Wabtec Corporation Q2 2010 Earnings Call Transcript

Jul.27.10 | About: Westinghouse Air (WAB)

Wabtec Corporation (NYSE:WAB)

Q2 2010 Earnings Call

July 27, 2010 10:00 a.m. ET

Executive

Tim Wesley - IR

Al Neupaver - President and CEO

Alvaro Garcia-Tunon - Sr VP, CFO & Secretary

Pat Dugan - VP and Controller

Analyst

Scott Group - Wolfe Trahan

Jim Lucas - Janney Montgomery Scott

Kristine Kubacki -Avondale Partners

Steve Barger - KeyBanc Capital Market

Alison Wolf - Longbow Research

Scott Blumenthal - Emerald Advisors

Tom Albert - BBT

Art Hatfield - Morgan Keegan

Operator

Good morning and welcome to the Wabtec Corporation Second Quarter 2010 Earnings Conference Call. All participants will be in listen-only mode for the presentation. But there will be an opportunity of course you ask questions, instructions will follow at that time. (Operator Instructions).

At this time I would like to turn conference over to Mr. Tim Wesley. Please go ahead Mr. Wesley.

Tim Wesley

Thank you. Good morning everybody. Welcome to our second quarter 2010 earnings conference call. Introduce you for the rest of our team members who are 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 be happy to take your questions. Of course once I refer to today's press release or the appropriate disclaimers on our forward-looking statements. Also want to point out that we will be referring to some non-GAAP performance measures. So we encourage you to review the reconciliation table within today's press release.

With that I'll turn it over to Al.

Al Neupaver

Yeah. Good morning everyone. I don't know if all of you heard the music. I just want to make sure you knew that that is not the Wabtec theme song. Today we reported a strong quarter and improved outlook.

Sales were 374 million that was 12% higher than year ago quarter and 3% increase over the first quarter. Earnings per share was at $0.65, this is the highest in more than a year. This compares to an adjusted non-GAAP number of $0.55 and that's what Tim was referencing there, in the year ago quarter.

Our operating margins was strong at 13.3% of sales. We increased our guidance for the year and we made good progress on our gross strategy. This demonstrates the strength of our diversified business model and that our strategic initiatives are paying off. And that we continue to benefit from the Wabtec performance system.

Today we increased our 2010 earnings per share guidance based on our performance in the first half and an outlook of the rest of the year to $2.45 to $2.55. This compares to 2.40 to 2.50 was previously our guidance. Sales are still expected to be slightly up for the year with growth in freight more than offsetting a decrease in transit.

The overall economy seems to have rebounded which is having a positive effect on the freight rail industry. But this recovery remains sluggish with unemployment's still high and budget issues at the federal, state and local levels. So it's proven to remain cautious about our outlook.

I want to emphasize that regardless of the economy we will stick to our long held philosophy. Be discipline went it comes cost and focus on generating cash to invest in growth opportunities.

Let's talk a little bit about the freight rail market. Rail traffic has rebounded solidly this year after 15% drop in 2009. Through mid July, ton miles were up 9% and intermodal traffic was up 13%. Volume bottomed out in the second quarter of 2009 with an average weekly 10 mile about 26.8 billion. This compares to 32 billion ton miles that was recorded on average in the second quarter of this year. This traffic increase has lead to a smilar rebound of our North American great after market business.

Great after market business is up 28% compared to second quarter 2009. The traffic increase has lead the railroads to pull more parked cars and locomotives out of storage which will eventually help the freight OEM market. About 365,000 cars however are still in storage or parked, its about 25% of the fleet. It's down from the peak of 0.5 million cars in the middle of last year.

New rail car outlook is improving but still well below historical norms. The second quarter deliveries were about 2,900 and the orders were 4,900. Slightly less than first quarter but doubled the year ago quarter or orders. The backlog was to about 15,000 that's the highest we've seen in three quarters. We expect the locomotive OEM deal to be about 400 this year.

Our international freight markets have almost fully recovered the pre-recession volumes. In general, conditions are improving in the freight markets and our results reflect that.

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

Our long-term outlook in the U.S. and around the world is strong for transit markets. With good funding levels and ridership expected to increase again as unemployement and economy recovers. Current federal spending bill has been extended through year-end while our permanent bill is being negotiated. The House is asking for 2011 spending of about $11.3 billions in transit that's a 5% increase from this year.

Ridership was down 2.7 in the first quarter. However in March it actually increased 1.3% for the first time in several months at cities such as Chicago, New York and L.A. as well increased. The pace of orders is steady with new projects awarded at New York City transit, WMATA which is in Washington D.C. and Amtrak. Over the next several years we expect additional orders from Metra which is in Chicago, Miami, New York City transit, BART in San Francisco and Amtrak.

A new commuter locomotive orders from Metra and Amtrak. As you probably saw, we were selected to build locomotives for MBTA, the Boston Commuter Railroad. This was about a $140 million order which wont included in our backlog until we sign the contract.

We also continue to make good progress with qualifying our components in braking systems in the European market. As we have discussed this is a large market where we only have a small share at this point. This will however take time to develop.

We also have made an entrance into the China mass transit market with the signing of JV, Golden Bridge. This JV will support the transit couple of market in China. So Wabtec is in good position to take advantage of a long-term strong commitment in the U.S. and abroad to expand mass transit. And we will manage aggressively through any short-term issues.

We remain focused on growth in cash. Cash remains a priority. This provides the opportunity to invest in organic growth and acquisitions. We'll stay focused on increasing free cash flow by managing cost. Driving down working capital and controlling our capital spending. We will also continue to invest in our strategic growth opportunities, global and market expansion, aftermarket expansion, new products and new technology and acquisitions.

I'll like to spend a few minutes on each of these. Global and market expansion; for the second quarter in a row our sales outside of US were almost 50% reflecting the progress we're making in developing our international markets. We received our first order for bus stores in Australia and India. And as I mentioned we completed our third JV in China and won an order for transit cutlers for about $7 million.

In the after market expansion area our overall after market sales were 53% of our total a growth of 8% compared to a year ago quarter and 3% greater than the first quarter. Our service center in Brazil is already looking to expand to include additional components such as compressor and brake valves. We also are seeing other organic growth through the rail traffic increasing and cars and locomotives coming out of storage.

In new products, positive train controller is a major growth opportunities for Wabtec and we continue to work and transit agencies to develop and implement system for the onboard locomotive solution which is really the brains of the system. Our current product and market position could resolve in incremental sales growth of 250 million to 500 million over the next four years, with a ramp of expected at some point next year. We made good progress at getting our systems and components qualified in the European transit market and just a matter of time until we begin to win system orders.

We've also been busy on acquisitions. We are very pleased with the inauguration of Xorail which we acquired in mid-March. Xorail has expanded our capability into the signaling, engineering design and construction and adds to our train control offerings. We signed an agreement to acquire GMD Specialties and Bock Simpson from Global Railways industry. These two businesses will compliment our existing businesses nicely. GMD provides a variety of signal and track products and Bock Simpson designs and manufactures electronic instrumentation.

With that I turn it over to Alvaro, who'll talk a little more in depth about our financial performance.

Alvaro Garcia-Tunon

Great, thanks, Al and good morning everyone. We had a good performance in the quarter and really are optimistic of our market position which is why we improved our outlook for the year.

For the quarter, sales were 374 million or about 12% higher than last year this is the highest total to the first quarter of '09. Of this increase about half is organic with the rest coming from acquisitions that Al mentioned.

Freight group sales which is I think a good sign for optimism. The sales were up about 40% more than half of that coming from organic growth. We also saw a growth in the after market due to increase in rail traffic and with more rolling stock coming out of storage.

Transit group sales on the other hand were slightly lower than last year this is mainly due to the completion of the R160 order in New York which we discussed previously and for some other reason regarding state funding that Al mentioned.

Returns and margins, we're continuously focused on driving margins higher with particular attention on the operating margin. For the quarter, operating margin was 13.3% versus 11% last year, on the other hand once you make an adjustment that we talked about for the comparative purposes to last year operating margin for 13.5% last year. So we're slightly down basically level.

SG&A was slightly high in the year ago quarter -- I am sorry it's a little bit higher than the year ago quarter mainly due to the acquisitions of Unifin and Gorail the relative purchase price accounting for those units. There was a settlement of a product liability law suit for about a 1 million, 1.5 million which we included in this quarter and some what increased accruals inventive compensation based on a company's improved performance.

On the interest line interest expense was a little higher due to higher debt levels compared to second quarter of '09. Other income was a little bit higher we always have to paper effects in other income sometime it’s a loss sometimes it's a gain. Typically its not material and this quarter was a gain.

The effect of tax rate was about 33% it was higher than the second quarter last year which included the tax benefit of 9.7 million which we referred in the press release and earlier as well.

In terms of working capital compared to March 31, receivables were about 275 million and this was up 27 million from the prior quarter. This was mostly due to the timing of progress payments related to long term transit contract, I'll be quite frank, I think we have some work to do in receivables and working capital in general and we expect to hopefully accomplish over next quarter and generate additional cash.

Inventories were 239 million down 2 million, so in terms inventory levels making some progress. Payables were 124 million basically flat just up 2 million from the prior quarter.

Cash at quarter end we had about 167 million in cash. This was down from a 179 million at the end of the prior quarter but we paid down about 12 million in debt. Cash generated from operations was about 17 million in the a quarter.

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

In terms of some another numbers that we technically give you during the call, depreciation was 6.6 million during the quarter versus 6.8 million last year. Amortization was 2.1 million this quarter but the same last year. CapEx modest level 3.4 million versus 5.3 million last year. That's one of the benefits of that type performance system we tend to be very right on CapEx.

Turning to backlog, backlog was down slightly but it doesn't include recent MBTA order which Al mentioned which was about 140 million. After we sign the contract which we expect to I sign it up I think very shortly, that would put us back over 1 billion mark, right now we're 921 million.

The rolling 12 month backlog compared to last quarter, just read out the numbers. The total -- this is the backlog that we expect to execute over the next 12 months. The total is 522 million versus 543 million in prior quarter, transit is 348 million versus 394 and freight is 174 million versus 149. So freights gone up by 25. In total the mutilate backlog this includes the 12 month backlog as well as what we expect to execute after the 12 month period, the totals now 921 million versus 938 million last quarter, but again once we sign MBTA that will put us back over -- up a $1 billion level. Transit is 665 versus 705 million in last quarter a modest decrease and freight is up 256 million to 233 million.

And I think that pretty much concludes the numbers part of the discussion. With that I'll turn it back over to Al.

Al Neupaver

Thanks Alvaro. Once again we had a good performance in the second quarter and for the first half of the year and we are cautiously optimistic about the rest of 2010. Longer term we couldn't be more pleased with our strategic progress and the growth opportunities we see. We are really excited about our future growth opportunities. We continue to benefit from our diverse business model and Wabtec performance system which gives us the tools we need to generate the cash and reduce cost.

We have an experienced dedicated management team that is managed aggressively through the tough times and continues to drive progress on our growth initiatives.

With that we'd be happy to answer your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from Ed Wolfe of Wolfe Trahan.

Scott Group - Wolfe Trahan

Hey morning guys its Scott Group, in for Ed.

Al Neupaver

Hey good morning.

Scott Group - Wolfe Trahan

First, why don't you talk a little bit about positive train control? Is there anything for PTC currently in the backlog? And if not when do you think it does show up in the backlog?

Al Neupaver

Let's talk in generality and then I'll answer your backlog question. I'll answer that first. There is very little PTC in the backlog. We do have some contract with Xorail from the signaling design and engineering standpoint. But actual hardware orders are not in the backlog. We do have development programs going on with each of the railroad. We're making great progress on the development of the PTC systems right now. That development would probably continue to probably later this year well into the third quarter at which we will go into the testing phase. At the completion of that testing phase then it will move into a product safety plan approval from FRA, the Federal Railroad Association.

Some other things that are being worked out with the class one railroads or inner operate-ability, that is their ability to drive their trains on other peoples railroads and be able to communicate. And that work is also going on right now. So there is progress being made. However as far as our backlog is concerned there's not much backlog in there for that particular technology at this point.

Scott Group - Wolfe Trahan

Okay. That's helpful. And when -- I think I heard you Al talk about the 250 million to 500 million in revenue that you think from PTC and that's in line with what you've said in the past. Does -- can you just refresh me, does that include opportunities with Xorail or do you think brings you above that 250 to 500 range?

Al Neupaver

The 250 to 500 does include Xorail. We figured that Xorail added about 50 million to 100 million to our faded opportunity in the past for the on-board computer. And that's always been in $200 million to $400 million range. I want to make sure you understand there's a lot of other expenditure that are going to be associated with positive train control some of which we have product and interest in trains to develop that is not included in those numbers. And if that program rolls out as the development of those product like on the dispatch system or trying to tie these systems together between the on-board computer and our capability in engineering design for the signaling side with Xorail that creates other opportunities for us.

Scott Group - Wolfe Trahan

Okay, that's helpful. Next can you give us the breakout of a transit for freight operating margins the quarter?

Al Neupaver

We typically don't give those out, they will be in K which will -- the Q I'm sorry. And that should be out in early, August okay?

Scott Group - Wolfe Trahan

Okay. So actually though can you talk about was there some pressure on transit margins now that's a big subway car contract with New York has finished? And then with respect to that contract can you talk about the time for new bid with the MTA for subway cars in New York?

Al Neupaver

Okay. I really can't comment on the trends of those margins, you can look at past performance and I could tell you that we're a -- the company was is very focused continues improvement and there's a lot of things that impact the margins quarter-to-quarter. But over the long run our goal is to continually improve and grow our margins which we've been successful in the past in doing.

As far as new orders from the New York City systems, there is two contracts. One is already been granted to the car builder and that is smaller car number, I think its only like 26 or 28 cars with some options and that's called R 188, A larger car order, we're working on the design and that is called R179 that should follow shortly they are doing a lot of work right now on the specification. That would be a larger car order probably in the range of 100's of cars versus smaller R188.

Scott Group - Wolfe Trahan

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

Al Neupaver

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

Scott Group - Wolfe Trahan

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

Al Neupaver

We continue to have a very active pipeline and continue to look for acquisitions. It's an important part of our growth strategy. Typically we have a corporate development team that -- what we try to do is have a seamless hand off from the execution of a contract and the acquisition. We hand it out to the integration team that has been part of diligent team. And that's usually our operating folks that take control as such. They are the once that are actually doing the integration and we got the corporate development team out there digging up more opportunities.

Scott Group - Wolfe Trahan

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

Al Neupaver

Okay.

Alvaro Garcia-Tunon

Yeah. I think going forward we'll probably be somewhere around the 35 to 36 range probably somewhere in the middle phase. But somewhere around 35.5.

Scott Group - Wolfe Trahan

Okay. Thanks guys.

Alvaro Garcia-Tunon

Thank you.

Al Neupaver

Thank you.

Operator

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

Jim Lucas - Janney Montgomery Scott

Thanks, good morning guys.

Al Neupaver

Good morning Jim.

Alvaro Garcia-Tunon

Good morning Jim.

Jim Lucas - Janney Montgomery Scott

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

Alvaro Garcia-Tunon

Year-over-year well that -- well might be more relevant, I don't know you tell me, Jim is actually run-rate from last quarter to this quarter.

Jim Lucas - Janney Montgomery Scott

Yeah, that's --

Alvaro Garcia-Tunon

And I can tell that either. But I thought basically you guys probably needed -- excuse me, for modeling purposes. And I'd be happy to do it from either quarter. But from last quarter we were about 44.5, 44.6 in SG&A. Acquisitions added about 4 million to the SG&A line. 1 million of that was some expenses that one of our acquisitions used to re-class in cost of sales and actually under our account we put those under SG&A. But about 4 million of the increase is do to the acquisition on Gorail and Unifin.

Incentive comp is up about 1.2 million we've been kind of under approving incentive comp a little bit, just pending results but now results you saw what the increased guidance look pretty solid and we increased the incentive comp like I said by about 1.2 million. And then we had a settlement of a law suit it was a product liability in one of our units that we thought was just more prudent settle. This was more of a one time item. But again there always -- that's why I always caution you with SG&A. There is always something in SG&A either a good guy or a bad guy and this quarter turned out to be a bad guy. And that was for about 1.5 million. It was law suit in Texas which is a plain of friendly state which we thought it was prudent to go ahead and settle. And I think if you add all that up you can see about 51 million that we had this quarter.

Jim Lucas - Janney Montgomery Scott

Okay. That's very helpful, thank you.

Alvaro Garcia-Tunon

Absolutely.

Jim Lucas - Janney Montgomery Scott

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

Al Neupaver

I think any time that volumes are down especially in the freight market there is some aggressiveness on everyone's part to try to get some volume back into their shops. So there is that pressure. However we have been very disciplined and we will continue to be disciplined. In the transit area you always have specially on contracts where close bid there is always been a pressure there try to obtain the order. So I don't think any things really changed in that arena at all. When you look at inflation and how we're handling what we are try to do is again have discipline with in the cooperation where we have agreements where there is a surcharge where there isn't a surcharge then we have to have the supply that needs to be guaranteed at a certain price.

So we have always even while all the prices have been down on the raw material side we tried to continue to make sure our contracts were favorable from a standpoint of inflation and handling surcharges related to them.

Jim Lucas - Janney Montgomery Scott

Okay. But nothing out of the ordinary that you're seeing out there?

Al Neupaver

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

Jim Lucas - Janney Montgomery Scott

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

Al Neupaver

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

Jim Lucas - Janney Montgomery Scott

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

Al Neupaver

Yeah. We've grown that business nicely over the last two years to where our sales in China are between $60 million and $70 million. And we expect that to grow with a great pace over the next couple of years. And we would anticipate we have more than a $100 million work of sales in only a few years.

We think that there is a nice window of opportunities that we need to take advantage of. So we've been pushing hard, getting a place and the position we're in right now. We have a few more JVs that we're working on that would really broaden the product offering that we could make and position us better. It is a great market, it is growing rapidly. I think the time to really be in there is now because it is only a window of opportunities as far as we view it.

Jim Lucas - Janney Montgomery Scott

Okay. Great, thank you very much.

Al Neupaver

Thank you, Jim.

Alvaro Garcia-Tunon

Thank you, Jim.

Operator

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

Al Neupaver

Kristine are you there?

Kristine Kubacki -Avondale Partners

Good morning.

Al Neupaver

Good morning.

Kristine Kubacki -Avondale Partners

Okay. I took a minute there. I'm still here. A few questions, you talked about the transit after market softness in North America as short term in nature. I was wondering if you can give us some insight or what kind of insight do you have into kind of the inventories or a slowdown in maintenance. I mean I guess I'm trying to figure out is it a two quarter kind of phenomena, that is a four quarter phenomena, do we need to get pass the highway there? Or what kind of -- what does short term mean?

Al Neupaver

What is happening at the authorities obviously is, their budgets have been cut, they're cutting service and they're cutting ridership. As you cut ridership and service out there, it has an impact on the ware and tare of their systems. And there is a decline that's proportional to that. We also feel that because they are so tight on cash, they're being very careful with their inventories. So they run that down.

Those are two things we'd have to see. We do not know, we had a good feeling for where their inventories are at, although we're seeing some -- a little bit of life there on the after market side from replenishing some inventory. But I can't say that's a trend right now.

The ridership stabilizing and actually showing improvement is a positive thing for the after market in the transit area. So if -- however I have to caution you this doesn't solve big problem. The big problem is that government needs you to come up with a way of funding the transit system in this country. And -- but that needs to happen. And I think that a long term in with -- the transit people want to see is a long term build. It supports the transit funding with increased spending over that period. And I think once that's in place that would go a long way in getting transit to where it needs to be. As everyone knows, a transit is it's a politically correct market. It really solves a lot of the countries problem. If they can pull an industry that we are really feel good about it's long term potential. Not only in North America but around the world.

Kristine Kubacki -Avondale Partners

Do you have any guess if to say if the Federal -- there has been some Federal push to kind of take over the safety over site. Do you have -- are you following that closely? And do you think that that would be an increase to the amount of maintenance? You're getting it into a state of good repair. I guess it’s a question where the funding will come from

Al Neupaver

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

Kristine Kubacki -Avondale Partners

Okay. Fair enough. Moving on to Europe I know you mentioned it about some of the trying to grow your market share there. But just looking at the market kind of come up in macro perspective, now we see there has been a lot going on economically over there. Have you seen anything related to the transit systems over there about them pulling back and spending there as the result of their economic world so to speak?

Alvaro Garcia-Tunon

No. We've seen no reduced spending or activity in the transit area from the economic problems in few of the countries there.

Kristine Kubacki -Avondale Partners

Okay.

Alvaro Garcia-Tunon

Their business really held up during the recession.

Kristine Kubacki -Avondale Partners

Okay. Anything that will suggest that would have continued to be the case?

Al Neupaver

None that we have, no.

Kristine Kubacki -Avondale Partners

Okay. And then my last question is we have been hearing some of the rail roads have been making some pretty bullish commentary and even talking about adding locomotives next year which is a bit over than what I have anticipated. What is your sense from talking to the railroads that are here in North America kind of what their direction is locomotives purchase are for next year versus this year in kind of railcar additions for next year replacement?

Al Neupaver

Yeah it's hard to predict. I think the railroad like us want to be cautiously optimistic about the future and if they can continue to grow that volume and ton miles I think they will continue to take what they have parked back into use and would lead to OEM orders into the future. And I have heard the same discussions what you heard there are some talk about that. But I think they are going to very cautious I think they have done a great job improving the velocity and efficiency and they want to continue to do that.

Kristine Kubacki -Avondale Partners

Okay. Thank you

Al Neupaver

Thank you

Operator

Thank you. And the next question comes from Steve Barger of KeyBanc Capital Market.

Steve Barger - KeyBanc Capital Market

Hi, good morning guys.

Al Neupaver

Good morning, Steve.

Alvaro Garcia-Tunon

Good morning.

Steve Barger - KeyBanc Capital Market

I think overall you sound pretty confident about conditions and how your performance is shaken out you have done a couple of acquisitions which should be agreed cost margin has been great in the first half if you look at the mid point of your guidance it suggest lower EPS in the back after what you put up in the front half so my question is are there any specific factors you see coming up that make you think earnings might fall below about 28 in the second half or you just being conservative

Al Neupaver

I am going to give you the quick as these answers. We are being prudent and conservative because I don’t think any one feels that this economy is road buff and in order to freight market to continue the economy has to continue to reboundAnd in the transit side, as I said spoke to it, this whole funding issue needs to be resolved I think to lift the cloud from especially North America.

Steve Barger - KeyBanc Capital Market

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

Al Neupaver

Nothing's overly concerned, although a ton mile being the plateau a little bit into the second quarter.

Steve Barger - KeyBanc Capital Market

Okay.

Al Neupaver

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

Steve Barger - KeyBanc Capital Market

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

Al Neupaver

Well, again the railroads talk about spending between 5 billion and 10 billion on PTC. And if you look at that and you know what has been spend already, what you're going to see is that opportunity -- I think this year what CFS had close to 200 million budged, another railroad had a 170 million. Depending on the size of various numbers, those numbers add up to maybe $600 million to $800 million a year, $1 billion a year for the next four years. So their numbers have gone too far up. You're look at $3 billion to $5 billion maybe more. We can not -- we do not participate in that entire market and there is a lot of competitors out there in the various marketplace.

We have not fully quantified that other opportunity. So there is opportunity, we'll get some share of it. But we have not quantified it at this point.

Steve Barger - KeyBanc Capital Market

Just to kind of help us frame up the potential opportunity. Is it -- could it potentially double the 250 to 500 you're talking about? Is it a function of that size? Any broad commentary on what is potentially available?

Al Neupaver

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

Steve Barger - KeyBanc Capital Market

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

Al Neupaver

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

Steve Barger - KeyBanc Capital Market

Sure. Alright, thanks. I'll get back in line.

Al Neupaver

Okay. Go ahead.

Operator

Thank you. The next question comes from Paul Bodnar of Longbow Research.

Alison Wolf - Longbow Research

Hi this is Alison Wolf calling in for Paul Bodnar.

Al Neupaver

Hi Alison.

Alison Wolf - Longbow Research

Hi, how are you?

Al Neupaver

Good.

Alison Wolf - Longbow Research

Good. Most of my questions have already been asked. But I do have question about what you were commenting on the European save the environment. And you said over the last 12 months that with over 300 million in bids--

Al Neupaver

Right.

Alison Wolf - Longbow Research

And you're not won any. First of all, how many have not been awarded out of that 300 million?

Al Neupaver

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

Alison Wolf - Longbow Research

Okay. And would you consider sort of 300 million in bid sort of a typical annual rate of it for that market? Or do you think it's a little late?

Al Neupaver

Yeah. We haven't been playing in that market that long. But the study suggest that that's a pretty good profit it's running at.

Alison Wolf - Longbow Research

Okay, alright. And then in terms of the impact of the --

Al Neupaver

And keep in mind we didn't bid on all the opportunity. Those were the once we bid on.

Alison Wolf - Longbow Research

Okay, right. So this 300 million you see a sort of a good kind of run-rate fore the foreseeable future, for next year, for year after?

Al Neupaver

Right.

Alison Wolf - Longbow Research

Okay. And then in terms of the impact of the decline of the euro, how do you see that impacting your penetration into this market?

Al Neupaver

We have -- we acquired a company by a name of Polly few years ago and that is out European platform, our cost is in euros. So we really don’t feel that there is a major issue there. Some of the technology in some of our products may come for the U.S. But a majority of the product would be laid at our European site.

Alison Wolf - Longbow Research

Okay.

Al Neupaver

And we also have a low cost platform in Macedonia.

Alison Wolf - Longbow Research

Okay. Alright, thank you very much.

Al Neupaver

Thank you.

Operator

Thank you. And the next question comes from Tom Albert of BBT.

Tom Albert - BBT

Hey, Al, Tim and everyone else. Couple of questions here, you had this really strong revenue growth in the freight segment 40%. If I just plug in just a 40% growth rate for the third quarter you went up about a 174 million revenues which would be below the 190 historically the third quarter was a little softer than the Q2. But its been so long since we have had kind of normal period can you just talk about what the revenue potential might be for the freight division here as we move back towards normal times?

Al Neupaver

I think you got to keep in mind that what the numbers that we're being able to deliver. The railcar build is still at the deliveries was 2900 back to the 12,000 car build rate for the year. I don’t know if we were over that low maybe back in the early 80's but I know when the kind trade I have been involved looked at 17,000 was low. I mean we're still at an awful low railcar build. And if you look at the locomotive build we talked about in the 400’s I mean just last year we were looking at 8 9 almost a thousand 700 last year so still have a very low basis the market place and there is a tremendous amount of expansion going to be available if this economy continues to rebound and the question. That’s what $60million question is will it continue to rebound.

Tom Albert - BBT

So Al, you are saying that I mean I get the big picture comments. But are you saying that its not clear whether we should be thinking about a similar or even a greater revenue growth rate at least for the next one to two quarter?

Al Neupaver

I think the builds the next one or two quarter you have guessed railcar builds and locomotives builds is probably as good as anyone. And I mean we could really openly discuss what things consultants are saying and in next few quarter they do not see a major rebound.

Tom Albert - BBT

Right. And with in the transit space what percentage of the backlog I guess relative to the next 12 months is with in North America versus elsewhere?

Al Neupaver

Oh boy now you are getting.

Alvaro Garcia-Tunon

I would say a large chunk of that is with in north America as long you include NAFTA a large chunk of that is within in NAFTA.

Al Neupaver

I'll calculate in a few minutes.

Tom Albert - BBT

Okay. And then I wanted to clarify one thing on, as you went through the SG&A which was very helpful, you mentioned a $1 million was re-classed from cost of goods, was that a $1 million on top of the 4 million?

Alvaro Garcia-Tunon

No. No, no.

Al Neupaver

Within the four.

Alvaro Garcia-Tunon

I'm sorry. Actually I could have made that clearer, I'm sorry. No, the 4 million includes the re-class.

Tom Albert - BBT

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

Al Neupaver

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

Tom Albert - BBT

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

Al Neupaver

Thanks a lot.

Tom Albert - BBT

Thank you.

Alvaro Garcia-Tunon

Okay, Tom.

Operator

Thank you. And the next question comes from Scott Blumenthal with Emerald Advisors.

Scott Blumenthal - Emerald Advisors

Good morning gentlemen.

Al Neupaver

Hi Scott.

Alvaro Garcia-Tunon

Hi.

Scott Blumenthal - Emerald Advisors

Al you talked about the numbers of cars that are still parked in, I think that they are over 25,000 more than last call and were down from about a 0.5 million. When we look at the gross margins which were really terrific for the -- so that suggests some pretty higher margin sales coming through in the current quarter. Could you talk about the opportunity as we see the parked cars, the number of parked cars dropping and the backlog in new rail cars kind of building a little lit the opportunity with Wabtec with regard to would we prefer to have some of those parked cars and rehabilitated or just send new car bill ramped and I guess have to visibility that we would get seeing all those new cars ordered in front of us.

Al Neupaver

Right. Generally even when they scrap a route car its my understanding that they disassemble it and utilize as many of the good parts if they can now there is obviously parts that get thrown away and provide a -- opportunity to it that we also see the benefit of any part taken off that might need repaired or upgrade so there is a benefit for us when they do scrap a car it creative from both angles one it creates the opportunities that a new car could be built but two we probably get some of the work on the after mark on those products I think we will see is combination of both I mean you going to continue to see the part cars come down which your going to see is surely just cars specialize specific application cars maybe there wont be enough in a modal cars at a specific sight may not be enough covered hoppers may not be enough aluminum coal cars I think it is going to be they are going to come out of unique order for specified particular car. So we will see that during the OEM and non car parts go away what we get backlog the normal run rate which is probably 40,000 to 50,000.

Now keep in mind I don’t think anyone knows what a normal number of parked cars is at least no one has able to answer that question to me and I think its all over to place I heard the lowest 15 I’ve heard highest is 250 I have no idea and I am not sure any one does because they never kept records before few years so its all good for us because the economy will recover will come back and as it comes back our after market is going to be good as long as the traffic in is upwards track today or higher.

Scott Blumenthal - Emerald Advisors

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

Al Neupaver

I wish I knew the answer to that question. I've been trying to get it and it's really been something that's no one has really been able to get their hands around that. Maybe there is someone that understand that. But I'm not sure what that bottom number is and I'm not sure how many of these cars are cars that are never going to back. And so --

Scott Blumenthal - Emerald Advisors

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

Alvaro Garcia-Tunon

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

Scott Blumenthal - Emerald Advisors

Okay. And I guess one last --

Al Neupaver

I can tell you Scott that there was a railcar panel was put together by an analyst and we had all the experts together. They couldn't answer that question.

Tim Wesley

Was Alvaro one of the experts?

Alvaro Garcia-Tunon

No. No. we were in the audience.

Al Neupaver

Again guys see you there.

Scott Blumenthal - Emerald Advisors

Okay. And if I may one last one about PTC, there was a nice article in the economist this week, that is a female's attempt, talking about the possibility of tax incentives needed and the rail, the railroad company is not being terribly excited about making those large investments believing that it only covers a small portion of the human error that occurs over the course of time, which would require I guess the use of PTC. Do you see tax incentives maybe needed in order to get that, I guess, is that up a little bit?

Al Neupaver

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

Scott Blumenthal - Emerald Advisors

Okay. I appreciate that. Thank you.

Al Neupaver

Okay.

Alvaro Garcia-Tunon

Thanks Scott.

Operator

I think we have a follow-up question from Tom Alert of BBT.

Tom Albert - BBT

Yes hey guys.

Al Neupaver

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

Tom Albert - BBT

Oh!

Al Neupaver

But for you we'll make an exception.

Tom Albert - BBT

Well there you go. That's always hearty to hear. You might have commented on this, in the beginning I was sort of looking at things and listening. But in the gross margin, would you say that the biggest influence and a favorable gross margin year-over-year was the performance sort of late stage transit project where you've talked about how very late those margins can be favorable? Or was it due really to the strong recovery in the freight side?

Al Neupaver

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

Tom Albert - BBT

Okay. Thank you.

Al Neupaver

Okay.

Tom Albert - BBT

Thanks.

Al Neupaver

Alright.

Operator

And last question comes from Art Hatfield of Morgan Keegan.

Art Hatfield - Morgan Keegan

Hey good morning everybody.

Al Neupaver

Good morning, Art.

Art Hatfield - Morgan Keegan

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

Al Neupaver

We always have a mix of things in that line, Art as you can imagine. The predominant portion, that deadline can be negative, it can be positive. Obviously this quarter was positive. And most of that is due to paper FX, you have to recognize FX gains and losses based on inter-company accounts on other asset liability and P7L balances. And that was it was due. I think about 500 or 600 was due to the effects of large majority of that.

Art Hatfield - Morgan Keegan

Okay. That's helpful. And then you spoke a lot about freight car -- new freight car demand and I don’t want to go into all that again. But just one quick question I didn't hear you address this. Are you seeing from any of the builders them kind of poking around of you with regards to some potentially large orders that they maybe getting and seeing about your abilities to supply those orders?

Al Neupaver

We'd love to that to happen. And we'd be happy to supply them. But I am not aware of anything.

Art Hatfield - Morgan Keegan

Okay. And then finally, on the high speed rail, and I know that we're in a countries in the very early stages of discussion on this and kind of the direction going. But in the past I think there are also, the economist was referenced earlier, I hate to reference it again. But in spite of first time in history --

Al Neupaver

We're impressed that you read it.

Art Hatfield - Morgan Keegan

Well, I don’t. But somebody else does for me.

Al Neupaver

That would be more impressive what they have.

Art Hatfield - Morgan Keegan

Yeah. Well whatever. I'll take the compliment. Thank you. Talking about high speed rail, one of the difficult things that did occur in other countries is the sharing of passenger are freight on the same line. And here we have a unique circumstance relative to some other countries where the infrastructure is owned by the government, here it's owned by private companies. Have you heard or seen anything early stage discussions? Or about how that will occur? Or are you looking into the developing any products that could help make that kind of pass inconvenience a little bit more tolerable than the freight railroads?

Al Neupaver

Yeah. Well first of all if you look at the programs that were approved, there is only a few of them that are actually going to go on dedicated lines. And yeah you're right, in Europe you have dedicated high speed line, it's electrified. And they are able to create that system. And that's exactly what they're going in China. But China is spending about $300 billion to do that. We've got about 8 billion has been funded for high speed rail. The two programs that are going to be dedicated as you talk is the one in Florida between Tampa and Orlando, and that's only about, I think it's an 84 mile track. And they're going to need quite a bit of money just to get that completed.

The rest of the projects really are going to be shared between the freight and the transit programs. There is some expansion in the northeast, that's the only other exception. So -- and to answer your question, are we working on anything that would help those two work together. And that's truly what PTC is about. And if you remember the Genesis of the mandate was that a transit line that can use the railroad was running on a freight line and ran into a freight locomotive. So yeah, we're working hard on that. And what you're going to see is an upgrade of some of the freight lines. So they could take faster trains. But you're not talking about the 300 mile and a 200 mile track. You're talking about lines on 80 mile an hour to maybe 95 or a 110. And that will allow the freight lines which almost upgrade those and we hope to participate in some of that development.

Art Hatfield - Morgan Keegan

That's very helpful. Thanks Al.

Al Neupaver

Okay. Anything else Art?

Art Hatfield - Morgan Keegan

No that's it. I am good. Thank you.

Al Neupaver

Hey, thanks a lot.

Operator

Thank you. (Operator Instructions). Okay. There is nothing more to present Tom. I'd like to turn it over to Mr. Neupaver for any closing remarks.

Al Neupaver

No. Thanks a lot and we'll talk to you at the end of the next quarter.

Alvaro Garcia-Tunon

Thanks everybody.

Al Neupaver

Bye-bye.

Operator

Thank you. That does conclude today's teleconference. You may now disconnect your phone lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!