Wabtec Q1 2009 Earnings Call Transcript

Apr.22.09 | About: Wabtec Corporate (WAB)

Wabtec Corporation (NYSE:WAB)

Q1 2009 Earnings Call

April 22, 2009 10:00 AM ET

Executives

Timothy R. Wesley - Vice President, Investor Relations and Corporate Communications

Albert J. Neupaver - President and Chief Executive Officer

Alvaro Garcia-Tunon - Senior Vice President, Chief Financial Officer and Secretary

Analysts

Ryan C. MacLean - Janney Montgomery Scott

Art Hatfield - Morgan Keegan

Scott Blumenthal - Emerald Advisors

Kristine Kubacki - Avondale Partners

Greg Halter - Great Lakes Review

Steve Barger - KeyBanc Capital Markets

Todd Maiden - BB&T Capital Markets

Shawn Boyd - Westcliff Capital Management

Patrick D. Dugan - Vice President and Controller

Bentley Offutt - Offutt Securities

Operator

Good morning and welcome to the Wabtec First Quarter 2009 Earnings Conference Call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your question at that time. (Operator Instructions). Please note this conference is being recorded.

Now I would like to turn the conference over to Mr. Tim Wesley, Vice President of Investor Relations. Mr. Wesley, please begin

Timothy R. Wesley

Thanks Camille. Good morning everybody and welcome to our first quarter earnings conference call this morning. I would like to introduce the rest of the Wabtec team who is here: our President and CEO, Al Neupaver; our CFO, Alvaro Garcia-Tunon and our Corporate Controller, Pat Dugan.

We'll make our prepared remarks as usual and then we will take your questions and we will of course make some forward-looking statements during the call. So please review today's press release for the appropriate disclaimers.

With that, I'll turn it over to Al Neupaver, our President and CEO.

Albert J. Neupaver

Thanks Tim. Good morning everyone. What I'll do as usual is cover the results and our current market conditions including on how we will respond into those conditions. Then I'll talk a little bit about our progress related to our strategic growth initiatives. Alvaro will dive deeper into the financials and then we will go into the Q&A.

Given the state of the economy and particularly the freight rail market, Wabtec performed solidly in the first quarter. Our sales were slightly lower than a quarter ago, down at $378 million, a decrease of around a percent.

We had good performance in a period of negative GDP and with the North American freight rail market off by double digits.

Our first quarter EPS was $0.68. This is $0.02 better than the prior year quarter. Included in these results were some one-time items including a sale of a building and the purchase price accounting charges related to the Standard Car Truck acquisition.

All in all, these basically offset each other. The backlog remained over $1 billion for the 12th quarter in a row. I remind you that we achieved this performance in a weak global economy and a very weak U.S. freight rail market. 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.

Okay, now I'll go into the markets a little bit. We'll start with the transit market. We continue to see a strong transit market. This is being driven by federal funding, including money from the stimulus package and good passenger ridership.

The federal transit spending, before you take account for the stimulus dollars, should be up 6% in 2009 to a record $10.3 billion. The current spending bill will run through September 2009. Congress should start debating the new bill later this year. The stimulus package should present additional opportunities as state and local governments sort through their projects and future plans. This package set aside $8.4 billion for public transportation, an additional $1.3 billion for Amtrak. And last week, the Obama administration announced its plan for high-speed rail in the U.S., including an additional $5 billion in funding, about $1 billion a year for the next five years. This is on top of the $8 billion already in the stimulus plan that is designated for high-speed rail.

Although we know that this will take many years to develop, it's another long-term positive for the company. Wabtec is in good position to take advantage of this commitment to expand the country's mass transit capabilities.

When you look at ridership, ridership was up 2% in the fourth quarter of 2008 and was up 4% for the full year. The results so far this year are a bit mixed. We have statistics from January that show that subway ridership was down 4% in New York City, but yet in Chicago, rail ridership was up 5%.

But what is important, there are positive long-term trends in Transit that should continue to drive growth and investment. This is being driven by population growth and urbanization, the long-term concerns about fuel prices and our environment and the desire to reduce our dependence on foreign oil.

Looking at the freight rail market, freight rail traffic is off significantly due to the economy. Year-to-date ton miles is down 16% and car loadings are off 17%. Coal represents about half of what railroads carry, and that's only off 5%, if you want to look for some bright spot in the freight rail market. Intermodal traffic is down 16% through the summer months.

As expected, railcar deliveries have slowed considerably. Although the first quarter numbers have not been released yet, our best estimate for deliveries are around 6000 cars and there were orders for only a few thousand.

We had been expecting deliveries around 30,000 for the year, but now it looks like that number could be as low as 20,000. Remember that our exposure to the new car, OEM car market is no more than 20% of our revenues. It is an important market for us, but not as big of a piece as it used to be. We find the locomotive market also slowing, but not at the same rate. When you consider domestic and international orders for locomotives, we expect it to be down around 25% in 2009.

This overall weakness will result in lower than expected sales in the Freight Group for the remainder of the year. We're responding with further cost reduction actions at corporate and in the business units that are impacted.

Companywide, we're now targeting annualized cost reductions of about $30 million, with related one-time costs of about $10 million with about $4 million of that taken in 2008. Some of the actions include workforce reduction. In total, that will be around 8% from all levels of the company. There is plant consolidations, mainly in the Freight Group as a result of the Standard Car Truck acquisition and we have a increased emphasis on lean and sourcing activities.

Our goal is to balance our continued investment in growth opportunities with the need to take prudent actions that reflect the economic and business realities we face. We believe that we are achieving that balance.

Also today, we affirmed our 2009 guidance, EPS of $2.45 to $2.75. We do expect sales to be slightly down for the year based on weaker than expected freight market conditions. Our previous guidance was for sales to be flat to slightly down. We see the year still as a challenge in light of the market conditions and the continued uncertainty in the freight markets. But we think it's achievable as long as the freight market does not weaken further and the transit remains stable.

Our focus is on growth in cash. In this poor economic environment, we need to focus on the ability to grow the business long term and preserve our cash position. We will continue to invest in strategic growth opportunities. For example, new products such as positive train control where Wabtec is very well positioned with potential revenues of $200 million to $400 million over the next five to seven years.

We continue to invest in global expansion. We just completed a second joint venture in China; this one for breaking and related products. We are also exploring new opportunities in the aftermarket as rail roads and transit authorities consider outsourcing. And we'll be focused on acquisitions such as POLI and Standard Car Truck which further differentiate our product lines and boost our geographic coverage.

A little bit on the China JVs. We have now established a presence in China with two joint ventures: Huaxia and Shenyang. Huaxia is a majority owned JV that manufactures friction products, Shenyang is a 50:50 JV to manufacture braking equipment. These are both small investments, but they get us started in a market that is sure to grow in the future.

Our second focus is cash. Cash provides the opportunity to invest in these acquisitions and strategic alliances as well as other growth strategies. We are renewing our efforts to increase free cash flow. We are able to generate this cash through cost reductions, driving down working capital and squeezing the capital expenditures. During the quarter, we reduced our debt by $25 million and bought back $7 million worth of stock.

Now I will turn it over to Alvaro, a little deeper look at our financials.

Alvaro Garcia-Tunon

Thanks Al and good morning everyone. Welcome to the call. As I think Al mentioned and I'll note again, though, I think we felt we had a good performance this quarter in an increasingly difficult environment.

We think that the fact that we are up 3% year-over-year earnings wise is not something we normally brag about. But in this environment, we think that's very positive.

In spite of that, though, we do remain cautious about the future. We recognize that the markets out there are very, very difficult; all you have to do is pick up the paper everyday and recognize that. And that's particularly true in the freight market and the general financial community.

Given that, to go over the specific results, sales were basically fat... flat. Not too fat, mostly flat, about 1% lower than last year at $378 million. The Transit Group was up slightly year-over-year. This was due mostly to increased sales, resulting from the POLI acquisition.

The Freight Group sales were down about 6% as higher sales from the acquisitions were more than offset by lower sales in what we've described as a not very good freight market. Margins, however, were positive. I think a recurring theme of these phone calls is our emphasis on a margin, improving margins, and this is particularly true in this tough environment.

For the quarter, operating margin was about 14.7% versus 14.1% last year, which we feel is a commendable performance.

A couple of one timers, just for you all to take into account in evaluating the results and then modeling going forward. Expenses, we have talked about purchase price accounting before. And what we call purchase price accounting is what I would say quick turnaround, generally a year or less, of non-cash charges mostly relating to writing up inventory, backlog and other intangibles in an acquisition. Our expenses included a one-time purchase price accounting charge for basically Standard Car and Truck. The POLI PPA is now complete of about $3.4 million. And this was mostly all in cost of sales.

And then we also... I think everyone is aware of our downsizing of our Canadian operations, as a result of which we sold one of the properties that we had in Canada and we had a one-time gain from the sale of that property of $2.1 million, and that's in SG&A. So SG&A has been favorably impacted by $2.1 million as a result of this sale and cost of sales negatively impacted by the PPA of Standard Car and Truck of $3.4 million.

In regards to other expense categories, I think all the other ones were relatively stable. Interest obviously is higher due to the increased debt for the acquisitions. The effective tax rate is slightly lower, but again, it's moving in the normal range as you would expect.

To get down to some of the actual working capital balances and backlog numbers et cetera et cetera that we always disclose. Working capital as compared to December 31, so compared to the end of last year. Receivables were down... I'm sorry receivables were $260 million, down $14 million from the prior balance sheet. Inventories were $253 million, down $11 million. So we have tried to decrease working capital and have been successful somewhat, but we still think we can do better.

As a result of the reduced purchasing activities, payables were $126 million, down from $163 million, so down almost $40 million as we reduced again the purchases and other spending.

Cash. At March 31, we had $98 million in cash. This was down from $142 million at December 31. Again, we are working down some of the liabilities. We paid off $25 million of our long-term debt; I think Al mentioned that. And we also used about $7 million to repurchase shares during these times that we thought were very attractive prices.

A couple of other miscellaneous items. Depreciation, relatively stable, $7 million this quarter versus $6.4 million last year. Amort is increasing slightly because again of acquisition activity. But this amort, I wouldn't call this a one-time item; this results from writing up various intangible assets as a result of an acquisition. But this will be an ongoing number. And I think for modeling purposes you can assume it's going to be relatively stable. Amort for this period was about $1.4 million versus $900,000 last year. And CapEx, stable; again, in this environment, we are watching our CapEx very carefully. It was $3.4 million this quarter versus $3.9 million last year. So in spite of the acquisitions, we are managing to maintain our discipline on CapEx.

In terms of backlog, Al referred that we're still over $1 billion; not by much, but we're still over the $1 billion number. The total backlog is $1.01 billion versus $1.06 billion at 12/31/08. Now, I'm comparing that again to the just completed prior quarter. Of this $1.01 billion, $818 million is in Transit and $192 million is in Freight. And then the rolling 12 month backlog, the part of this $1.01 billion that we expect to execute over the next 12 months, is $560 million. And this compares to $566 million again at the end of the prior quarter, 12/31/08. So nothing... no material change there to speak of. And out of that $560 million, $450 million is in Transit and $110 million in Freight.

And with that, I think I'm sure we'll have a few questions here and there. But that concludes the financial part of this and I'll turn it over to Al for a quick summary.

Albert J. Neupaver

Okay. So once again, we had a solid performance in a very difficult environment. Like most companies, we continue to face very challenging market conditions and uncertainty due to the economy.

We are fortunate that we have a diverse business model and that our Transit business, a little over half the company now, remains stable at a high level. The Wabtec Performance System provides an established culture of lean manufacturing and continuous improvement and drives that margin improvement, even in tough times. We have an experienced and dedicated management team.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question will come from Ryan MacLean from Janney Montgomery Scott. Please go ahead.

Ryan MacLean - Janney Montgomery Scott

Good morning. First question, I just want to know what the FX contribution you disclosed for the top line for a second (ph).

Albert Neupaver

The question is what impact did FX have on the top line from a year ago quarter? It was $22 million negative.

Ryan MacLean - Janney Montgomery Scott

And just wanted to talk a little bit about within Transit funding. Obviously, federal stimulus dollars are going to be... start flowing more so than we have seen already. And I am just wondering if, in the first quarter, have we seen any of the Transit customers maybe defer some of their spending while they are waiting for the money to start flowing their way, or was it... normally, did sales occur as they normally would?

Albert Neupaver

We saw no deferment of any spending during the first quarter and we actually have never... not seen any of that even last year, Ryan. What you will find is the ongoing approved programs are moving ahead at a pretty good pace and there is a tremendous amount of activity by most of our customers, transit authorities, governments to get in projects that would allow them to be successful in getting some of the stimulus funding.

Ryan MacLean - Janney Montgomery Scott

Okay. Shifting over to... on the freight side of the business, you mentioned that you expect the locomotive builds to be down about 25% this year. And I was wondering if you can kind of go into it a little more detail as to how that relates, U.S. versus international, we hear of the --

Albert Neupaver

We expect, Ryan, on the locomotive, we think that the domestic purchase could be down greater than 40%, 50% for the year. But there is still a lot of backlog related to some international purchases. In those cases, it may not be a full locomotive that is shipped and statistics may be a bit confusing. But in our case, we would be setting up a subtype of... a kidding (ph) of the products that we would supply to these various projects. So it still becomes a locomotive build. And that's built into that... when we talk about the 25% decline as we view it. So that may not be consistent with what you would hear about North American locomotive builds.

Ryan MacLean - Janney Montgomery Scott

Okay. And finally, on the Standard Car Truck acquisition, I was just wondering if you could give any updates on to... as for the integration of the company so far, if there is any pluses or minuses versus what you expected when you closed the deal.

Albert Neupaver

Well, I can tell you that the integration, and I have been involved in a lot of acquisitions over my career, and I don't know if I've ever had a smoother integration. And that's really a compliment Rick Mathes and the whole Standard Car Truck team. They had an excellent business that they managed extremely well and a lot of things in place.

So on the positive side, that has really been a real plus. And we've also... those synergies that we identified early along in the evaluation of the acquisition, they all look like they are achievable, and so that's a positive. The negative obviously is that the market has not been kind in the rail market, and a good percentage of their business is tied to the OEM rail build.

But our view of Standard Car Truck is a long-term view and a strategic view. And we feel that by... able to offer a broader range of products to the rail car builders that strategically, we're going to be in a much better position as this market rebounds. And long term, they have some great technology, they have got some great international businesses and their model, their business model is really one that allows us some things to learn from. So all in all, we couldn't be more pleased with the acquisition.

Ryan MacLean - Janney Montgomery Scott

All right, thank you very much.

Albert Neupaver

Thanks Ryan.

Operator

Our next question will come from Art Hatfield from Morgan Keegan. Please go ahead.

Art Hatfield - Morgan Keegan

Good morning. Thanks guys and I will confirm what you all said from the outside. This is a great quarter and congratulations on some good work, Al, Alvaro and everybody else. Hey Al, just kind of your thought process on a couple of things. When you talked about the fact that your expectations for freight car builds have changed and you think it's going to be as opposed to 30,000, closer to 20,000, why don't you change your guidance at that point in time? And if it's because you've got some other things on the hopper such as ability to cut costs elsewhere, can you give us some more specificity on what you can do in that area?

Albert Neupaver

Yeah, obviously, when we put together the original assumptions and guidance of the business and we communicated those to you, things have deteriorated from that. So that car build does have an increased impact, if you look at a drop of 10,000 cars or so, which will have an impact on the sales side. And obviously, we're indicating that now related to those assumptions.

Some of the things that we were able to do in the first quarter is that to offset that reduction in sale and the contribution margin impact of that is that we are able to be much more aggressive and successful in some our cost reduction efforts.

I'll give you an example. Last year, as you know, we have what we call a lean approach, our Wabtec Performance System. Last year, if you looked at month, we would do maybe 30 to 40 Kaizen events each month. This quarter we were able to do on average 60 Kaizens, which means that every operation in Wabtec did at least two Kaizens per month. And that increased activity, although a Kaizen doesn't necessarily have to result in hundreds of thousands of dollars improvements; it does result in efficiencies, in productivity improvements. And incrementally, that kind of approach helps you get the margin improvement that you are seeing.

Now, obviously, there is a lot of factors that go into the performance in addition to our effort on the Wabtec Performance System. We have also really pushed outsourcing product rather than being vertically integrated. We've moved a lot of product as you know from high cost facilities to lower cost platforms we have, like Mexico or even China. We have also really focused on, as the raw materials pricing has come down, we have negotiated a lot harder on our purchases. And where possible, we have tried to utilize as much pricing leverages we could.

So all in all, we will see lower sales, but we think that our improved margin improvement, especially in the Transit area where there has been a lot questions over the past year; can we increase margins in the transit area. And we think we can continue to increase those margins and we were successful in doing so a bit in the first quarter. But there is still a lot of factors. Will the mix change next quarter? Will there be other one-time issues that come up? Always will be. So I think that on balance, we feel that this affirmed guidance is... we are comfortable with it.

Art Hatfield - Morgan Keegan

Right, thank you. That's all I got today.

Albert Neupaver

Okay, thanks Art.

Operator

The next question will come from Scott Blumenthal from Emerald Advisors. Please go ahead.

Scott Blumenthal - Emerald Advisors

Good morning gentlemen, thank you for a great quarter.

Albert Neupaver

Thanks Scott.

Scott Blumenthal - Emerald Advisors

Al or Alvaro, could you give us some insight into the transit margin, which I guess we have learned are historically lower than the freight margins? How close are we to parity there or have we achieved that?

Albert Neupaver

As you know, Scott, we do not give that information out until it's finalized in the... will be the Q. So what I did say and I will repeat is that we have been tremendously focused on those margins because we knew that transit is going to a bigger portion of our business going forward. And we had good success in the quarter in improving those margins in a number of the divisions. And we will continue to stay focused on that and we don't really have a goal. A lot of times we are asked what's your goal. Our goal is to continuously improve. Obviously, volume helps on the way up and it hurts on the way down. So you would imagine that the freight margins would be somewhat eroded whereas the transit margins would have help from the just the volume. But those other items that I talked about are all incrementally contributing as well. Was that as political as I could be?

Scott Blumenthal - Emerald Advisors

That's pretty good Al, thank you. How much of this... so I guess from here, we can kind of assume that the transit margins are improving and obviously volumes are helping there. But can you attribute any of this to the mix of what you are delivering or possibly your ability to negotiate better transit contracts during kind of a robust booking season last year, year before?

Albert Neupaver

There is one factor that helps us... sorry for the echo. Is everyone hearing that echo? Are you hearing that Scott?

Scott Blumenthal - Emerald Advisors

Just a little.

Albert Neupaver

There is one factor and that is that a lot of the transit projects that we had in the backlog that we've had for a while, obviously, as the learning of producing those particular products over time allows us to really apply productivity improvements. When you look at our Performance System, it's really about not just accepting necessarily margin on a project, but continually apply measures in order to increase that margin over time. Some of these projects last... were towards the back-end of them, we do get the advantage of that experience.

Scott Blumenthal - Emerald Advisors

Okay. Alvaro, could you give us a gauge I guess based upon the current guidance as to where you expect debt at the end of the year?

Alvaro Garcia-Tunon

I would say obviously, it all depends... one of our big emphasis this year is working capital reduction and cash generation. We feel that in declining markets, you should at least be able to accomplish that. We have done it in the past and we don't see any reason why we can't do it right now. Generally, we have a target. I think our overall target when we set the budget of operating cash flow was about 125, 130 million. We would like to exceed that target by year end. But that's our target right now.

Now, how much of that we'd use for debt reduction? We could use some of that for acquisitions, we could use some of that for stock repurchases, we could use some of that for debt reduction. It really depends on the circumstances that present themselves throughout the year. But in general, that's our cash target, which we hope to exceed, to be perfectly honest. If we have management out there listening, I'll throw that gauntlet out to our managers as well. But again, it all depends how we use that cash on the circumstances that occur throughout the year.

Scott Blumenthal - Emerald Advisors

And at this point currently, your priorities for the use of that would be?

Alvaro Garcia-Tunon

I think Al intimated this, but obviously, what we want to do is continue our growth strategy. We do want to continue to invest in our various growth strategies as we go forward. That includes CapEx, that includes internal growth projects, that would include acquisitions. But again, it does include stock buybacks. And in terms of debt, right now, we're at about one-time EBITDA debt net of cash. And we feel that's a very, very manageable position. So I would say we would invest in the other factors first, for example, if a particularly good acquisition presents itself, we would invest in that and probably debt reduction, we use excess cash for that.

Scott Blumenthal - Emerald Advisors

Okay, that's really helpful. And one more, if I may. Al, how much of last month's New York City subway order do you expect to kind of get through the pipeline this year, if any?

Albert Neupaver

Most of that's going to be delivered 2010, 2011.

Scott Blumenthal - Emerald Advisors

Okay. Terrific, thank you.

Albert Neupaver

Alright, thank you Scott.

Operator

Our next question will come from Kristine Kubacki from Avondale Partners. Please go ahead.

Kristine Kubacki - Avondale Partners

Good morning.

Albert Neupaver

Good morning, Kristine.

Kristine Kubacki - Avondale Partners

Great quarter. I can't say that about my hockey team, but on with my question. With the recent joint ventures that you announced, can you talk about any issues as you ramp up there and are you approaching any other areas there, transit in China?

Albert Neupaver

There is no issues as far as ramping up. We've really been working on these for quite a while. We finally got to the point on the Shenyang joint venture that the company is actually operating. We had really signed agreements last fall. But the time it went through all the government procedures and approvals, it just took a while and the JV is actually operating now and we have a GM in place and it seems to be going smooth. The one thing about that particular joint venture is their market... we were just over there last week and their market is slow as well. They have a number of rail cars and locomotives parked. The only difference is they seem to be continuing to order rail cars even as they have them parked. So the business seems to be moving forward. But they do have a freight slowdown. And as you know, they have a tremendous amount of stimulus money themselves in the infrastructure for both transit and freight planned.

The friction joint venture is operating extremely well. We have a lot of opportunity for growth. This is a... Huaxia was a company that our beckeret (ph) division had worked with for a number of years and it supplied products into that market. So this was just a further progression of taking this business forward. Both of these are not large right now, but we really look forward to growth in the future. We are working on JVs in the transit area right now, but I don't have anything I can report on.

Kristine Kubacki - Avondale Partners

Okay. In terms of transit in the U.S., I would tell you the statistics are a little bit confusing as ridership continues to be pretty healthy, but operating budgets are under duress. Can you highlight the impacts in short and long term on your transit business?

Albert Neupaver

I think it's really something that the local transit authorities and our governments are going to have to resolve. As you all have seen, the tremendous interest in transit because of the reasons I talked about in the prepared text. It is a very hot item, it is a very important item. And one of the thing that really could hamper the particular growth in the transit area is the fact that the operating budgets are under stress everywhere. And a lot of this has been caused by the recession, yet the ridership is there. And hopefully they can resolve it because the real concern that I personally have is that I can see where if the service declines, then people will get discouraged with it and the ridership will be down. I mean the nice thing so far is if you look at the price of fuel when it declined, you would have thought that ridership would go down proportionally, and that's not what's happening. So I think the service is critical to maintain that ridership and our job is to continue to supply and offer the technology that will help them do that.

Kristine Kubacki - Avondale Partners

Are you seeing any impacts on the aftermarket business in transit specifically? And then as you as the focus on capital spending by several funds is increasing and you're seeing those dollars start to flow, will that have a one-to-one kind of impact as that installed base gets bigger on your transit aftermarket?

Albert Neupaver

We haven't seen any impact on the transit market. It's still... that capital really hasn't started flowing yet. We have seen a few projects that are a result of this, but the flow is... there is really a lot of positioning right now for projects and the money. That we do see.

Kristine Kubacki - Avondale Partners

Okay. Any impact on the aftermarket though from transit projects (ph)

Albert Neupaver

No, we're not seeing it right now.

Kristine Kubacki - Avondale Partners

Okay. And then my last question, with your decision to repurchase shares in the quarter, can I infer that that was a result of... or reflects a lack of attractive acquisitions? And are you expecting any maybe distressed sellers to enter the market the longer this freight downturn continues?

Alvaro Garcia-Tunon

Well in regards to the first question, I would say absolutely not., I mean, actually, I did the math earlier. And if you look in the press release, I think we bought 290,000 shares for $7 million and that's an actual average price of about... it's under $25. So that's obviously very attractive. And I don't know if you are aware of this, but we probably had an active ongoing share repurchase program for over, I'd say, a year, or probably closer to two years. And the one benefit we have given our capital structure and given our ability to generate cash is that we can really do both, that we can maintain an active share repurchase program and repurchase shares particularly to offset dilution from the issuance and exercise of stock options and still leave plenty of flexibility for acquisitions. Like I said earlier, our debt to EBITDA is about one or even a little bit less and we have plenty available under our line of credit. So I still think we have substantial flexibility for acquisitions.

Kristine Kubacki - Avondale Partners

Okay, thank you very much. Great quarter.

Alvaro Garcia-Tunon

Thank you.

Operator

The next question will come from Greg Halter from Great Lakes Review, please go ahead.

Greg Halter - Great Lakes Review

Yes, good morning.

Albert Neupaver

Good Morning, Greg.

Greg Halter - Great Lakes Review

I didn't hear a figure provided on the equity or estimated equity number at 331. Did you provide that?

Alvaro Garcia-Tunon

You mean our estimated shareholders equity?

Greg Halter - Great Lakes Review

Yes.

Alvaro Garcia-Tunon

Again, our balance sheet it subject to reclass, so when we give you a number, we are happy to give you a number, but just be aware that it is subject to adjustment until we issue the Q. But total shareholders equity should be somewhere in the range of about 660 million.

Greg Halter - Great Lakes Review

660, okay. And how much did Standard Car Truck add to your backlog?

Alvaro Garcia-Tunon

Let's see, if I have backlog data here. I think overall, not too significantly, but... give me two seconds to look it up here. It looks like it's about 12 million per --

Unidentified Analyst

Are you going to add the other --

Alvaro Garcia-Tunon

About 15, including --

Greg Halter - Great Lakes Review

Okay. So relatively minimal.

Alvaro Garcia-Tunon

Relatively minimal. Again, the freight units tend to have relatively minimal backlog. That's typically done through POs and other relatively quick ordering mechanisms. Most of the backlog historically and certainly through right now will be in transit. One thing, I was going to mention this earlier; I didn't want to interrupt Al. Those of you that have visited us in Wilmerding know that we are right next to a freight rail line. And you will get occasional background noise from the freight trains. It does... it can disrupt a conference call. That's right now, to be honest, that's a welcome sign and we like it. But I apologize for the occasional background noise here.

Greg Halter - Great Lakes Review

And have you seen any cancellations in the backlog on the transit side specifically?

Alvaro Garcia-Tunon

When we book backlog, its' basically firm backlog. I mean it's a binding obligation. And so you rarely see cancellations in our backlog. You'll see deferrals. And it's typically true with transit contracts that a passenger transit car is a relatively complex system and one or two vendors can throw off the timing. So you'll see deferrals, but rarely will you see a cancellation.

Greg Halter - Great Lakes Review

Okay. And the same questions, but on revenue of how much Standard Car and POLI added to your revenue in the quarter.

Alvaro Garcia-Tunon

Sure.

Albert Neupaver

I can give you that. I mean together, the acquisitions added 39 million, 33 Standard Car Truck, 6 or 7 for POLI.

Greg Halter - Great Lakes Review

Okay, great. And I think, Alvaro, you talked about the tax rate. Should we assume it should be around 36% for the full year?

Alvaro Garcia-Tunon

I think this year was probably... what happens is, not to get into too technical a discussion, but we have to adopt an accounting standard called FIN 48, again about a year and a half two years ago. And that can add some volatility. It's very conservative, basically a bit of accounting regulation. And that can add some volatility to your tax rate. I think probably this quarter, we were probably a little under what we normally expect. I would say for the tax for the year, you can do it somewhere around 36.5. But it's going to be somewhere between 36 to 37 depending on how issues can turn out.

Greg Halter - Great Lakes Review

Okay. And one...

Alvaro Garcia-Tunon

But basically, we would expect it someone in that range.

Greg Halter - Great Lakes Review

And one last quick one. Your other income was about $400,000 versus other expense last year of about $400,000 for about an $800,000 swing. Any commentary relative to that?

Alvaro Garcia-Tunon

Not really. That's typically not a very significant item. Probably the most significant element of that line item is paper and it is paper, it's non-cash, foreign exchange gains and losses arising from inter company balances. And what we try and do to be honest is minimize that by paying off the inter company balances as quickly as possible. But obviously, the cross border transactions occur and well, you try and minimize it, you will have some minor gains and losses there occasionally. But it's nothing significant (ph).

Greg Halter - Great Lakes Review

Okay, thank you. And congrats again on a good quarter, coming from a city with a good basketball team in Cleveland.

Alvaro Garcia-Tunon

There you go.

Albert Neupaver

Thanks Greg.

Alvaro Garcia-Tunon

We are a little disappointed that we didn't get to the final four, but we'll take it.

Operator

Our next question will come from Steve Barger from KeyBanc Capital Markets. Please go ahead.

Steve Barger - KeyBanc Capital Markets

Good morning.

Albert Neupaver

Good morning, Steve.

Steve Barger - KeyBanc Capital Markets

I heard the revenue contribution from Standard Car Truck, but can you talk about where the margins came in for that company and... or maybe just talk about it kind of directionally relative to the legacy freight business?

Albert Neupaver

We don't necessarily give out specific margins on any particular division. I can tell you that it's running very close to what you would expect from our other freight businesses. It was a little lower at the acquisition. We were able to improve some of the margins related to the synergies, but it is not anywhere extreme in either direction. The only impact is that... and that's all before purchase price accounting and some of the charges we are taking. So we are very pleased where we are at with it.

Steve Barger - KeyBanc Capital Markets

Okay. And can you talk about, I think you had mentioned you use pricing leverage where you could. But did you have positive pricing in the quarter on either freight or transit or negative, or can you just talk about pricing?

Albert Neupaver

I think it was generally neutral. We had a lot of pressure to reduce and there were a few incidences where we had some ability to increase. Most of those were contractuals.

Steve Barger - KeyBanc Capital Markets

Okay. So when I think about the margin expansion that you got, which was impressive and you talked about outsourcing, pushing to low-cost areas, bringing raw materials down, what was really the big driver there in terms of cost reduction?

Albert Neupaver

It's really a lot of factors and there is no one thing. And that's I think key to continuous improvement in the lean philosophy is that you just do a lot a little things. When I was talking about the Kaizen, in some Kaizens, when we visit... we try to visit every operation when we go there. They are going to give... they have to give a presentation on two Kaizen that they did in the last month. And amazingly enough, some of these Kaizens only result in a few thousand dollar savings, others are larger. So it's a lot a little things that continually add up over time and it's the same with all of our approaches.

Steve Barger - KeyBanc Capital Markets

Okay. So given the things that are in your control, is there anything that occurred in the quarter that shouldn't be sustainable?

Albert Neupaver

Well we obviously won't sell... we can't sell buildings every quarter.

Steve Barger - KeyBanc Capital Markets

Well, right. But in terms... I mean you got... the margin expansion on the operating line didn't come from selling a building. So I'm talking about from the pure blocking and tackling and the benefit that you got in terms of the 60 BPs of operating margin expansion year-over-year.

Alvaro Garcia-Tunon

Steve, just one thing, not to interrupt, but I don't want to create a misimpression here. The gain from way the accountants basically do it. The gain from the salability was a reduction of SG&A. So the gain from that was did benefit our operating margins. Now offsetting that was the costs is going to go away from purchase price accounting while PPA on from Standard Car Truck, which is the cost of sales, but I just didn't want to leave the impression that the salability was in others or something like that, because it is in SG&A.

Steve Barger - KeyBanc Capital Markets

Okay. Were those two things generally a push?

Albert Neupaver

That's generally a push and there were some other one times and that's what we're seeing. There is no one-time. Now your real question is the sustainability of margins.

Steve Barger - KeyBanc Capital Markets

Right.

Albert Neupaver

And I think you have to study history a little bit. You'll see from quarter-to-quarter margins do fluctuate dependent on a closing of a project, and we have a lot of large transient projects, the mix of our product. So I think if you look at last years margin tranquil you see that the first quarter I think might have been our best quarter or close to it. Pat will verify that as we are sitting here. It does fluctuate and especially between transient freight, so you have to look at it over the long run. What we try to do is show that the trend that we're continuously improving at operating income over a longer period of time. And that's what's we're focused on.

Now are we going to be able to deliver 14.8 or whatever the number was consistently and continue to improve on it? It's got to be on average. There is a lot of factors involved in it. We think that we have a good control of our business and we want to continuously improve. But there are fluctuations and a lot of factors that go into it. Was I right at that?

Alvaro Garcia-Tunon

Yeah, that (inaudible) the first quarter.

Steve Barger - KeyBanc Capital Markets

Okay, great. Kind of switching gears for a second, China recently placed an order for 100 high speed locomotives. Obviously, there is lot of good positive talk about high speed rail. Can you talk about may be your content per car or locomotive on a high speed system when those start to come through?

Albert Neupaver

There is a lot of definition to high speed that you have to start with. When we talk about high speed in the U.S., there has been a lot of reference to 110 miles per hour. When you talk about high speed in Europe and other part of the world, you're talking about 300 kilometers or I think it's a 187 miles per hour or more. The acquisition of POLI and European technology is really designed to address that high speed market. And we have a product that is on those particular rolling stock now. When you look at a speed of 110 miles per hour, that's... our locomotives that we build out in Boise could be converted or made to reach that. So that's the extreme that we are talking about and I don't think it's clear now. I know there is some talk that they want the super high speed versus the 110 in some places, but I'm not sure that's clear yet.

The answer to your question is any expansion of transit or freight business in the world helps us. And we're going to be part of it. And that's really been our thrust with some of our acquisitions to get better positioned to compete in Europe, because the European technology, as we've talked about before, is the technology that's primarily gone to Asia along with the Japanese technology that we've been working with. So that's been our focus and will continue to be.

Steve Barger - KeyBanc Capital Markets

All right, thanks very much. Nice job, gentlemen.

Albert Neupaver

Thanks.

Operator

Our next question will come from Tom Maiden (sic) [Todd Maiden] from BB&T Capital Markets. Please go ahead.

Todd Maiden - BB&T Capital Markets

Thank you. Hey guys, nice quarter. Just wanted to hone in --

Albert Neupaver

Have you changed your name to Tom or it's still Todd?

Todd Maiden - BB&T Capital Markets

No, it's Tom now. Just wanted to hone in a little bit on acquisitions, I know typically, you give us a little bit of color quarter-to-quarter on what the pipeline looks like. And we talked around it a little bit on this call, pretty much covered everything else I wanted to talk about. But I wanted to hone in on this a little bit. In the past, you've kind of tipped us off to various things, certainly the JVs in China, that sort of stuff. Last quarter you mentioned the pipeline was not that robust and you didn't really think that multiples and valuations were in line. Is that... has that continued? Is that what you are seeing still and are you thinking it will probably be more the JV route rather than outright acquisitions or any color you can give me there?

Albert Neupaver

The activity related to acquisitions is, in our case, we're seeing less activity; that's a fact. However, we are evaluating and continue to evaluate acquisitions. And we're going to be opportunistic. At this particular time, doing acquisitions are extremely hard because everything is a moving target. I think everyone on this phone realizes, because some of the businesses... no business is stable in this kind of economy. So that said, we are still aggressively pursuing opportunities. We have some opportunities we're evaluating. And we'll continue to be opportunistic going forward, especially with those that are extremely strategic like Standard Car Truck and the POLI acquisition and Ricon.

Todd Maiden - BB&T Capital Markets

Okay. And any thought about moving maybe outside of freight or transit? You have the heat exchanger business. I mean if you saw something like that where you felt like it would tuck in pretty nicely that maybe wasn't really part of the bulk of your business, is that something you would do?

Albert Neupaver

We would have to have obviously the core competency to do it without distracting the management. And we do have about 10% of our business is outside of the rail. We think that that could possibly grow as long as it's not a distraction. Right now, being in the rail business, at least the transit rail business, is a good business to be in, not so much the freights. But we look at it long term and we think that having some of our businesses on some of our competencies, our core competencies and adjacencies makes sense and we'll continue to look at that and again we will continue to be opportunistic.

Todd Maiden - BB&T Capital Markets

Alright, great. Thanks a lot. Again, nice quarter guys.

Albert Neupaver

Thanks Todd.

Operator

My apologies, Todd.

Todd Maiden - BB&T Capital Markets

That's all right.

Operator

Our question will come from Shawn Boyd from Westcliff Capital Management.

Shawn Boyd - Westcliff Capital Management

That's all right. I have just got a couple of follow ups here if I could. On the organic growth in freight, we mentioned 39 million from acquisitions. What is the actual year-over-year change, just the organic growth in freight revenues?

Alvaro Garcia-Tunon

After adjusting for everything, we are probably down 20%.

Unidentified Analyst

Did that include the FX?

Alvaro Garcia-Tunon

FX impact and the acquisitions, probably 20%.

Albert Neupaver

Again, what we do just not to create is we'll take each individual operating unit and we probably have about 25 to 30 different operating units and we'll segregate their sales between transit and sales. The 39 million you quoted was for both POLI, which was transit and Standard Car and Truck, which is freight. So if you doing a freight to transit distinction, the acquisition effect was only about 32. Again, it's a minor amount, but it sounds like you are trying to model something, so at least we get it right.

Shawn Boyd - Westcliff Capital Management

Understood, appreciate that. Yes, 32 and 7 from POLI. Okay. And also on the... thinking about in freight and looking at that 12 month backlog, we've had two quarters now of pretty good step downs to this $110 million level on the 12 month backlog in freight. Where... swing forward a little bit, how far out... how far do you see that dropping and how far out in time is it? A quarter, a couple of quarters? Can you help us on both of those?

Alvaro Garcia-Tunon

I'll tell you, I will be very honest. Freight is not a backlog-driven business. And when we look at the strength of our freight business, there are certain factors we look at. We look at car loadings, we look at revenue ton miles, we look at car builds, we look at other aftermarket activity. But freight backlog to us, we disclose it because it's something that I think you guys like to keep track of. But it's not anything that I would rely on to indicate the strength or the weakness of the freight market.

Shawn Boyd - Westcliff Capital Management

Okay. So it's more important as a --

Alvaro Garcia-Tunon

The way we look it if you want to look at the strength of the freight market take a look at traffic which again revenue tom-miles and car loadings. Take a look at car bills, try and gauze how many if any cars are parked etcetera-etcetera. Those are really indicative of what the future market is going to be like in freight rather backlog.

Albert Neupaver

I think if you were to try to analyze the backlog the one thing you would notice is that the percentage in the 12 month category a year ago, it would have been 70:30 transit to freight, now it's 80:20. So you see the impact of it a lower market.

Shawn Boyd - Westcliff Capital Management

Right. Okay, it's helpful. One other question is on transit. The guidance that you've given today. I'm wondering within transit how much of that is based on kind of eluding to your earlier question, your earlier point about freight not been backlog driven. Is some of that guidance also not backlog driven. Is it the line (ph) upon terms versus book-to-business and transit?

Alvaro Garcia-Tunon

I mean there is a certain element of the transit business that is not backlog driven. I'll give you two and its mostly after market. For example operations (ph) that's not backlog driven, and friction is a meaningful portion of our entire business. When they're products, when they were repair services overhaul the parts et cetera et cetera. For us that's a key portion of our business. That doesn't tend to be backlog driven, but again the key to that is that in most jurisdictions ridership is tabled up and that they need to keep the cars and did repair the service of that ridership.

Shawn Boyd - Westcliff Capital Management

what I am wondering here is, in terms of the drivers in transit, you mentioned of the front rider ship you also mentioned there are several transits standing (ph) up pre-stimulus not substantially 6% this year and then the stimulus spend in your guidance for '09 on trend. Are you facing that on existing ridership and the existing budget on transit or is there any additions.

Albert Neupaver

Our guidance is based on the transit market remaining at its level it's at.

Shawn Boyd - Westcliff Capital Management

Okay, okay. Thank you.

Alvaro Garcia-Tunon

Thank you.

Operator

Our next question will come from Steve Nerin (ph) from Matrix Capital Group. Please go ahead.

Unidentified Analyst

Thank you, gentlemen. I was wondering if you can go back to the backlog figures you gave us earlier and tell us what the transit and freight backlog was at this time last year.

Alvaro Garcia-Tunon

Last year, see typically, what people are looking for is how to compare the prior quarter --

Albert Neupaver

Actually I would have to leave the room to get the information. I could tell you the last year that it was about $1 billion. This is, don't think it as exact. It was about a $1 billion and this is my reference to 70: 30 versus 80:20, because I did look at this before I come in and it was 70% of the billion was transit and 30% of the first 12 months was freight and the first 12 was the basically the same which is about 55%. So if you look at the 12 month and the next rolling 12 month, it was about the same level. The only difference was that 70% of it was transit and 30 was freight, now it's 80:20.

Timothy Wesley

Steve, this is Tim Wesley. If you want to give me a call after the call, I get you the numbers exactly.

Unidentified Analyst

That would be great. Also, can give us a pro forma number on the first quarter on the top line with Standard Car from last year, just to kind of compare apples and apples?

Albert Neupaver

Some of that... go ahead, Pat.

Patrick Dugan - Vice President and Controller

Well there is an 8-K out there that does the pro forma financial. It may not necessarily do it as in the quarter, but we have disclosed year information that would have SCT rolled into it.

Unidentified Analyst

But not for the quarter?

Albert Neupaver

No.

Patrick Dugan - Vice President and Controller

Not for the quarter. But on that one, to be honest, I would like to leave everyone... the backlog information I don't think is that material, to be honest, not that critical. But when you're talking about 8-Ks and disclosures, I would like just to refer everyone to the 8-K and leave that as a basic point of reference.

Unidentified Analyst

Okay. Also, you mentioned that the locomotive market do you expected of course we've heard about locomotive sitting on the sidelines, that it could be down as much as 50% in United States, like you said you only expect that your total business can be down 25%. What percentages over season... how much do you think that's going to grow?

Albert Neupaver

These are orders that have been filled out of the backlog, so I said 40%, not 50 but --

Unidentified Analyst

You said 40 to 50.

Albert Neupaver

Yes. So, I mean the 25% is where we see it. So there is quite a bit of orders rate now that are going international that we're going to see. I don't know, I don't really understand your... what specifically you're asking?

Alvaro Garcia-Tunon

One way to answer it is, basically the annual output of locomotives, it's somewhere plus or minus few 100, is plus or minus 1300. So if you want to take 25% of that 1300 and say those are international this year rather than domestic last year I think that might put you on the track to answer your question.

Unidentified Analyst

Got you, okay. Thank you very much.

Alvaro Garcia-Tunon

Your welcome, thank you.

Operator

Our next question will come from Bentley Offutt from Offutt Securities. Please go ahead.

Bentley Offutt - Offutt Securities

Very good, thank you. Good morning Al and good morning Alvaro.

Alvaro Garcia-Tunon

Good morning.

Bentley Offutt - Offutt Securities

Question relating, I think Al said earlier that the estimate now is that the positive train control over the next five to seven years will be somewhere between 200 million to 400 million. And I was wondering is this a stretching out of the opportunity that you see because of the current problems within the freight rail industry, or is this pretty much in line with what you are thinking has been?

Albert Neupaver

It's petty much what our thinking has been. What we've seen is that the class was (ph) because of the economy has not been ordering the capital type equipment that we would have liked to see right now, and the reason why the delay is not because of lack of commitment to positive train control, is that there is a few things that have to come clear. One is there is still a tremendous amount of work around in operability and key to that is the communications is a hand help communication system that has not been finalized, also is that the FRA not come out with all the requirements that are going to pertain to the positive train control system. And until those particular requirements are out and understood there is a little bit of reluctance to go too far. But that's all going to happen this year. We don't expect a lot of revenues to flow this year because of this, but I think 2010 and beyond you will start seeing it ramp up nicely.

Bentley Offutt - Offutt Securities

Okay, that sounds good. And EC pay, has there been anything going on as far as that particular opportunity?

Albert Neupaver

It's still being... there is trial programs of our product on a, what we call, a unit train from the Powder River Basin down to Alabama and they are still analyzing the data and there is pilots in a few of the other railroads going on as well. So there is still a bit of analyzing it. I think that again the economy is probably hurt the implementation. And we see this is a longer term technology being excepted because of the cost and there is a lot of things that need to be ironed out of, who pays for, who gets the benefit out. The benefit's there, can the benefits be obtained partially by other methods? So I think that's a much longer... it's a bigger opportunity, but it's a much longer one.

Bentley Offutt - Offutt Securities

Are there any opportunities that you see, going back to positive train control when we were...I guess it was a couple years ago where you had the program over in Wallaceburg (ph) at your facility there. And you were talking about accessory type business other than just putting the information into the locomotives and other opportunities related to communication equipment et cetera. Is there... do you see an opportunity there for Wabtec?

Albert Neupaver

Yeah, we do. And we have expanded our product offerings, we now are involved in dispatch systems, so other communication items. We view it as opportunity, but we want to make sure that we have the right technology in the product and a lot of the interfaces with our positive train control system does give us growth opportunities.

Bentley Offutt - Offutt Securities

Very good, thank you.

Albert Neupaver

Thank you.

Operator

Thank you. At this time, I would like to turn the call back over to Al Neupaver.

Albert Neupaver

Okay, well, if there is no other questions, we'll talk to you again in a quarter. Thank you.

Alvaro Garcia-Tunon

All right, thanks everyone.

Operator

Thank you. That does conclude today's conference call. Thank you for attending. You may now disconnect.

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