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Wabtec Corporation (NYSE:WAB)

Q4 2008 Earnings Call

February 24, 2009 10:00 am ET

Executives

Timothy Wesley - VP of IR and Corporate Communications

Al Neupaver - President and CEO

Alvaro Garcia-Tunon - SVP and CFO

Pat Dugan - VP of Finance and Corporate Controller

Analysts

Jim Lucas - Janney Montgomery Scott

Wendy Caplan - Wachovia

John Barnes - BB&T Capital Markets

Steve Barger - KeyBanc Capital Markets

Paul Bodnar - Longbow Research

Greg Halter - Great Lakes Review

Kristine Kubacki - Avondale Partners

Mark Bishop - Boston Company

Operator

Hello and welcome to the Wabtec fourth quarter 2008 Earnings Call. (Operator Instructions).

Now, I would like to turn the conference over to Mr. Tim Wesley. Mr. Wesley, you may begin.

Timothy Wesley

Thanks, Chad. Good morning, everybody. Welcome to our fourth quarter earnings conference call today. I'd like to introduce the rest of the Wabtec team who are here: our President and CEO, Al Neupaver; our CFO, Alvaro Garcia-Tunon; and our Corporate Controller, Pat Dugan.

We will make some prepared remarks, as usual, and then we will be happy to take your questions. We are going to make some forward-looking statements, of course, during the call, so we ask that you review today's press release for the appropriate disclaimers.

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

Al Neupaver

Thanks, Tim. Good morning, everyone. What I'm going to cover is the results from our fourth quarter and the full year. We will look at some current market conditions, including our response to these conditions. We'll talk about the progress we made on our strategic initiatives. Alvaro will go a little deeper into our financial numbers, and then I will summarize and go into the Q&A.

The company performed well in the fourth quarter and for the year. We had strong sales increase, about 11% to a record $405 million. For the year, we hit $1.58 billion in revenues that was a 16% increase.

Our earnings per share in the fourth quarter was $0.64, that was 10% higher than a year ago quarter. For the year, we had $2.67, a 20% increase over '07. The backlog remained over a $1 billion at the end of the year, even with record sales. That's the 11th quarter in a row we have maintained over a $1 billion backlog.

We had a great cash flow from operations in the fourth quarter of $82 million, and for the year, we were able to generate cash of $159 million. Keep in mind that this performance was achieved in a weakening global economy and a very weak US freight market.

I think that this shows the strength of our diversified business model, that our strategic initiatives are paying off and we continue to benefit from the Wabtec performance system.

What I'd like to do is go into the market conditions right now. For the first time since I have been here, I am going to start with transits, since it was more than 50% of our sales in the quarter and the year.

We continue to see a strong transit market, driven by passenger ridership and federal funding, including future money from the stimulus package. Federal transit spending was up 6% in 2009, to a record $10.3 billion.

The current spending bill runs through September '09. Congress will start debating a new bill later this year. Additive to this spending bill is the stimulus package that should present additional opportunities. I'll talk a little bit more about that in a few minutes.

Ridership continues to increase across the US, even as the price of fuel has come down. It was up 6.5% in the third quarter, the largest quarterly increase in 25 years, setting records in some cities. We understand that that trend continued into the fourth quarter.

Positive long-term trends in transit should continue to drive growth in investment. This is a compelling market, being driven by population growth, urbanization, long-term concerns about fuel prices and availability, as well as the environment.

International transit markets are much larger than those in the US, and our market shares are very small at this time. So, we expect faster growth in these overseas markets.

Let's talk a little bit about the stimulus package. Of the $789 billion, up to $20 billion could impact the transit market; $8.4 billion for public transportation; $8 billion for high speed rail. It allocated $1.3 billion just for Amtrak; and $1.5 billion for discretionary intermodal projects, possibly freight and passenger rail.

We should see opportunities from each of these buckets. Three quarters of this money must be spent by September 2010. Favor will be granted to projects that can be started quickly.

Wabtec could benefit as transit authorities exercise option orders and/or accelerate projects, but remember, there has always been and will continue to be a long-lead time in the transit market.

A not so good story is the freight rail market. Rail traffic is up significantly, due to the economy. Year-to-date ton-miles are down 15% and car-loadings are up 16%. The decline did moderate in the most recent weeks, so we will take that as a first bit of good news in a while, but too soon to call a trend.

Most people seem to think the traffic will be down as much as 5% this year, as comparisons do get easier in the second half of the year. As expected, railcar deliveries have slowed considerably.

There was delivery of about 60,000 railcars in 2008. Most people estimate that, in 2009, it will show at least a reduction of 50%. It may get worse before it gets better; we can't predict when it will start to recover.

Remember that our exposure to the new railcar market is about 20% of sales. It's an important market for us, but not the biggest piece, as it was a few years ago.

The locomotive market is also slowing, but not at the same rate. About 1500 locomotives were built in 2008. It's expected to be 25% lower in 2009.

We have responded to these market conditions, with cost reductions in several of our business units and at the corporate headquarters.

Companywide annualized cost reductions of about $25 million with related one-time cost of $8 million, half of which were taken in 2008.

These actions include a workforce reduction of about 5% from all levels of the company and plant consolidations, mainly in the Freight Group as a result of the Standard Car Truck acquisition. There is an increased emphasis on lean and sourcing activities.

Our goal is to take prudent actions that reflect the economic and business realities we face, while continuing to invest in growth opportunities, and I believe that we are achieving that balance.

Today, too, we affirm our 2009 guidance for earnings per share of between $2.45 and $2.75. This is challenging, in light of the market conditions and the continued economic uncertainty.

I'd like to review our major assumptions, which are critical to this guidance. The global economy does not weaken further. Our transit market remains stable with no negative impact from state and local budget issues.

Freight ton-miles down about 5% for the year, the freight car build at about half of last year's 60,000, the locomotive build down about 25% from last year, and no major changes from current foreign exchange rates.

In this environment, we are going be focusing on two things, growth and cash. We will continue to invest in strategic growth opportunities. New products, such as positive train control, where momentum is building and Wabtec is very well positioned, potential revenues are $200 million to $400 million over the next five years.

I am going to stay focused on global expansion. We just completed a JV in China for friction products and are working on another one for braking other freight products. There will be new opportunities in the aftermarket, as railroads and transit authorities look to outsource. We're looking for acquisitions, similar to POLI and Standard Car Truck that would further differentiate our product lines and boost our geographic coverage.

In December, we completed the Standard Car Truck acquisition, a leading manufacturer of freight car and locomotive components. About 30% of their sales are aftermarket and about 15% outside of NAFTA. This is a very strategic acquisition that eventually leads to our ability to provide a complete railcar undercarriage.

Our combined knowledge of in-train braking forces and design capabilities gives us the opportunity to advance stabilization technology for the industry. Improved stabilization means less damage to the lading. The integration is going extremely well, with our focus on achieving synergies from the acquisition.

Second focus, is "cash is king". Cash provides the opportunity to invest in acquisitions and growth strategies, where we're renewing our efforts to increase free cash generation. This year, we generated $150 million in cash from operations; that was after hitting $143 in 2007 and $151 million in 2006.

What I like to do now is ask Alvaro, our cash king, to dig in a little deeper into our financials.

Alvaro Garcia-Tunon

Thanks, Al, and good morning, everyone. Like Al said, we feel we had a good quarter, and we know it's an increasingly difficult environment. We do realize that your main concern regards the future, but right now, we remain cautiously optimistic, recognizing that we face challenges with the current freight market and general uncertainty in the economy, but, at least for the moment, to review the financial highlights for the prior quarter.

Sales were about 11% higher than last year, and hit a record $405 million. About a third of this came from acquisitions; the balance came from organic growth. For the year, about $65 million of growth came from acquisitions, primarily Standard Car Truck, POLI and Ricon, which we bought about a year and a half ago. So, organic growth represented about two thirds of the total growth in 2008.

Going back to the fourth quarter, the Transit Group led the way with a strong increase, due mainly to increased sales of transit car components in North America and the POLI acquisition. Freight group's sales, however, were also higher than the year ago quarter, as acquisitions, and higher sales and services, and electronics more than offset lower sales of components for new freight cars.

Margins, as you know, we're always focused on driving margins higher, with particular attention on the operating margin, mix can have a very significant effect on gross margin, so we tend to focus on operating margins.

We think the results for the quarter reflected a good performance, considering that mix change toward transit. For the quarter, the margins were about 12.4% versus 12.5% last year, as a percent of sales operating expenses were slightly lower though, at 13.7% versus 13.9% of sales.

We do have, we've discussed this in prior phone calls, and it does impact the margins and the overall expenses, what we call PPA charges for SET and POLI in the quarter. These are short-term paper write-offs of acquisition costs mainly related to inventory and backlog.

For the quarter, these totaled about $4 million, or about 1% of sales. That total split roughly evenly between cost of sales and SG&A, and we expect about a slightly higher amount for '09, that's about $5 million to $5.5 million.

The other major items of the income statement, interest was higher due to increased debt incurred for the Standard Car and Truck acquisition. Taxes, essentially the same as the prior quarter and pretty much consistent with prior experience. That pretty much wraps up the income statement. I think apart from the acquisitions, it was a very straight forward quarter and in line with prior quarters.

To turn to the balance sheet. Working capital compared to our September 30 balances. Receivables were about $274 million, they were down about $25 million from the prior quarter again September 30 and, if you include Standard Car and Truck balances, are actually down $52 million. So, we did a good job concentrating on receivables and we continue to focus on receivables.

Inventories were $264 million, about $41 million higher than the prior quarter, but this was entirely due to Standard Car and Truck, if not for Standard Car and Truck, they would have remained flat.

Our payables were $163 million, up about $8 million. There is always room for improvement in working capital, but we thought we did a good job in wrapping up the year and, as Al says, that’s a key component of generating cash for us.

Speaking of cash at year end, we had $142 million in cash. This was down from $187 million at September 30, because we used some of those balances for the Standard Car and Truck acquisitions. Cash for the quarter from operations was about $82 million and, as Al said earlier, about $159 million for the year.

To give you a few numbers, I’ll read of the numbers as we always do during the call. Depreciation was $6.2 million, versus $6.4 million last year. Amort was about $1.6 million this quarter, versus $1.5 million last year, and CapEx was about $7.2 million, versus $7.5 million last year.

In terms of backlog, Al referred to backlog briefly. It remains over $1 billion, in spite of the record sales during the quarter. It has remained over $1 billion for 11 straight quarters, which I think for us is a key to our stability going forward.

The rolling 12 month backlog compared to September 30th. So, this is a backlog that we expect to execute over the next 12 months. It totaled $567 million, versus $627 million at 9/30, so it's down slightly by about $60 million, and this is mostly due to freight. In the freight, it was $191 million at 9/30; now its $149. And transit decreased just slightly – about $436 million as of September 30th, and now it stands about $417 million.

The multi-year backlog, the total backlog, which includes the 12 month numbers, stands in total about $1.06 billion, versus $1.15 billion at 9/30. Freight again down slightly, not as much as you would expect. $224 million on September 30th, now it's about $198 million. Transit was at $922 million; now it's $865 million.

Hopefully, that covers all the other numbers that we cover specifically in the call. And with that, I will turn it back to Al for a quick summary.

Al Neupaver

Hey, once again, we had a strong performance with a $0.64 quarter, record sales and a strong backlog. Like most companies, we face a very challenging market and continued uncertainty due to the economy.

It's very fortunate that we have a diverse business model in our transit business; about half of our company now remained stable at a high level. The Wabtec performance system provides an established culture of lean manufacturing and continuous improvement.

We have an experienced and dedicated management team.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Jim Lucas with Janney Montgomery Scott. Please go ahead.

Jim Lucas - Janney Montgomery Scott

Thanks. Good morning, guys.

Al Neupaver

Good morning, Jim.

Jim Lucas - Janney Montgomery Scott

Al, could you give us an update with the inclusion of Standard, of what Wabtec's content is for railcar and for locomotive? I'm trying to get anecdotally how much content you gain because some data will start building again, but I want to gain a better understanding there.

Al Neupaver

Okay. Right now, when you looked at on share adjusted number, we have about 5,000. That's just the current Wabtec products without Standard Car Truck, about 5000 per car. Adding Standard Car Truck in on share basis, you would multiple that, probably you would have another $5000 per railcar. On a share basis, their share is lower than ours. I would guess that the number would be probably in the $4000 to $5000 per car, when you do a share adjusted basis.

Jim Lucas - Janney Montgomery Scott

Okay. And on the locomotive?

Al Neupaver

On the locomotive it varies. If we got all the things that we make in a locomotive, it's a very high number, it's a 150,000 and their locomotive business is not that strong. It may add another $4,000, $5,000 to that.

Jim Lucas - Janney Montgomery Scott

Okay. And as it was helpful walking through the assumptions and your guidance. And one of the things about Wabtec is the cost and cash focus that is deeply ingrained in the company. What variables are you looking at internally that you would have to ratchet up, another round of cost cutting given the uncertainty that lingers out there today?

Al Neupaver

Yes. Wabtec is in a strange situation. When you got basically half of your business that is maintained and then the other half, obviously the market conditions are pretty challenging on the freight side. So division-by-division, what we continue to do is try to continue to forecast the changes, where normally, in normal conditions you do it once a month. We probably had three or four iterations, especially in the freight area over just the last five or six weeks.

And if we see any change from the assumptions or an issue that's out there, we react with some type of restructuring plan or recovery plan in order to make up for it. We are trying to find other revenues, but we are not afraid to take the actions we need to, to really protect the business. This cost reduction program is something that we've really being doing over the last three years.

It's not that we have one major program. We continue to focus on a division-by-division basis, moving our product to lower cost manufacturing platforms or outsourcing, if necessary. So it's been a continuous program to do that, and that's what the whole Wabtec performance link culture's about, as you know, Jim.

Jim Lucas - Janney Montgomery Scott

Okay. And finally, could you give us an update on the penetration of the international transit markets? And any additional commentary about what you are seeing into M&A environment?

Al Neupaver

Okay. First question, related to the international transit markets. We've been focused on the two largest markets, which are the European market and the Asian market. The penetration is going to take time. We knew this when we acquired POLI. If we had gone after these markets with the greenfield-type of approach, we could be talking about to five to seven years. We think that we could expedite that entry.

We've set up an office in Europe now, in the Munich area. We've got the team in place. We are making sure that our technology, which we acquired from POLI, along with our technology that we have in our transit components group in Spartanburg, we are focusing the development on entering that market and we are making progress. It's going to take time though, and it's the same thing with Asia.

Jim Lucas - Janney Montgomery Scott

Okay.

Al Neupaver

Your second question, what was that Jim?

Jim Lucas - Janney Montgomery Scott

Of acquisition environment?

Al Neupaver

Okay, the M&A environment, we are seeing some flow in the pipeline. It is down, noticeably down. And what you are finding is that the targets that we are looking at, they are moving targets, because their business is changing. So valuations on businesses get to be very, very difficult in this environment. So, it's a tough area. We still have, our pipeline is flowing and we're going to continue to focus on that and be opportunistic, with the economic conditions in the entire globe.

Jim Lucas - Janney Montgomery Scott

Okay. Thank you.

Al Neupaver

Okay.

Operator

Thank you. Our next question comes from Wendy Caplan with Wachovia. Please go ahead.

Wendy Caplan - Wachovia

Thank you. Good morning.

Al Neupaver

Good morning, Wendy.

Wendy Caplan - Wachovia

You mentioned, Al, in your presentation about your customers outsourcing some of their aftermarket. Can you remind us of some of the history, in terms of another economic downturn? What are we seeing from our customers, in terms of their outsourcing of service component?

Al Neupaver

I think that what happens is, as we all get pressured to reduce our costs, an alternative to having a fixed cost when you're vertically integrated is compared to outsourcing. It's an opportunity, and we really stretch that point. I'm not saying that that's how we approached our business.

A few years ago, we were very vertically integrated. We felt that anytime you are in a sick lick business and things turn down as those are fixed costs, where if you are outsourcing, you are able to treat it more as a variable cost. I think some of the Class I, as well as the transit authority see that, and we've seen an increased interest in that area.

One of the negative aspects of it is right now, especially in the freight area. They actually have a number of vehicles, railcars, as well as locomotives, which means that those particular railcars or locomotives might need some type of aftermarket attention, of service, instead of giving us an opportunity to do that work. So there is a negative part of that as well, that I thought that I should mention.

Wendy Caplan - Wachovia

Yes. Thank you. And some of us have visited, your trip last year, the UK refurbishment business. Can you give us some sense of how that’s performing?

Al Neupaver

Yes. Sure, our Wabtec, we are limited in the UK. We actually had a good backlog coming into the year and it is performing quite well. The only impact that we are seeing is basically the exchange rate as we convert back to dollars, but their business, when you look at their volume, is actually holding up. So we are happy to – that's the situation there in the UK.

Wendy Caplan - Wachovia

Okay, thanks. And finally – and then I'll pass it along. Thanks for going through the stimulus plan, in terms of the pieces of it. Can you help us understand how much of Wabtec-related product is currently, as they say, shovel-ready?

And what are your transit people, who have certainly been through years of going with this market, saying in terms of their excitement level or lack thereof on the programs that could be generated by the stimulus program?

Al Neupaver

Yes. The stimulus program, as I mentioned, I think as each of those buckets give us an opportunity. I think that where we find that we're really ready to go, especially on these projects that have options. If you look at the locomotives, we have about $200 million of options that are still out there that have not been exercised. We just announced that Go Transit exercised about $85 million of their options, which was 20 locomotives.

So, that's where you're going to first see any kind of gain or activity. These options are going to get moved, because, as you know, the stimulus package is designed to get money into the economy as best as it can. We're hoping that also some of these options get extended. By that I mean, they're asking for greater numbers of the same type of product, because, otherwise, you had to go and redesign the products.

You're talking about years before not only the product has to be designed, you've got to get a bid out, you've got to rationalize who receives that bid and then start production. So, those longtime programs are probably not going to be impacted that much by the stimulus. It's going to be those products that we already have designed and ready to go.

Wendy Caplan - Wachovia

And, given the purpose of all the stimulus, as you said, to get the cash out there. Would we anticipate that much of what is ordered will be existing products?

Al Neupaver

I would think that's what's going to happen, Wendy. I think most of it's going to be existing. Well, if that doesn't exist, so much is in the high-speed rail. When you get that, I think its $8 million associated for high-speed rail development. That development, which will be part off, but, obviously, there are no high-speed rails in the US right now, although they exist in other parts of the world. So that's the one area where I think its longer term.

Wendy Caplan - Wachovia

Thank you very much.

Al Neupaver

Thank you.

Operator

Our next question comes from John Barnes with BB&T Capital Markets. Please go ahead, Mr. Barnes.

John Barnes - BB&T Capital Markets

Thanks. Good morning, guys. Could you remind us what the value of the current options that you have associated with your backlog is?

Al Neupaver

Yes. It's about $200 million right now. It was $300 million last month and we've exercised the option or [Torano] exercised the ops for $85 million, 20 locomotives.

John Barnes - BB&T Capital Markets

All right. Could you give us a little bit of an idea on, as you look at your guidance for 2009, what kind of freight car OEM number are you using in that guidance? The reason I asked is, it seems like you know a couple of forecasting agencies have gradually been welding this number to nothing. I'm curious as to what you're using for it.

Al Neupaver

Yes. What we've done in the assumptions is, we're assuming that obviously the deliveries were about 60,000 in 2008, and our assumption for the -- our guidance range is that it would go down by about 50%. So you're in basically the 30,000 build rate. I've seen numbers around there. I've seen some a little lower. I've seen some a little higher and it is a moving target. That's why we felt it was really important to provide everyone the assumptions that we've made, at least the macro assumptions that we've made with this guidance.

John Barnes - BB&T Capital Markets

And in that 30,000 range, is that kind of the midpoint of your guidance, or is it the lower end, higher end?

Al Neupaver

You know, it's tough, because when you look at the number of assumptions I gave, you've got to assume all the other ones are going to be right in the middle as well, to answer that question, John. So it's a tough quarter, because there is a -- I think I listed six different macro assumptions.

John Barnes - BB&T Capital Markets

Okay. All right.

Al Neupaver

One thing, you know the backlog for railcars now is about 31,000. Now, Trinity took about 10,000 out of the backlog this last quarter. Now in that 30,000, it's hard to tell the quality of that backlog at this point, so that becomes a whole other variable.

John Barnes - BB&T Capital Markets

All right, very good. I'm sorry if I missed this earlier, but acquisition revenue during the quarter?

Al Neupaver

During the quarter, acquisitions amounted about $20 million revenues, and for the year about $65 million.

John Barnes - BB&T Capital Markets

Okay.

Al Neupaver

I'm talking about 30%; how you get the 30% on the last quarter is FX was negative about $20 million. So the actual growth from our base business was still about 60% of the growth in the quarter.

John Barnes - BB&T Capital Markets

Okay. Understanding that when you came to the agreement with Standard Car Truck for the acquisition, since then the world has changed significantly and I understand that. But, as you look at Standard today, is there any potential for an impairment, I mean, already given where the OEM market is fallen off to?

And then, the existing management that was in place there, are they being retained on any kind of earn-out or something like that, where you can actually see a little of a benefit, because I would imagine targets that were set would be probably pretty difficult to hit in this environment?

Al Neupaver

Yes. There is no risk of impairment whatsoever. The Standard Car Truck, when we acquired the business; we're always looking at reoccurring profitability, EBITDA and the long-term strategic potential of the business.

As I stated, the integration is going extremely well and they're performing quite well. We know the content per car, we know their market share and they have also stepped up as far as the acquisition target that we had for synergies.

We have got all those moving in the right direction right now. The management team that all came along with the acquisition has been nothing short of fantastic. Actually, Rick Mathes, who ran the business for a number of years for the family, he is now a group executive running the whole railcar business force. He and his team have done a great job.

Where we have had any kind of duplicate opportunities, whether it would be from Wabtec standpoint or Standard Car Truck's standpoint, we have tried to eliminate all those duplicate people. So, I think the integration is going well. It’s a great addition to Wabtec, and I think that, strategically, it was a great move for us.

John Barnes - BB&T Capital Markets

Last question and I’ll turn it over. There have been a couple of articles in the Wall Street Journal lately, talking about the number of railcars, of the Class I's in storage at this point? And the railcar or the railroad has announced earnings in the quarter, talked to, I think, the number in aggregates, about 120,000 units at this point.

Have you heard of any instances where the rails are beginning to cannibalize their stored cars for parts? What kind of pressure will that put on potentially pulling your parts and service business? If it doesn’t occur now, does it just really prolong the inevitable, that you have got to maintain the equipment and it just bumps in out a little bit?

Al Neupaver

Yes. Some statistics that we’ve actually heard were that almost 25% of the cars are parked at any one time, which is about twice as much as they normally have parked. And locomotives are very similar. Now we won’t ask that question. As of right now, we don’t know of much cannibalization that's going on, any type of cannibalization would have an impact on a business.

But I have a feeling that the effort, the time and the labor do it. There is tremendous benefit. I think that the Class I's are still very healthy, and what we’re seeing is commitment on their part to try to maintain their capital spend, even during these tough times. So it will have a small impact. I don’t think it will have a major one.

John Barnes - BB&T Capital Markets

Okay. Very, good. Nice quarter guys. Thanks for your time.

Al Neupaver

Thank you, John.

Operator

Our next question comes from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Steve Barger - KeyBanc Capital Markets

Hi, good morning, guys.

Al Neupaver

Hi, Steve.

Steve Barger - KeyBanc Capital Markets

I wanted to go back to your macro assumptions for a minute. Of the 460 you mentioned, which one has the most impact on results, if it’s worst than you expect? Or, where is the sensitivity to your analysis?

Al Neupaver

Yes. The sensitivity is, let me go through, obviously, the economy is everything, that’s what drives everything. But the impact on profitability probably happens most when you look at the things that impact our volume, which is the railcar build and ton-miles and locomotive build.

When you look at FX, we basically have a natural, we hopefully have a natural hedge. It doesn’t always work perfectly, but most of our costs associated where revenues generated. So that doesn't have as much impact.

But if economy driven, the railcar build, the ton-miles will affect our aftermarket, the locomotive build will impact the OEM and aftermarket as well. And we're counting on the trends that market's holding, and we have the backlog and pretty good visibility on that as well.

Steve Barger - KeyBanc Capital Markets

Okay. And can you tell us what your revenue assumptions are for Standard Car Truck in 2009? What will that add to the topline?

Al Neupaver

What I can't say is that when you look at revenues, and it follows basically the guidance from our acquisitions, and growth initiatives are basically offsetting the negative impact from car build, the FX impact. The FX alone, the average foreign exchange rate could have an impact if it would stay at the spot rate. Today, it's almost $60 million of revenues and a small amount of profit impact.

We also have an impact as the material surcharges, as you know, we were very cautious and very careful about making sure that our raw material escalations over the last few years were covered. Now that the material prices come down, we've had to get back those surcharges that impact revenues, but do not impact profitability, and you have the impact on revenue negative of aftermarket in loco.

So, if we were able to see the fruition of those assumptions, we think we can get a balance between the two.

Steve Barger - KeyBanc Capital Markets

Right. Well, I think Standard Car Truck was about $225 million topline trailing 12 months. Is that close?

Al Neupaver

That was…

Alvaro Garcia-Tunon

Certainly that's close.

Steve Barger - KeyBanc Capital Markets

Okay. So, if you assume that that's going to be down a fairly significant amount because of its exposure to the freight markets. If it adds 150 million or whatever to revenue in 2009, then a commensurate amount has to come out of the legacy transit or freight business to get your overall revenue guidance of flat to slightly down. So is that decline in the legacy business ex-FX likely more skewed to the higher margin freight business?

Al Neupaver

Yeah, I believe it is, Steve.

Steve Barger - KeyBanc Capital Markets

So, coming back to the guidance, broadly speaking, if you've got flat to down revenue, and let's call it a mid-20 set headwind from the interest expense, and then you're getting a push on margins from lower freight. Can you walk us through what the margin expansion levers are, that you can get to flat EPS year-over-year at the midpoint of the range?

Al Neupaver

If you look at the revenue gains that we see again, I'll go through this slowly for you, but from the acquisitions, and growth initiatives, okay, that growth from there would basically offset the declines.

Steve Barger - KeyBanc Capital Markets

Yeah.

Al Neupaver

Now, part of the negative also related to profit is that there are certain purchase price accounting charges that we're going to see from Standard Car Truck. So, that will have a negative impact on the revenues, although we're going to get a gain on the profit, where we get a gain on the revenues. Okay, the other negative is the interest charge on the revenues.

Steve Barger - KeyBanc Capital Markets

Yeah.

Al Neupaver

Now, the plus is that we will get contribution margin from all that business, okay.

Steve Barger - KeyBanc Capital Markets

But Standard Car Truck is lower margin than the legacy freight business?

Al Neupaver

It was lower than the normal freight business, but equivalent to our base business margins, and remember I talked about synergies, okay.

Steve Barger - KeyBanc Capital Markets

Yeah.

Al Neupaver

We told you this is on the plus side of profit. We talked to you about cost reductions. That was mentioned in the presentation, right, 25 million. Now, on the negative side, you've got revenue down because of car build.

Steve Barger - KeyBanc Capital Markets

Right.

Al Neupaver

FX, we have revenue coming down, but the profits are only slightly impacted, because of the natural hedge and where we have our sales and cost at -- revenue in cost. Material surcharges is the passthrough, and then the base business, when you look at locomotive aftermarket declines, you would have a contribution margin impact on your profitability. That's the components that make up our plan, and based on those assumptions, we come up with the range of our guidance.

Steve Barger - KeyBanc Capital Markets

Okay, very good. I will jump back in line.

Al Neupaver

Okay. Thanks.

Operator

Our next question call comes from Paul Bodnar with Longbow Research. Go ahead, Sir.

Paul Bodnar - Longbow Research

Yeah. Al, can you just give a little more color on the aftermarket piece of the business on the freight side? And obviously, it looks that you are looking for down 5% on revenue ton-miles, although this somewhat tends to track each other. But what kind of, if you will, there's multiple of that, the expected decline this year or just some guidelines on the direction where you think that will head?

Al Neupaver

Good question, Paul. The concern is that the way it's tracking so far this year, when most people feel that the comparisons are going to get better. I mean, so far, we are talking about 15%, not the 5% that we have in our assumption. When you look at ton-miles, that's a pretty good indication of what happens with our aftermarket business.

The only wildcard there is the amount of cars that are parked. When you have cars parked, they don't get repaired on time, because there's no need. So we would actually see our aftermarket could be a little worse than the actual ton-mile decline. But we are also working, I mean, everything we are doing in this business is focusing on growth initiatives.

And one area, a specific initiative of ours is the aftermarket and we look to expand our offerings. We look to have increased capability. We look for geographic footprints to improve that aftermarket portion of our business. So, we are really focused on growth in that particular area as one specific strategy of ours.

Paul Bodnar - Longbow Research

How dependent then do you see guidance is, based on gaining growth from those initiatives? If that doesn't pan out, do you end up borne towards lowering the range or what's your…

Al Neupaver

Well, obviously, if those assumptions aren't maintained and we would hit our range of guidance. I mean those are our assumptions. I am not sure I understood the question.

Alvaro Garcia-Tunon

Yes. Again, there is probably 15 to 20, 30 moving parts in our guidance and to say [GE's] that's why we gave a broad range, because there are so many moving parts in the guidance. And, obviously, if we don't hit one aspect of those, its going to impact our overall results, but then results elsewhere could be more favorable. The transit market could be higher. The international markets could be higher. We could make more penetration in the international.

So again, obviously, if we don't hit one of the targets we set, it's going to impact our results. But, you know, Al listed the five or six most important, but really there are probably 25 or 30 key components to our guidance that that you'll have to take into consideration of this, also it's a cost element and other different factors.

Paul Bodnar - Longbow Research

Okay. And then a follow through on the freight side with margins. Can you walk through or, broadly, I know you may not walk through and say detailed original equipment, freight cars, where that falls in the margin. But if you could say if that's, what's above and what's below your average margin in that group, and work through some of the math?

Al Neupaver

Yes. Our margins between OEM and aftermarket in the freight area are not that much different, both of those product areas have pretty good margin.

Paul Bodnar - Longbow Research

That's true with both the locomotives and the cars?

Al Neupaver

Yes.

Paul Bodnar - Longbow Research

Okay. And then on the transit funding right now, how much of this is shipped in terms of projects you thought, what got paid for out of state budget, but, due to shortfalls, now are falling into this bill? How much do you think is really going to be incremental new business out there that you won't have seen before?

Al Neupaver

Yes. I think it’s a good question and I can’t answer it. I would hope that there is a requirement in the grants that doesn’t allow the states to just to say, okay, instead of our portion being paid by the state, we’re just going to use the federal funding. I think time will tell. Obviously, there maybe some of that, where state and local don’t have the ability to fund the capital program.

But I think the last time we talked a little about that, when you look at capital funding, the loco has come up in general, on average they have been around 15%, where federal is 43% within the stimulus package. If federal could go up to 80% of the projects, so I think it already has built in the fact that the state and local will not have to come up with as much, but so I think time will tell there. I don’t have that answer.

Paul Bodnar - Longbow Research

Okay. Well, thanks a lot.

Al Neupaver

Thank you.

Alvaro Garcia-Tunon

Thank you.

Operator

The next question comes from Greg Halter with Great Lakes Review. Please go ahead

Greg Halter - Great Lakes Review

Yes. Good morning. Thank you for taking these questions.

Al Neupaver

Sure.

Greg Halter - Great Lakes Review

I know you had some, you have the acquisition of the Standard Car Truck and the amortization you had in the quarter. But I just wondered if you could comment on what that amortization rate will be on a quarterly basis going forward?

Alvaro Garcia-Tunon

You are talking about the purchase price adjustment, the PPA or amortization of goodwill?

Greg Halter - Great Lakes Review

Amortization of goodwill?

Alvaro Garcia-Tunon

How much is that probably for '09, Pat, just to make sure I give the right number.

Pat Dugan

'09, we think the amortization of goodwill will be around $4 million for the year.

Alvaro Garcia-Tunon

Yes. So, I was just say about $1 million. But I want to make sure of one thing that, I mean, I want to caution you quite a bit on this. Basically, when you do your purchase accounting, you have a year to basically look back and adjust your purchase price allocation.

So, when we give you a number right now, it will probably change, but right now that's the number that we're looking at. This will be amortization of intangibles, what we call purchase price accounting, which is more related inventory and customer list and backlog, which gets through a lot quicker, actually inventory and backlog.

Greg Halter - Great Lakes Review

And that $4 million you just provided is for Standard Car Truck, that would compare to the $5.1 million you had for the full year on your line item amortization expense on the income statements?

Alvaro Garcia-Tunon

That's correct.

Greg Halter - Great Lakes Review

Okay. So, it's an additional $4 million to that figure.

Alvaro Garcia-Tunon

Correct.

Greg Halter - Great Lakes Review

Approximately $4 million.

Alvaro Garcia-Tunon

Right. And, it will probably change. If I didn't say that before, let me be redundant.

Greg Halter - Great Lakes Review

Okay. And, the PPA you talked about the $4 million. Was that just in the fourth quarter?

Alvaro Garcia-Tunon

Yes.

Greg Halter - Great Lakes Review

Okay. And, that…

Al Neupaver

It was just in the fourth quarter.

Greg Halter - Great Lakes Review

And, that was obviously run through the income statement.

Al Neupaver

And it was run right through the income statements.

Alvaro Garcia-Tunon

Some of that came still was from…

Greg Halter - Great Lakes Review

I think we still had some from a little bit from POLI.

Al Neupaver

Yes, little bit from POLI, mostly…

Alvaro Garcia-Tunon

That wasn't all Standard Car Truck.

Al Neupaver

Standard Car Truck.

Greg Halter - Great Lakes Review

Okay. All right, that's very helpful. And, relative to your debt, can you comment on what the rate…

Alvaro Garcia-Tunon

And, I'm sorry I don't mean to cut you off, but, again, and we probably have and again this is subject to change, because the purchase price allocations can change, but in terms of PPA for Standard Car and Truck, we probably have another $5.5 million that will flow through in probably the first couple of quarters of '09.

Greg Halter - Great Lakes Review

Okay, that is helpful, too.

Alvaro Garcia-Tunon

It sounds like you're trying to build your model just to get the numbers right.

Greg Halter - Great Lakes Review

And on your debt, can you comment on the rates that you're paying? And whether or not the debt is either fixed or floating basis currently?

Alvaro Garcia-Tunon

Sure. That's easy. Right now, we have about -- not about 150 million of bonds that are at 6 or 7/8ths. They mature in about four years and that's fixed. And then, we have about a year-end anyway, we had $235 million of variable bank debt and that's a 175 basis points over LIBOR.

Greg Halter - Great Lakes Review

Okay. And in your income statement, you had other income this quarter, the fourth quarter of about, I think it was $1.7 million positive swing over last year?

Alvaro Garcia-Tunon

Correct.

Greg Halter - Great Lakes Review

So, can you comment on that?

Alvaro Garcia-Tunon

Sure. Most of that, large, large majority of that is paper FX on say, for example, intercompany receivables. When you have an intercompany receivable, it's different from your functional currency. You have to make it. Basically, it's a paper FX gain or loss. We try and minimize those as best as we can.

And you can see that our year-to-date balances in that other income expense, where we're basically down to zero, I think that for the year as a whole, it's about 300. So that's most of it. It's paper FX. Again, we try and minimize it. You'll see that for the year, it balances out, but for the quarter, we did have a small gain.

Greg Halter - Great Lakes Review

Okay, great. And you gave the FX for the quarter. I think you said negative $20 million, what was it for the full year '08?

Al Neupaver

It was only $2 million.

Greg Halter - Great Lakes Review

Negative?

Al Neupaver

Yes.

Alvaro Garcia-Tunon

And that's on sales. For EBIT, it was basically breakeven, very small shifts one way or the other, not material.

Greg Halter - Great Lakes Review

All right. And a couple other quickies here. On your balance sheet, you have the equity figure as well as total assets?

Alvaro Garcia-Tunon

Let's see. Again this is subject to change, we do have preliminary number. Total assets, which would include obviously Standard Car Truck are little bit in excess of $1.5 billion. It's about $1.508 billion.

Greg Halter - Great Lakes Review

Okay.

Alvaro Garcia-Tunon

And equity is about $645 million roughly.

Greg Halter - Great Lakes Review

And relative to your pension plan, were there any adjustments in the fourth quarter, or do you expect any, and what would you expect your pension expense to be for '09?

Alvaro Garcia-Tunon

Our pension expense for '09 is probably going to be negatively impacted from what we would have expected, and this is in our model, but we would have been by roughly about $2 million. When we originally started budgeting, that's why I said earlier today in response to another question, there's a lot of moving parts to this plan. When we first hit the budget, we thought it was going to be because of the smoothing out effect and because discount rates have gone up, we thought we'll be probably breakeven.

By the time we finalized the budget, we realized that we're probably going to have to incur another $2 million worth of pension expense, obviously, because the balances have gone down. And the same thing happened to the pension assets, obviously, they are invested in common stocks and bonds and they've gone down.

Greg Halter - Great Lakes Review

Okay. And one last one, what are your thoughts, expectations on capital spending for 2009?

Alvaro Garcia-Tunon

Pretty stable, I think this year we're not sharply decreasing capital spending. I mentioned earlier, the keys to this year are growth and cash is king and, obviously, CapEx is part of the cash is king equation. But, we don’t want to cut off on those two, despite our phase. They'll probably be stable at somewhere between and $25 million to $30 million, which is in line with our past practices, once you add in Standard Car Truck.

Greg Halter - Great Lakes Review

Okay. That includes SCT in there?

Alvaro Garcia-Tunon

Correct.

Greg Halter - Great Lakes Review

Okay, great. Thank you.

Alvaro Garcia-Tunon

Thank you.

Operator

Our next question comes from Kristine Kubacki with Avondale Partners. Please go ahead.

Kristine Kubacki - Avondale Partners

Good morning.

Al Neupaver

Good morning, Kristine.

Kristine Kubacki - Avondale Partners

Just a couple of questions. One, on your strategy for uses of cash in '09, you are talking about cash is king, which is prudent. Do you have a view that you'll maybe pay down debt, or you are going to hold down to it in case the acquisitions become more attractive in '09?

Al Neupaver

As we always do in each of the board meetings, and even between the meetings, we talk about what’s the proper utilization of what cash we have in our strong balance sheet. We feel the first priority is always the best type of growth, is internal growth. We continue to look for acquisitions. We'll continually have about 70 million left on our stock buyback program and we'll look at other options as well. But it's that list, the priorities, that we'll be looking at. Alvaro, do you want to add anything to that?

Alvaro Garcia-Tunon

Yes. The only thing I would add, Kristine, is what we have is, we have a combination revolver and term credit loan. The revolver is $300 million and we've used very little of that. So regardless of what we do, we will always have that $300 million. The term loan was 200 million. We actually made a small payment on that one; it's about 7.5 million in January, required payment on that.

And what we'll do is, as we accumulate cash, we will evaluate the uses of that, whether we should eliminate the term loan. We do have an active stock repurchase program and that’ll be part of it. And we just evaluate as we go along, but, obviously, in these times, maintaining financial flexibility is key.

Kristine Kubacki - Avondale Partners

Okay. And you're comfortable then with your debt levels at this point and even upward from here a little bit?

Alvaro Garcia-Tunon

Yeah. We did the calculation the other day, debt-to-EBITDA is one-time, basically just a fraction over one-time. So we think, that's pretty conservative right now, we're okay with that.

Kristine Kubacki - Avondale Partners

Okay. And then a quick question on raw material costs. It was my understanding that, even with surcharges, you weren't able to absolutely cover those costs. And even though I understand, as you give back those surcharges, you're going to see a little impact on the revenue side. But shouldn't we expect a little bit of tailwind, in terms of, if raw materials continue to come down here on the profit side in '09?

Alvaro Garcia-Tunon

It will. But there is a timing issue, generally when there's not too many of our suppliers who are anxiously giving up their new founded profitability. So, it really takes a lot of effort on our part in purchasing and negotiations. But you are correct, eventually we should see some, especially those that were covered. But we had, I think, we spoke before about this, we had a very large portion of our raw materials were covered on surcharges and when they come down, they impact revenues, but not profitability, actually helps the margins.

Kristine Kubacki - Avondale Partners

Okay. And then a question on the stimulus, as you're talking to the transit authorities, I know the timeline of projects is still little uncertain. But I know that it's been our thesis, as well, about the contracts would open options. But do you get a sense from them, that maybe they are going to be more bus-focused or more rail-focused at this point, or is it too early to tell?

Al Neupaver

I think it's a little early to tell. One thing, I think everyone is scrambling right now to see, to get in line and get their money. So it's pretty hard to tell.

Kristine Kubacki - Avondale Partners

Okay. And then on the last question on positive train control with the current economic environment, do you see any delays by the railroads, maybe pushing this out a little bit to 2010 or 2011 to get started or any unforeseen delays there?

Al Neupaver

Yeah. There are three aspects right now. When we looked at the year, we really expected to see more activity. But obviously, the economy has an impact. But there's other impacts right now that our pilot programs and the development programs going full speed ahead, and we're really making some good progress there. But there's two developments that need to happen in order for us to start seeing some hardware orders.

And one of them is that the railroads, the Class I's are working on interoperability and the real center of that interoperability is a handheld radio system. It's a 220 megahertz system. And that's being developed right now, so that you could have this interoperability by Mediacom, which is a division of BNSF. The second thing is as the FRA is still working on fine tuning the regulations related to the positive train control.

Our particular system, we don't anticipate any problems with either one of those, and our system already needs all the regulations. But the FRA was coming out with new regulations, especially as it relates to interoperability. So the economy in those two developments, which everyone's working hard on, right now we'll probably see a little less hardware revenue than we would have anticipated. But the program is moving ahead full speed.

Kristine Kubacki - Avondale Partners

Okay, very good. Thank you for your time.

Al Neupaver

Thank you.

Operator

Our next question comes from Mark Bishop with the Boston Company. Go ahead, Sir.

Mark Bishop - Boston Company

Hi. I just heard a question about your guidance, you have freight ton-miles down 5% for the year as your assumption and you said that normally your revenue in that area tracks to that, except now there's all these parked cars. So I just want to talk about that a little bit, couple of questions on that. First of all, what percent of your maintenance revenue or whatever you call it…

Al Neupaver

Aftermarket.

Mark Bishop - Boston Company

Aftermarket is from railcars in the freight area, as opposed, and what parts of locomotives and what parts from transit?

Al Neupaver

Bishop, if you look at the full year freight, our aftermarket business was about 53%. So, OEM was obviously the 47 and transit was 52 and 48. When you look at aftermarket related to railcar and locomotive, I think it really fluctuates quite a bit. But they were probably about the same, probably half and half, 50% or so.

Mark Bishop - Boston Company

Railcar and locomotives is half of the aftermarket?

Al Neupaver

Yeah, I would think half is related to railcar and half is related to locomotive, but, that fluctuates month-to-month and different programs, there may be a particular upgrade on a railcar parts, it would dominate more the aftermarket or vice versa. We may get a quite a few locomotives to overhaul and those big numbers. So there's big swings in that, and I don't think that there is a good statistic that could be used.

Mark Bishop - Boston Company

I don't think I quite got it. So half is railcar, half is locomotives, is that within the freight cars?

Al Neupaver

Yeah, that's within the freight.

Mark Bishop - Boston Company

And freight, did you say freight is about half of the aftermarket?

Alvaro Garcia-Tunon

I think, what we're trying to say, Mark, is, if you look at our disclosure at freight revenues, above 52% of that is aftermarket and I know that 52% very roughly because, again, you've got a lot of moving parts in that, but of that 52%, half is locomotive and half is freight.

Mark Bishop - Boston Company

Okay. 52% of freight revenue is aftermarket.

Alvaro Garcia-Tunon

Right.

Mark Bishop - Boston Company

Okay, thank you. And then, you also mentioned that maybe be it's little bit worse this year because when some of your customers are parking the cars that need service and not fixing them, so I wondered, could you talk about that a little bit, if, how often do you normally do maintenance on a freight car? Is it every year? Is it every five years?

Al Neupaver

Giving an example, I mean, it depends on the wear on the freight car and every component has different rules. There are certain rules set up by the AAR that require periodic testing. One of the things that they have to do is, if they take a railcar and travel right now, 1500 miles or 1000 to 1500, they have to stop them, test the actual brake. And if it fails, it needs to be repaired.

They also have a duration where, every so many years they have to bring it in and have it overhauled, and locomotives have the different time period, and different components have different time periods. But it's generally controlled by regulations when it has to be brought in for an absolute repair.

Mark Bishop - Boston Company

Okay. So, my point is that.

Alvaro Garcia-Tunon

I'd add one more thing, be careful, because when we talk about aftermarket, we are talking a lot more than just repairs on freight cars. For example, we are talking about friction products and those are just the disc brake pads and brake pads and those are just normal wear and tear items. So, they're not subject to inspection.

We are talking about things like electronics, like in the train devices, which are sold directly to the railroads and not to the freight car manufacturers. So we would classify those as aftermarket. So it's not just a repair of a freight car itself, it really is so much broader than those segments, we talk about overhaul locomotives aftermarket, so there is a lot in there.

Mark Bishop - Boston Company

So what percent of the aftermarket in this area of brake pads and stuff? And what percent of something else?

Alvaro Garcia-Tunon

We don't have that finally broken down, to be honest, with this call. Maybe if you give Tim a call later, we can try and pick up some numbers for you.

Mark Bishop - Boston Company

I just mean are brake pads, is the regular, you are going to replace stuff constantly anyway, a big deal, or are brake pads really only replaced every couple of years anyway?

Al Neupaver

Now, it depends on the wear, it can go from six months to maybe a year or year and half, but it depends on wear.

Mark Bishop - Boston Company

Okay. The point was I just wondered when you said, you could be a little worse this year because of part cars. If cars don't need service constantly, is it possible that your customers just keep switching out the cars when they need to, or just park it, you said that's happening. I don't know, don't take a car, it doesn't need maintenance and use it. And if you only need maintenance every couple of years anyway, maybe you don't have hardly any maintenance revenue on the freight side for at least a year?

Al Neupaver

It's very hard to completely understand it, remember, there are probably 10 different types of railcars, each of them has different requirements. So, it's just not that easy to make an impact. We've actually taken a look at, dependent on the number of cars that are parked, what that impact is on our business. And we're trying to use those in our estimate. So, it's a very complex situation. I don't think you really break it down and give you a statistic is going to make you feel comfortable.

Mark Bishop - Boston Company

Okay. But in your assumption, you're assuming just a little bit less than 5%?

Al Neupaver

Right, that's exactly right.

Mark Bishop - Boston Company

Okay. And do you have any experience, numbers in the recent month or two, as to whether it's substantially worst than 15% or you don't…

Al Neupaver

Not yet, we haven't been able to really, yet. We have an estimate of what we think the impact would be. But we have not been able to validate that yet.

Mark Bishop - Boston Company

In the last month or so, is it been much worse than the 15% or is it about the same?

Al Neupaver

Our aftermarket in the last few weeks has really held up so far.

Mark Bishop - Boston Company

Okay. Great. Well thanks so much.

Al Neupaver

Okay. Thank you.

Timothy Wesley

John, I think we're…

Operator

Right, we show no further questions at this time. So I'd like to turn it back over to you for any closing remarks.

Al Neupaver

No, we'll talk to you again in the couple of months with the first quarter results.

Alvaro Garcia-Tunon

Thanks, everybody.

Timothy Wesley

Thanks.

Operator

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

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