美國西屋制動公司 (WAB) 2010 Q3 法說會逐字稿

Good morning, and welcome to the Wabtec Corporation third quarter 2010 earnings conference call. All participants will be in a listen only mode. (Operators Instructions). Please note that this event is being recorded.

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

Thank you, Steve. Good morning, everybody, welcome to our third quarter 2010 earnings conference call. Let me introduce for you the rest of our team members who are here, Al Neupaver, our President and CEO, Alvaro Garcia-Tunon, our CFO, and our Corporate Controller, Pat Dugan.

We will make our prepared remarks, as usual, and then we will take all your questions. I want to refer you to today's press release for the appropriate disclaimers on our forward-looking statements.

With that, I'll turn it over to Al.

Thanks, Tim. Good morning, everyone. Today we reported a strong quarter, with a bright outlook. For the third quarter, sales were at $376 million, that's 14% higher than the year ago quarter . Earnings per share was $0.63, that's 11% higher than the $0.57 in the year ago quarter. Our operating margins were good at 13.5% of sales, and we generated $51 million of cash from operations. We also made some good progress on our growth strategies.

We feel these results demonstrate the strength of our diversified business model, that our strategic initiatives are paying off, and that we continue to benefit from the Wabtec Performance System. Today we updated our 2010 guidance for earnings per share. Based on our performance in the first nine months, and the outlook for the rest of the year, we now give a guidance of $2.50 to $2.55, that compares to $2.45 to $2.55. Sales are expected to be up for the year 6% to 7%, with growth in freight more than offsetting a decrease in transit revenues.

The overall economy seems to be improving, which is having a positive effect on our freight rail industry, and it will help transit agencies, as local and state funding become more available. The recovery is still sluggish as we all know, with unemployment high and budget issues at federal, state and local levels. We are still cautious in the short term, but quite optimistic in the long term. I want to emphasize that regardless of the economic climate, we'll stick to our long held philosophy. Be disciplined when it comes to cost, and focus on generating cash to invest in growth opportunities. Just a reminder for everyone, we'll be issuing our 2011 guidance in February, with our year-end results.

Let's talk about our markets. The freight rail market. Rail traffic has rebounded solidly this year, after a drop of 15% in 2009. Through early October, ton miles were up 8%, and intermodal traffic was up 15%. Freight rail traffic bottomed out in the second quarter of 2009, with average weekly ton miles of about 26.8 billion, compared to 32.3 billion in the third quarter of this year.

The increase in traffic has led to a similar rebound in our North American aftermarket business. Aftermarket was about two-thirds of our total freight sales in the third quarter, with sales up, both compared to second quarter and to the year ago quarter. The freight traffic increase has led the railroads to pull more parked cars and locomotives out of storage, which will eventually help our OEM markets. There is still about 330,000 cars parked, or about 22% of the fleet, down from a peak of more than 0.5 million cars.

The new rail car outlook is improving, but still well below historical norms. Third quarter deliveries were at 3,706, third quarter orders 9,194, more than double the second quarter. And the backlog rose to over 19,000 cars. We expect the locomotive OEM builds to exceed 500 this year, as most of the units in storage are now running once again.

Even with rail car and locomotive deals at historical lows, we have performed extremely well. Freight revenues exceeded $200 million in the quarter, the highest level in recent years. As rail car and locomotive builds recover to normalized levels, we should see good internal growth.

The transit market. The long-term outlook remains strong, with good growth opportunities, both in the US and international markets. However, in the short-term, as we discussed on our second quarter call, we continue to see effects from the budget issues at our transit agency customers. These issues have affected short-term aftermarket demand, and have delayed some OEM projects. As the economy improves, we feel this trend will reverse. Our transit sales have also been affected by the completion of a few major OEM programs, with new programs being delayed but not canceled.

Our long-term transit outlook is good, both domestic and internationally. Current US federal transportation spending bill has been extended through the year end, while a permanent bill is being negotiated. The House is asking for a 2011 spend of about $11.3 billion, that's a 5% increase from this year. Just today, the Obama administration announced additional funding for passenger rail projects, about $2.5 billion. It appears that most of this is targeted for high-speed rail corridors. The second quarter ridership has increased 5% compared to the first quarter. This data is normally delayed a few quarters.

We're starting to see new orders awarded at New York City, Ramada and Amtrak. Over the next few years we expect additional bids from Metra, Miami, New York City Transit, BART and Amtrak. And new commuter locomotive orders for Metra, Amtrak, and in Florida

During the quarter, we signed a $115 million contract with MBTA in Boston to build 20 next generation, higher-speed passenger locomotives, a significant order that we feel will position us well for future business. We also continue to make good progress with qualifying our components and braking systems in the European and Asian markets. Overall, Wabtec is in good position to take advantage of the long-term strong commitment in the US and abroad to expand mass transit, as we are managing aggressively through the short-term issues.

We are focused as a Company on growth in cash. Cash remains a priority. It 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 expenditures. With this cash, we will continue to invest in strategic growth opportunities. Global and market expansion, aftermarket expansion, new products and technologies, acquisitions.

I'd like to spend a couple of minutes to discuss our progress in these strategies, because I think it continues to be quite meaningful. As far as global and market expansion, our sales outside of the United States was 42% of our total sales for the quarter, 15% higher than a year ago quarter, reflecting our progress in international expansion. In Europe, our progress has been good. We received a brake system order from Bucharest Metro, we've received door orders for Amsterdam, Athens and Turkey Metros.

Numerous products are in qualifications testing. We just completed our fourth JV in China, with one more on the way. In the aftermarket expansion area, overall freight and transit aftermarket sales totaled 56% of our total for the quarter. That's a growth of 20% compared to a year ago quarter, and 7% greater than the second quarter. We are seeing organic growth, especially in the freight aftermarket, due to rail traffic increasing, and cars and locomotives coming out of storage. Our new service center in Brazil continues to grow, as we see other opportunities to participate in that market.

New products, over the last few years we have had tremendous focus on developing new products, and enhancing our existing ones. Positive train control is a major growth opportunity for Wabtec. With current product and market position could result in incremental sales growth of $250 million to $500 million over the next 3 to 4 years, with a ramp-up expected at some point next year. The addition of Xorail that was acquired earlier this year, has opened a door to a number of other positive train control opportunities for us.

Acquisitions. We are very pleased with the integration of G&B Specialties and Bach-Simpson, which were acquired during the quarter. They complement our existing businesses nicely. They both are a good strategic fit. They allow expansion in our core markets with our core customers.

G&B provides a variety of track and signal products that expands our presence with critical components. We expect some incremental business due to PTC, Positive Train Control, implementation. Bach-Simpson designs and manufactures electronic instrumentation products. This business strengthens our position in transit rail electronics, and provides additional market penetration with commuter and transit customers. Both will have growth opportunities now that they are a part of Wabtec. We also expect margin opportunities through the application of our Wabtec Performance System.

I'll turn it over to Alvaro

Great, thanks, Al, and good morning, everyone. As Al mentioned, I think we had a very good performance in the quarter, and we remain and continue to remain optimistic about our market position. In terms of specifics, I think the quarter I would classify as pretty normal. There wasn't too much at any one time, there ins or outs -- sales were about $376 million, 14% higher than last year, and the highest total since the first quarter of 2009. Of this increase, about half was organic, with the rest coming from acquisitions.

A positive, a definite positive was freight group sales, which were up 68%, with about two-thirds of that coming from organic growth. So we see the revival of the freight market, and we expect that to continue. We also saw growth in the aftermarket, due to the increase in rail traffic, and more rolling stock coming out of storage. The transit group sales were lower, as Al mentioned, but I think we're probably to the point where we're starting to hit bottom, and we can see some rebound.

Margins, as always we're focused on driving margins higher, with particular attention on the operating margin. For the quarter, operating margin was 13.5%, 20 basis points higher than the second quarter, and year-to-date 30 basis points higher than last year. SG&A was higher than the year ago quarter. This was mainly due to acquisitions of Unifin, Xorail, G&B and Bach-Simpson, but you will notice that it was lower than the run rate of the last quarter.

Also in this year's quarter, we include about $1.4 million of what we call PPA, or Purchase Price Accounting. These are the basically short-term amortization required in accounting for acquisitions. They typically run out in about nine months to a year. Like I mentioned, there's about $1.4 million of that in our results for this quarter, compared to none last year. If you exclude PPA, operating margin was $13.8 million rather than the $13.5 million we reported.

Interest. Interest expense was relatively stable, higher due to higher debt levels compared to 2009. And other expense was slightly higher than the prior year. Last year we had a little bit of income, this year we had a little bit of expense, mostly due to paper FX translation losses at some of our subs.

The effective tax rate was 33.4%, slightly lower than the year ago quarter. About the same as the second quarter, we had a couple of small releases of reserves. I would say for the fourth quarter, you could probably expect a tax rate of somewhere around 35% or so.

Working capital. Receivables were down about $10 million. Inventories were up $9 million, and payables were up about $6 million. So a net positive adjustment of about $7 million. However, working capital does include acquisitions of about $15 million, so we actually reduced working capital in the period by about $22 million, which is a positive accomplishment.

Cash from operations for the quarter was about $51 million, or 13.5% of sales. At the quarter-end, we had $177 million in cash, and net debt of $233 million. Of the gross debt, gross is before cash, net is after cash, obviously, we had $410 million. This debt consists of $150 million in bonds, $137 million on a term loan, and $123 million on a revolver. I think if you take a look at our balance sheet, basically we had our debt to EBITDA is about 1, a little bit over 1. We have plenty of capacity for investing in growth opportunities.

To give you a few of the numbers that I think are of general interest to everyone. Depreciation for the quarter was $7.1 million, versus $5.3 million last year. Amort was about $2.6 million, versus $1.7 million last year. The increasing amortization is basically due to the acquisitions and allocational purchase price and amortization of some of the intangibles.

CapEx continues to be very reasonable. $5.4 million for the quarter. Year-to-date, the CapEx was $12.4 million versus $10.8 million last year.

Backlog. The multi-year backlog is up significantly, due in part to the 115 million locomotive contract with MBTA that Al mentioned previously as well, and we had previously announced. The total backlog, this includes 12 month backlog, as well as backlog to be executed later, is $1.04 billion, up from $921 million last quarter. $748 million of that is in transit, versus $665 million. So the total transit backlog has gone up.

And the freight backlog is $289 million versus $256 million. Again, freight is not a backlog driven business, so you would expect their backlog to be lower than transit. The rolling 12 month backlog, or what we expect to execute in the next 12 months compared to the last quarter, last quarter being June 30, 2010, in total was $497 million versus $522 million. In transit, it's $291 million versus $348 million, and in freight it's $206 million versus $174 million. Hopefully I didn't go too fast on that, and you were able to get that down, but please let us know if you didn't.

And with that, I'll turn it back over to Al.

Okay. In summary, we had a good performance in the third quarter, and we're expecting to finish the year strong. I want to emphasize, longer-term, we couldn't be more pleased with our strategic progress and the growth opportunities that we see. We continue to benefit from our diverse business model, and the Wabtec Performance System, which gives us the tools we need to generate cash and reduce cost. We have an experienced management team that managed aggressively through the recession, and is now focused on driving for growth initiatives.

With that, we will be happy to answer your questions.

Thank you. We will now begin the question and answer session. (Operator instructions) And the first question comes from Arthur Hatfield with Morgan Keegan year,

Good morning everybody, and congrats on a great quarter.

Thanks Mark.

Alvaro, a quick question, on the tax rate . Tax rate came out a little bit lower than we anticipated, and it's been that way for a couple quarters. I think historically your guidance has kind of been in that 35% to 36%

Yes.

What went on in the quarter and how can we think about that going forward?

Basically what we do Arthur, is we forecast -- provide tax rates relatively conservatively, and then what happens is we don't really release anything against that tax rate until any benefits have been realized. During the quarter we did receive a couple of small refunds, as well as -- a couple of state tax issues expired. So the tax rate was a little bit lower than it would have been normal otherwise. But again in the fourth quarter we would expect it to be normal again which for us is about 35% .

Okay. So we should always think about 35% and any benefits that come in just -- they come in as they come in.

Yes.

And then in the quarter too, I guess I know you guys really like to think that operating margins, but if you could think about this that perspective in gross profit . In the quarter was there any negative or positive impact on your margins due to the

That's one of the reasons -- it gets complicated. Because when you do this purchase price accounting, some of it goes to cost of sales, some of it goes to SG&A, some of it can go to amortization, and that can have an impact which is why, to be honest, just focus on operating margin line, and not so much where we put these numbers. And again, what we would call the short-term purchase price accounting adjustment was about $1.4 million.

Part of that was in cost of sales. Part of that was in SG&A. Let's see cost of sales was probably about -- it was almost 50-50. Little bit less in cost of sales little bit more in SG&A.

But if we wanted think about a more normalized operating margin, we would want to add back $1.4 million in expenses.

Yes but you wouldn't want to add it back until 2011. It's actually probably going to go up from that $1.4 million to about $1.5 million, in the fourth quarter. And then again for your purposes -- that's not a great big number ,I'd say for your purposes you could probably split it between cost of goods and SG&A. And -- probably be about half of that and it'll start to peter out in the second quarter of next year.

Just a couple more questions Al if you have some time. Gross profit or even -- we can focus on operating income and I know you guys get this question all the time, but is there -- how should we think about it going forward?

Two things. One what are the things that can help you get that number to move higher, and two, what are the kind of natural forces that may be prohibit you from improving the margins going forward?

As you know our goal is to continuously improve and apply our Wabtec Performance System, and the things that we focus on our that we are looking at sourcing opportunities. Were looking at making sure were manufacturing the lower price platform, were looking at pricing opportunities, were looking at applying that lean manufacturing techniques, and in these acquisitions that we have, we look to apply that.

When you look for margin improvement in the long-term, one thing that we did, and I mentioned it in the prepared remarks, is we aggressively managed through the downturn. And that we are still at historically very low levels of -- locomotive builds the freight market and we've been able to rebound in the aftermarket area . As those markets come back, volume will also help with the margins.

In addition to volume improvement and applying this Wabtec Performance System, we expect to continually improve those margins. If you look at how we handle the margins during the recession with the decline of about at least 10% in volume we were able to really maintain our margins at a very respectable level and if that volume comes back, we would expect our margin to improve into the

With that let me ask then this. And this I guess is my concern about margins going forward, or just something we've been thinking about lately -- in the competitive environment and any pressure on pricing. Can you comment on -- I know it's early in this -- but the Amsted Faiveley relationship here in North America, what you think about that, and what if any I know it's -- again that's very early, but any pricing pressure on products that you may compete with them.

Keep in mind that the Amsted Faiveley cooperation agreement is really two people that we've competed with in the past and that's Alcon and Amsted both. So it's not like an introduction of another competitor.

We are -- we like everyone else has competitors in the marketplace, and our focus is on the things we can control, and that's to have the best quality product delivered at the lowest cost. And we will continue to focus on that. There is, as you can see from my explanation, there's not a new entrants into the market place. They've joined forces probably to maybe consider bundling their products a little better in their offering. Something that we're able to do because we have a large content, especially in the freight car area. When you look at the diversity of product that we have and the breadth of product that we have right now .

So it's fair to say at this point in time, nothing has changed in the competitive environment and you have not seen them doing anything irrational in an effort to grab market share.

That's correct.

Okay that's very helpful. Thanks for your time I'll turn it over to someone else.

Okay thanks.

And the next question comes from Jim Lucas with Janney Montgomery Scott.

Good morning guys.

Good morning Jim.

First question, can you just bring us up-to-date on the overall China strategy network -- highlighted, you are now up to four JVs with another one coming? Talk a little bit about what exactly do the different JVs bring you and how you're thinking about the Chinese market attentional?

Good. Good question Jim. We right now have four completed joint ventures.

The first joint venture that we completed is with a company called Shan Ying rolling company, which really is the Ministry of the railroad. And when we first went into China, that was the partner that they suggested we get involved in. And they are strictly focused on the freight rail market. And we truly are the world leader in that particular area, and there has been a tremendous amount of focus right now on how they have proved their freight market place. And we are the only one that's really working in that area. And that JV is a 50-50 because that is the requirement they have if you're going to be involved in the government industry there. It has grown nicely. We expect to continue to work with them and develop our products in their market.

The second JV is in the freight friction area. And that's a JV that is not really regulated by the Ministry of the railroad since the friction products are considered more of a commodity. This is a company that our Beckett division had worked with for a long time and had a number of products in their portfolio and we are growing that business in the friction area.

The third focus was in the transit area. And we have a JV called Golden Bridge that is focused on couplers and other transit products . We started that - that JV was completed earlier this year. We had two major orders with Metro in China and also an export product.

The fourth JV is really one that Unifin, the acquisition that we made a year ago, a company that they had worked with when they were still with Koch, that had broken off, and we just established that opportunity because there was a lot it -- as you know there's a lot of -- generation activity in China and that gives us an opportunity to play in that market.

The next couple of JVs we're focusing on is another one in the transit area for some of the other products that are not on the portfolio of Golden Bridge. And a second thermal management type JV that we're working on to expand our heat exchanger business. The focus is to grow that business . Right now we $60 million to $70 million of sales in that arena for this year, and it will be growing rapidly over the next couple of years if they continue to spend a lot of money not only in transit, but also in the freight market. We want to take advantage of that window

Great. That's very helpful year, and on the PTC side in your prepared remarks you talked about Xorail bringing other opportunities on the PTC side and I was hoping you would be able to expand on that other opportunity comment.

What Xorail does is they give us a group of engineers that do the design and engineering work and some construction work related to the wayside. But focus has been in the Positive Train Control area because that's where a lot of the business is.

Joining that up with our capability that we have on the locomotive, as well as the back office,we now are involved in what would you consider it a system -- a more of a turnkey type of offering. There's two projects that are out there right now that have been -- have funding. One is with Metrolink and one is with Denver. And both of those we will play a role from the PTC side as well as the engineering design side. That's the kind of opportunities that I'm talking about.

Okay. And finally just on PTC sticking their -- you said you expect to ramp in to 2011, and can you just give us an update on what you're seeing on your order booking, your conversations with customers about what gives you confidence that you'll see a ramp in 2011 as opposed to it being pushed out for another year?

As far as orders what we're getting right now is still mostly development orders. And orders related to testing. We feel in order to meet the demand of completing the systems in the 2015 timeframe that it's going to require that hardware and some of the other activities are going to have to start slowing out. We don't have any firm orders related to that.

Okay. Great . Thank you very

Thank you. The next comes from Scott Group from Wolfe Trahan.

Good morning guys how are you doing?

Good how are you doing.

Very good. So, wanted to just dig a little deeper on the transit side. I think I heard one of you comment that you think it's bottomed in the third quarter. But the issue with state and local budgets doesn't seem to be getting any better, and the backlog, at least a one-year backlog fell from last quarter. So what gives you guys the confidence that transit gets better from here.

We've been monitoring closely the aftermarket business from the transit side. And it -- you can only go so long with delaying some of the work that you would have and I know that they've run down their inventories and they've put off whatever they can and they've taken some service cuts in order to meet their budgets. We think that it's really -- we're seeing a stabilization of that on the OEM, we've seen some contracts that they let go to the car builders. We'll be working to get our portion, some share of the business as well, and we expect more of that to happen here in to 2011.

So, we kind of feel that it's -- it has bottomed out, it stabilized and we also have about half of that business is this is outside of the US, where the market place really is not down and up and we continued to make progress in that area as well. So you've kind of got the bottom out in the US aftermarket and the opportunities that exist in -- on a global basis that we've talked about and we're making good progress. We've talked about some of the wins that we've had. That's what was really behind it, that Alvaro made during his prepared remarks.

All right there, that's good. And just to sum up if were thinking about it directionally from $167 million in revenue directionally should be flat or up from here not down more?

Well will see. There's always fluctuations quarter to quarter and we feel that the business has bottomed out . There are fluctuations quarter to quarter so that long-term trend will be up. And I can't comment on what will happen next week or the next three weeks because it really depends on larger contracts and transit than it does for the freight

Okay great. And I wanted to follow up on the last about PTC. One of the big rails, they cut their spending by about half for 2010.

Just -- what are you hearing from them about any technology or design implementation delays and how does this impact your timing for when you think PTC spending will ramp up. I know you said that you think it will start next year but is it coming in slower for next year then maybe you are thinking a few months ago -- it just feels like the rails have been slowed to really ramp up their spending.

The rails are trying to make sure that all the specifications related to the interoperability and their implementation plans are totally accepted and understood. So you don't get too far down the line and have all the hardware and have some of the specifications changed.

So I think this is in due course, the railroads are working very diligently and hard to get this -- the specifications agreed to and will be moving into the testing phase here shortly. Once were in the testing phase, then we talk about getting our product safety plan approved. For the implementation of the vital portion we are ready have it on the overlay system. I think it's progression of time and that we are working very closely with them.

I'm not -- we are not aware of any technology issue, it's a matter of making sure that we have the right specifications and protocols and it's been tested properly and that's what we're going through. Those things never happen as fast as you want, but we do expect that this will start ramping up in 2012. I can tell you, the railroads are spending a lot of time and money on this right now.

You think 2011 or 2012 is when it starts to ramp up?

Next year is 2011 I believe.

Okay. I thought you said 2012. Okay, and just directionally thought, when we think about having a PTC network by 2015. Should the on board computer be something that happens in the first three innings are the last three innings when we think about getting a full network up and running.

Well it's a complex system . The locomotive portion -- the on board portion of the system, when you talk about the total expenditure, you're talking about 15% to 20% to total expenditure so you can almost correlate that to the amount of work. And that's an item of work that is developed and you install it. The wayside, there's a tremendous amount of work . The revenues that go in that our area could be 40% to 50% of total spend.

And then you have a communication system and you have an office -- back-office dispatch. And then there's also going to be opportunity for installation and maintenance associated with the system. But rest assured in order to get the system started and running, you have to start at some point installing the brains of the system which is on the locomotive and get it out there. And so would I say it's in the first inning, no. Is it in the middle innings, yes. It's definitely not the

Okay great and then last a quick one if I can for Alvaro. I know it's early that -- it given discount rates are what do you think could be a pension expense headwind for the next year?

And you're absolutely right, the discount rate does have an effect on pension expense, and for those uninitiated in the GAP accounting basically you set you're pension expense at the beginning of the year and then regardless of changes you keep it up and then you do one for the next year . Right now it's difficult to estimate because we haven't gone through the actuarial process. The benchmark for the discount rate is about December of 2010. I'm not sure it's going to be that much different from the prior benchmark. Until we see that actuarial calculations come out though I would rather not comment one way or the other apart from that. I'm not an actuary, I tell

You sound like one though.

I'm as boring as one I hope we don't have any in the audience but --.

All right thanks for your time .

Thanks.

The next question comes from Paul Bodnar with Longbow research.

Pay good morning. Good morning Paul. A quick question here on the -- market, it is one of the areas that has really picked up I remember before you always had a little more contact on those cars. If you could just kind of comment on what additional content you have -- in that car type is -- and if you have any dollar differences versus a regular railcar.

On an intermodal car we probably get an additional maybe 30% to 40% more then we would have on a regular car.

And where's the main difference, just on the articulated?

Gets into the articulated. That's really thing that makes it any different.

Okay. And then I guess you talk a little bit about -- I don't know -- in terms of margin expectations this quarter and also any 2011 and you don't release your transit margins along with your quarterly release for the Q. Can you just directionally tell us a little bit more where that gone from last quarter , has it kind of in line with where that is, or if it's pulled back because of obviously volume fell down a little bit further -- and then also, should we expect it to stay at these levels your current levels heading into next

We obviously -- the second quarter numbers were out there in the Q. So you should have those. And as you can tell even with the volume drop I think that our management team managed those margins quite well. And we stay focused on continuing to manage those of margins. Even when we have this business at a lower level. I can't to give you the actual numbers because we haven't finalized the Q yet but those will be in there and you can rest assure that the management team is continually focusing on maintaining and improving on our margins.

If there is a shift as you say in the aftermarket work is kind of -- pent-up demand there, is that something we should think of our should there be some part of positive margin contribution on a higher margin products?

Our aftermarket is that generally equal or better than our normal margins as we've said before in our OEMs. So if that does get released I think it would be a positive.

Okay. Thanks a lot.

Thank you .

Thank you and our next question comes from Steve Barger of KeyBanc Capital Markets .

Good morning guys.

Good morning Steve.

I hear what you are saying on the aftermarket. We know the railcar orders on OE side have been ramping sequentially. Are you seeing the builders come in yet in a big way as their starting to increase builder rates, or is that yet to come? And then are you also seeing firming -- pricing starting to firm up in the marketplace?

I think that on the railcar area we gave 3700 was the delivery so that's what we see. Now the good news is that the 9200 and 9300 of orders placed were obviously a good indication of that what's coming down the road. And the fact that the backlog has come up -- but keep in mind just in 2008 we were at 59,000 deliveries and if you analyze the 37 that were talking about you're talking 14-ish.

So when I talk about historical lows, this year will be probably the lowest delivery of railcars all the way back to the 1980s. And then I think it was 17,000 and 2002 timeframe. So it is still that low. But positive is that we are seeing in this railcar build pick up and we're seeing primarily in specialized cars with this intermodal coming up 14% obviously there's been some demand in orders in that area. Of these parked cars no one really knows how many stay parked forever and I'm hearing that could be 100,000 or more.

So all the trends are going in the right direction. What we are seeing is -- I don't think anyone's acting irrationally out there as far as a railcar builder. They've weathered the storm pretty well. They've been through that before and they've done a great job of managing through it. So I don't think anyone's going to go out there and be irrational just to get a few orders at this point.

Yes. I hear you. But I would also -- it seems to me that you guys have taken some capacity off-line. I would guess your competitors have as well. Does that give you the ability to drive pricing a little bit, now that your seen the backlog back at 20,000 and that implies certainly a higher build rate in 2011 than we've seen in 2010?

We run an asset like business and that we're going to compete in the market. Our goal is to get our cost down and that were going to get our share of business. Are we going to act irrationally? No.

I guess another way to ask it then, is if you think about the business that you quoted or what's in backlog on the freight side right now, is the margin embedded in those orders lower than what you're quoting right now?

Well I think that the answer is we're really taking a look at what we've been able to do in our margins with where the business is. And I think that to be able to manage through that downturn and continue to have the margins we have, whether you want to look at gross margins -- there as high as they probably ever been or close to it. And the operating margin is high as well. So I think the answer is in the results, not what I could really say to you.

I agree that you guys have done a great job of keeping margin in a terrible volume environment . The implication for me is that if pricing has been depressed and you did that all on the operational side then when pricing comes back your cost structure is going to remain leaner than it was and you should have higher margins coming out of this is volume comes back

We are if I may use that term, I think I used the term on the summary sheet, something to the effect that we are very optimistic about the future and we are pleased about the growth opportunities we see. Including our profit improvement.

Got it. Okay.

I'm sorry but I think the question is a little focused on -- okay go ahead.

I guess there's no reason to think that given the dynamics that were talking about that you wouldn't see margin expansion as volume comes back, just based on how you maintain margins through the downturn. Is that reasonable --

I can answer that an astounding yes.

Okay and then finally as I look that your prepared comments you said, railcar and locomotive builds, as they start to recover, your to see good growth that makes sense. That makes sense. Have you see that railcar build progressing in FY 11 and FY 12 and I guess, what do you consider the normal rate, and I know it's a boom and bust kind of business, but just going forward, where do think the business gets back to you on an annual build right?

There's a lot of forecast out there but it's probably going to take a couple years depending on how many of the parked cars have to come back. What we're seeing right now -- if you track that scrap rates, there up there pretty high 34% of the total feet. Normal rate, if you average everything out, you should be between 40,000 to 45,000 car build. Locomotives should be in the thousands to 1200.

So we've really got a good ways to go. I think some of this last quarter gives a little more optimistic view on how long it will take. But one quarter doesn't make for a trend. So we're going to maintain and I'm not sure of the delivery on that those orders that come in. And we have to understand that as well. We're going to remain very cautious but optimistic about the future. The trend is the way we want it right now.

Got it . And one last question and sorry if I missed this earlier. Are you seeing any input price inflation yet or are your cost remaining pretty

It's kind of spotty . We are right now working on a plan with the divisions and a few of the divisions are seeing some spot increases but I'd say overall that the inflation is not -- it's not out of sight at this point. There are a few products that seem to have a little more power than others but the overall we're not seeing a major inflationary

Great. I'll get back in line. Thanks for your time there,

Thank you your next question comes from Scott Blumenthal of Emerald Advisers.

Good morning gentlemen.

Hi Scott.

I was a very surprised to learn on this call that Alvaro is not an actuary.

I'll try and study up for next time and we can see if I can't past the first level test.

I think that you could accomplish that by the next call Alvaro.

You are a gentleman.

I believe that -- was the freight sales number, was that a record for one quarter?

You know you have to go back . The number -- I think it came close to it, I think it came within $4 million or $5 million. I'd asked Tim to research, he went back five years and I think it is a record for five. I'm not sure beyond that. I think it might have been the time it went over that. Maybe that year that they had 80,000 cars or

I think it was the second quarter of 2005 was a bit higher.

Got it. Got it. Maybe we need an actuary to figure that one out.

Non-actuary speaking I can guarantee you that back then we didn't have delivery for 3500 cars.

Duly noted. I was surprised with the Xorail now in the numbers that engineering expense actually went down a little bit. Are you getting paid for some of that now Al and what is kind of moving that number?

I'm not sure we throw all the engineering expense in their do we Pat?

Yet some of the engineering get charged to contracts and cost of sales.

Right.

Okay. Got it, that's helpful. And Al could you talk a little more about the international sales growth that Alvaro mentioned, 15% year-over-year. Give us an idea maybe which regions and that kind of what products and product lines are driving that.

Well we had as you know a lot of focus on our international expansion. It being our number one - the first strategy that we talk about from a strategic thrust standpoint. What we've been able to do is that we are growing in those emerging markets in Australia. We are growing in China. I gave you some numbers related to China. We started up a business in Brazil. Now we have a manufacturing platform.

That's always been a pretty difficult market for us because of the import duty of 35% to 36%. And now were able to localize some of that business and were growing there. In the last few years we started up a platform in South Africa. That has really helped us grow. We're doing business in India as well, which is an emerging market and an opportunity in both transit and freight. We've got business now in Russia which we didn't have 12 to 18 months ago.

So it really is that not one area, not one focus, not one product, but a tremendous amount of effort on expanding our platform. And creating a platform that we can build from instead of just exporting the product. And I think that's been very positive for us.

Okay. That's really helpful. Alvaro can you maybe help me with the SG&A number. You did a tremendous job.

It's been a little deep in here.

You did a tremendous job there on -- it looks like you're down sequentially about 10% on an increase in sales. What went on there I guess it would sales mix.

Sure what really impact SG&A is acquisitions. And like Pat mentioned earlier sometimes with the acquisition -- like Xorail which is primarily an engineering company, so their cost get -- their charged engineering cost to -- I'm sorry to cost of sales rather than engineering or SG&A. But basically in this quarter we had about $1 million extra in SG&A from acquisitions from the second quarter of 2010. In the second quarter of 2010 we had a couple items that we didn't have this time -- I think we mentioned in the last conference call, there was one, we settled a litigation in Texas for about a couple million and we also cleaned up -- did some reserves and some bad debts and cleaned up a little bit there that impacted SG&A.

And that's why you really see if you compare to the second quarter actually going down which is always our goal actually. I think going forward once it you have the acquisitions in there for a full quarter going forward, you can -- and again SG&A is kind of a catchall for all of these expenses that don't fit any of the other categories. Some of the purchase price amortization goes in there from -- that I referred to goes in SG&A as well, but I think our run-rate going forward should the somewhere between $48 million to $50 million in the future.

Okay. Great.

I hope I live up to the building up there.

Everybody did a perfect job. Thank you.

Thanks Scott.

And we have another question comes from Jim Lucas with Janney Montgomery Scott.

Just a quick housekeeping question what is the total year-to-date spend on acquisitions?

Year-to-date -- I think it's just Xorail and Unifin were last year --

So it's Xorail this year and G&B and Bach Simpson. So you are looking at $85 million.

$85 million. And goodwill at the end of the quarter?

Goodwill at the end of the quarter -- it should be somewhere in that five somewhere in that [515 to 520] range.

Great .

There other intangibles most of which are associated with acquisitions so just the pure Goodwill element is like I said [515 to 520].

Jim it was $93 million counting a few small ones some of the JVs and stuff. So we have to add probably another $8 million -- that would get to up to $93 million.

That's what you will see in the statement of Cash flow.

Thank you there,

Thank you.

(Operator's Instructions). All right there are no questions at the present time so I'll turn the call back over to Mr. Wesley for closing remarks.

Okay thank you very much and just a quick reminder we will be giving the annual guidance in February along with the results for 2010. So look forward to talking to you then or before. Thank you very much.

Thank you in that does conclude today's teleconference. You may now disconnect your phone line.