the third quarter, you end up with about $174 million in revenues, which would be below the 190. Historically, the third quarter was a little softer than Q2, but it's been so long since we've had a normal period. Can you just talk about what the revenue potential might be for the freight division here as we move back towards more normal times?

Yes. I think you have to keep in mind that what the numbers that we're being able to deliver, the railcar build is still at, the deliveries was 2,900. That's at a 12,000 car build rate for the year. I don't know if we were ever that low. Maybe, back in the early eighties. But, I know in the time frame that I've been involved, I've looked at 17,000 was the lowest. We're still at an awful low railcar build and if you look at the locomotive build, we talk about in the 400s. I mean, just last year, we were looking at what eight, nine almost 1,000, -- 700 last year. We still have a very low basis of the marketplace and there is a tremendous amount of expansion going to be available if this economy continues to rebound. That's the $60 million question, is will it continue to rebound?

So, Al, are you saying, -- I mean I get the big picture comments, but are you saying it's not clear whether we should be thinking about a similar or even greater revenue growth rate? At least for the next one to two quarters.

I think that the visibility in the next one and two quarters, your guess on railcar builds and locomotive builds is probably as good as anyone and the only thing we can really openly discuss would be consultants are saying in the next few quarters, they do not see a major rebound.

Right. Within the transit space, what percentage of the backlog, I guess relative to the next 12 months, is within North America versus elsewhere?

I would say a large chunk of that is within North America as long as you include NAFTA. A large chunk of that is within NAFTA.

Okay and then I wanted to clarify one thing, Alvaro. As you went through the SG&A, which was very helpful, you mentioned $1 million was reclass from cost of goods. Was that $1 million on top of the $4 million?

No. I'm sorry. I should have made that clear. No, the $4 million includes the re-class.

Okay. I guess, last question Al, back to you. Maybe Kristine's question just asked a little bit differently, we know about the softness in the aftermarket, some near-term weakness with OEM projects, but you did describe a robustness for packages longer-term. Why do you think that dichotomy exists between weakness and yet a robustness for packages over the longer-term?

I think the real change has been one from a political standpoint, the correctness of transit. I just here in Pennsylvania, Governor Rendell out promoting we need to find ways to fund our transit. We've got to use more money in that mode of transportation. I think that we've really, we've got a major change in attitude towards transit and the projects, and also the projects that are out there, the programs that are out there are old and they need upgraded, and they need replaced. So, I think it's a compelling story going forward and I think that's what we're seeing. You've got all these woes related to their funding and their budgets, yet we're all planning for the future and trying to get high-speed rail trying to upgrade the quality and safety of our transit systems we have and, I think, that's what everyone wants to see in this country right now.

Okay, that's helpful. And if you end up calculating that other thing, the transit, feel free to share that. But, that's all my questions right now.

Thanks, a lot.

Thank you.

Thank you and the next call comes from Scott Blumenthal of Emerald Advisors.

Good morning gentlemen.

Good morning Scott.

Al, you talked about the number of cars that are still parked and I think there were about 25,000 more at the last call and we're down from about 0.5 million. Then we look at the gross margins, which were really terrific for the year, so that suggests some pretty higher margin sales coming through in the current quarter. Could you talk about the opportunity as we see the number of parked cars dropping and the backlog in new railcars, kind of building a little bit, the opportunity with where we're at for Wabtec with regard to, would we prefer to have some of the parked cars rehabilitated or would we just as soon have the new car build ramp and then, I guess, have the visibility that we would get seeing all those new cars ordered in front of us from a margin perspective?

Generally, even when they scrap a railcar, it's my understanding that they disassemble it and utilize as many of the good parts that they can. There's obviously parts that get thrown away that provide an OEM opportunity to it. But, we also see the benefit of any part taken off of there that might need repaired or upgraded. So, there is a benefit for us when they do scrap a car from both angles. One, it creates the opportunity that a new car could be built, but two, we probably get some of the work on the aftermarket of those products. I think, we'll see is a combination of both. You're going to continue to see the parked cars come down. What you are going to see is shortages of cars specialized, specific application cars. Maybe there won't be enough intermodal cars of a specific size. There may not be a enough covered hoppers. There may not be enough aluminum coal cars. So, I think, it's going to be, they're going to have to come out with a unique order for a specified particular car. So, we will see that building the OEM, and not until all those parked cars go away, would we get back to the normal run rate, which is probably 40,000 to 50,000. Now keep in mind, I don't think anyone knows what a normal number of parked cars is. At least no one's ever been able to answer that question to me and I think it's all over the place. I've heard it as low as 50 and I've heard it as high as 250. I have no idea and I'm not sure anyone does because they never kept records before a few years It's all good for us because the economy will recover, the railcar build will come back and as it comes back our aftermarket is going to be good as long as the traffic and volume is up where it's at today, or higher

Now, prior to the recession when we look at the fleet we discuss on these calls that the tendency, obviously the fleet is always aging, but the fleet at the time was getting towards the older, I guess, towards the end of its useful life and I would imagine of the 365 that's currently parked, you obviously have the dregs of the dregs and much of that will not come back. So, do you see, or would you, would it be your belief that we are probably closer to an increase in new railcar orders than the 365 would lead us to believe?

I wish I new the answer to that question. I've been trying to get it and it's really been something that no one has really been able to get their arms around. Maybe there's someone that understand's that, but I'm not sure what that bottom number is and I'm not sure how many of these cars, are cars that are never going to come back in service.

Well, if anybody would understand, wouldn't Alvaro understand?

I wanted to give Al a shot. I would say we're certainly in a better position to see what you're saying right now than we were a year ago and I think the numbers are going to improve. The question is, when rather than if?

Okay. I guess one last one.

I could tell you, Scott, that there was a railcar panel was put together by an analyst and he had all the experts together, they couldn't answer that question.

Was Alvaro one of the experts?

No. No, a member of the audience though.

I was at the ballgame. But I didn't see you there.

Okay, and if I may, one last one about PTC? There was a nice article in the Economist this week, that I emailed to Tim, talking about tax incentives needed and the railroad companies not being terribly excited about making those large investments, believing that it only covers a small portion of the human error that occurs over the course of time, which would require the use of PTC. Do you see tax incentives, may be needed in order to get that sped up a little bit?

I think the class I railroads, first of all, are in a situation where they spend, what 15% to 20% of their revenues in capital each year. I feel this technology, like other investments that they are asked to make, they should be helped with the funding. We think it would help commercialize this technology and help the class I feel a lot more healthy than they actually are. They're healthy companies today, but when you have a mandated technology that you have to implement, I sympathize very much with them.

Okay, appreciate that. Thank you.

Okay and we have a follow-up question from Tom Albrecht of BB&T.

Yes, hi guys.

Tom, you're only allowed one time. You can't have a follow-up.

For you, we'll make an exception.

There you go. That's always hardy to hear. You might have commented on this, in the beginning I was sort of looking at things and listening, but in the gross margin, would you say the biggest influence and the favorable gross margin year-over-year was the performance of late-stage transit projects? Where you've talked about how, very late, those margins can be favorable or was it due really to the strong recovery in the freight side?

I think it's really the mix and I think the favorable performance in the freight side had a bigger impact.

Okay. Thank you.

Okay?

Thanks.

Alright.

And our next question comes from Mark Hatfield of Morgan Keegan

Morning everybody. Just a couple things. Unfortunately, I've been in and out of the call, so you may have covered this. But the other income line of about $1 million positive in the quarter. What was that due to this quarter?

We always have a mix of things in that line, or added, as you can imagine. That line can be negative, it can be positive. Obviously, this quarter it was positive and most of that was due to paper FX. You have to recognize FX gains and losses based on inner company accounts, on other asset liability and P&L balances and that's what it was due to. I think about $500 million or $600 million was due to that.

Okay. You've spoken a lot about freight car, new freight car demand, and I don't want to go into all that again, but just one quick question, I didn't hear you address this, are you seeing from any of the builders, them poking around to you with regards to some potentially large orders that they may be getting and seeing about your ability to supply those orders?

We'd love for that to happen and we'd be happy to supply them. I'm not aware of anything.

Okay, then finally. On the high-speed rail, and I know we're -- the countries in the very early stages of discussion on this and the direction on this, but in the past, I think the Economist was referenced early. I hate to reference it again, but it's probably the first time in history.

We're impressed that you read it.

Well, I don't, but somebody else does for me. I'll take the compliment, thank you. Talking about high-speed rail and one of the difficulties that has occurred in other countries, is the sharing of passenger and freight on the same line. Here we have a unique circumstance relative to some other countries where the infrastructure's owned by the government, here it's owned by private companies Have you heard, seen anything, early stage discussions about how that will occur or are you looking in to developing any products that could help make that convenience a little bit more palatable in the freight railroads?

First of all, if you look at the programs that were approved, there's only a few of them that are actually going to go on dedicated lines. You're right, in Europe you have dedicated high-speed line, it's electrified and they're able to create that system. That's exactly what they're doing in China. But China's spending about $300 billion to do that. We've got about $8 billion that has been funded for high-speed railroad. The two programs that are going to be dedicated, as you talk, is the one in Florida between Tampa and Orlando and that's only an 84 mile track. They're going to need quite a bit of money just to get that completed. The rest of the projects, really, are going to be shared between freight and the transit programs. There is some expansion in the Northeast. That's the only other exception. So, to answer your question, are we working on anything that would help those two work together and that's truly what PTC is about. If you remember, the Genesis of the mandate, was that a transit line and commuter railroad was running on a freight line and ran into a freight locomotive. So, yes. We're working hard on that and what you're going to see is an upgrade of some of the freight lines so they can take faster trains. But, you're not talking about the 300 mile-an-hour to the 200 mile-an-hour train. You're talking about 80 mile-an-hour to maybe 95 mile-an-hour to 110 mile-an-hour. That will allow the freight line, which own those, to upgrade those and we hope to participate in some that development.

That's very helpful. Thanks, Al.

Okay. Anything else, sir?

No, I'm good. Thank you.

Thanks, a lot.

Okay, there's nothing else. I'd like to turn it over to Mr. Neupaver for any closing remarks.

No, thanks a lot and we'll talk to you at the end of the next quarter. Good bye, everybody.

This does conclude today's conference. You may now disconnect.