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Wabtec Corporation (NYSE:WAB)

Q3 2010 Earnings Conference Call

October 27, 2010 10:00 am ET

Executives

Al Neupaver - President and CEO

Tim Wesley - IR

Alvaro Garcia- Tunon - Sr VP, CFO & Secretary

Pat Dugan - VP and Controller

Analysts

Arthur Hatfield - Morgan Keegan

Jim Lucas - Janney Montgomery Scott

Scott Group - Wolfe Trahan

Paul Bodnar - Longbow research

Steve Barger - KeyBanc Capital Markets

Scott Blumenthal - Emerald Advisors

Operator

Good morning and welcome to the Wabtec Corporation Third Quarter 2010 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.

I now would like to turn conference over to Mr. Tim Wesley. Please go ahead sir.

Tim Wesley

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

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

With that I'll turn it over to Al.

Al Neupaver

Thanks Tim. Good morning everyone. Today we reported a strong quarter with a bright outlook. The third quarter sales were at $376 million, that’s 14% higher than year ago quarter. Earnings per share was $0.63, that’s 11% higher than the $0.57 in the year ago quarter.

Our operating margins were good at 13.5% of sales and we generated $51 million of cash from operations. We also made some good progress on our gross strategies. We feel these results demonstrate the strength of our diversified business model, that our strategic initiatives are paying off and that we continue to benefit from the Wabtec performance system.

Today we updated our 2010 guidance for earnings per share based on our performance in the first nine months and the outlook for the rest of the year. We now give a guidance of $2.50 to $2.55 that compares to 2.45 to 2.55. Sales are expected to be up for the year 6 to 7% with growth in freight more than offsetting a decrease in transit revenues.

The overall economy seems to be improving which is having a positive effect on our freight rail industry and it will help transit agencies as local and state funding become more available. The recovery is still sluggish as we all know with unemployment high and budget issues at federal, state and local levels. We’re still cautious in the short term but quite optimistic in the long term.

I want to emphasize that regardless of the economic climate we’ll stick to our long held philosophy. Be disciplined when it comes to cost and focus on generating cash to invest in growth opportunities.

Just a reminder for everyone, we’ll be issuing our 2011 guidance in February with our year end results. Let’s talk about our markets, the freight rail market.

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

After market was about two thirds of our total freight sales in the third quarter with sales up both compared to second quarter and to the year ago quarter. The freight traffic increases led the railroads to pull more parked cars and locomotives out of storage which will eventually help our OEM market. There’s still about 330,000 cars parked or about 22% of the fleet down from a peak of more than half a million cars.

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

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

The transit market. The long term outlook remains strong with good growth opportunities both in the US and international markets. However in the short-term as we discussed during our second quarter call, continued to see effects from the budget issues at our transit agency costumers. These issues have affected short-term aftermarket demand and has delayed some OEM projects. As the economy improves we feel this trend will reverse.

Our transit sales have also been affected by the completion of a few major OEM programs with new programs being delayed but not cancelled. Our long-term transit outlook is good both domestic and internationally. Current US federal transportation spending bill has been extended through the year-end while permanent bills being negotiated. The House is asking for a 2011 spend of about $11.3 billion, that’s a 5% increase from this year and just today the Obama administration announced additional funding for passenger rail projects, about $2.5 billion. It appears that most of this is targeted for high speed rail corridors.

The second quarter ridership has increased 5% compared to the first quarter. This stat is normally delayed a few quarters. We’re starting to see new orders awarded at New York City, WAMATA and Amtrak. Over the next few years we expect additional bids from Metra, Miami, New York City transit, BART and Amtrak and new commuter locomotive orders from Metra, Amtrak and in Florida. During the quarter we signed a $115 million contract with MBTA in Boston to build 20 next generation higher speed passenger locomotives, a significant order that we feel will position us well for future business.

We also continued to make good progress with qualifying our components in braking systems in the European and Asian markets. Overall Wabtec is in good position to take advantage of the long term strong commitment in the US and abroad to expand mass transit as we are managing aggressively through the short term issues.

We are focused as a company on growth in cash. Cash remains a priority. It provides the opportunity to invest in organic growth and acquisitions. We'll stay focused on increasing free cash flow by managing cost, diving down working capital and controlling our capital expenditures. With this cash we will continue to invest in strategic growth opportunities, global and market expansion, aftermarket expansion, new products technologies, acquisitions.

I'd like to spend a couple of minutes to discuss our progress in these strategies because I think it continues to be quite meaningful. As far as global and market expansion our sales outside of the United States was 42% of our total sales for the quarter, 15% higher than the year ago quarter, reflecting our progress international expansion.

In Europe our progress has been good. We’ve received a brake system order from Bucharest Metro; we’ve received door orders for Amsterdam, Athens and Turkey metros. Numerous products are in qualifications testing. We just completed our fourth JV in China with one more on the way.

In the after market expansion area, overall freight and transit after market sales total 56% of our total for the quarter. That’s a growth of 20% compared to a year ago quarter and 7% greater than the second quarter. We are seeing organic growth especially in the freight after market due to rail traffic increasing and cars and locomotives coming out of storage. Our new service center in Brazil continues to grow as we see other opportunities to participate in that market.

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

Acquisitions. We are very pleased with the integration of GMD Specialties and Bock Simpson which were acquired during the quarter. They compliment our existing businesses nicely. They both are a good strategic fit; they allow expansion in our core markets with our core customers. GMD provides a variety of track and signal products that expands our presence with critical components. We expect some incremental business due to PTC, positive train controller implementation. Bock Simpson designs and manufactures electronic instrumentation products. This business strengthens our position in transit rail electronics and provides additional market penetration with commuter and transit customers. Both will have growth opportunities now that they’re part of Wabtec.

We also expect margin opportunities through the application of our Wabtec performance system.

I’ll turn it over to Alvaro now.

Alvaro Garcia-Tunon

Great, thanks Al and good morning everyone. As Al mentioned, I think we had a very good performance in the quarter and we remain and continue to remain optimistic about our market position. In terms of specifics, I think there was a quarter I would classify as pretty normal, it wasn’t too much any one timers or ins or outs.

Sales were about 376 million, 14% higher than last year and the highest total sine the first quarter of '09. Of this increase, about half was organic with the rest coming from acquisitions. A definite positive was freight group sales which were up 68% with about two thirds of that coming from organic growth. So we see the revival of the freight market and we expect that to continue.

We also saw growth in the after market due to increase in rail traffic and more rolling stock coming out of storage. The transit group sales were lower as Al mentioned but I think we’re probably to the point where we’re starting to hit bottom and we could see some rebound. Margins, as always we’re focused on driving margins higher with particular attention on the operating margin. For the quarter, operating margin was 13.5%, 20 basis points higher than the second quarter and year to date 30 basis points higher than last year.

SG&A was higher than the year ago quarter. This was mainly due to the acquisitions of Unifin, Xorail, GMB and Bock Simpson but you’ll notice that it was lower than the run rate of the last quarter. Also this year we include – in this year’s quarter we include about 1.4 million of what we call PPA or purchase price accounting. These are the basically short term amortization required in accounting for acquisition. They typically run out in about nine months to a year and like I mentioned there’s about 1.4 of that in our results for this quarter compared to none last year. If you exclude the PPA, operating margin was 13.8 rather than the 13.5 we reported.

Interest expense was relatively stable, higher due to higher debt levels compared to '09 and other expense was slightly higher than the prior year. Last year we had a little bit of income, this year we had a little bit of expense mostly due to paper FX translation losses at some of our subs.

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

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

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

To give you a few of the numbers that I think is of general interest to everyone, depreciation for the quarter was 7.1 million versus 5.3 million last year. Amort was about 2.6 million versus 1.7 million last year. The increasing amortization is basically due to the acquisitions and allocation of purchase price and amortization of some of the intangibles. CapEx continues to be very reasonable, 5.4 million for the quarter. Year to date the CapEx is 12.4 million versus 10.8 million last year.

Backlog, the multi year backlog is up significantly due in part to the 115 million locomotive contract with MBTA order that Al mentioned previously as well and we’ve previously announced. The total backlog, this includes 12 month backlog as well as backlog to be executed later is 1.04 billion, up from 921 million in the last quarter. 748 million of that is in transit versus 665 million so the total transit backlog has gone up and the freight backlog is 289 million versus 256 million. Again freight is not a backlog driven business so you would expect that backlog to be lower than transits.

The roll in 12 month backlog or what we expect to execute in the next 12 months compared to the last quarter, the last quarter being June 30, 10 in total is 497 million versus 522 million. In transit it’s 291 million versus 348 million and in freight it’s 206 million versus 174 million. Hopefully I didn’t go too fast on that, you were able to get that down but please let us know if you didn’t and with that I’ll turn it back over to Al.

Al Neupaver

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

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And the first question comes from Arthur Hatfield with Morgan Keegan.

Arthur Hatfield - Morgan Keegan

Morning everybody and congrats on a great quarter. Hey Alvaro, quick question on the tax rate. Tax rate came in a little bit lower than we had anticipated and it’s been that way for a couple of quarters. I think historically your guidance has kind of been in that 35 to 36% range. What went on in the quarter and how can we think about that going forward?

Alvaro Garcia-Tunon

Basically what we do Art is we – forecast provide tax rates I think relatively conservatively and then what happens is we don’t really release against that tax rate until any benefits have been realized and during the quarter we did receive a couple of small refunds as well as we saw a couple of state tax issues expired. So the tax rate was a little bit lower than it would have been normal, than would have been normal otherwise.

But again the fourth quarter we would expect it to be normal again which for us is about 35%.

Arthur Hatfield - Morgan Keegan

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

Alvaro Garcia-Tunon

Yeah.

Arthur Hatfield - Morgan Keegan

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

Alvaro Garcia-Tunon

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

Part of that was in cost of sales, part of that was in SG&A. Let’s see, cost of sales was probably about, it’s almost 50-50, a little bit less than cost of sales, a little bit more in SG&A.

Al Neupaver

Okay, but if we wanted to think about a more normalized kind of operating margin we would want to add back 1.4 million in expenses.

Alvaro Garcia-Tunon

Yeah but you wouldn’t want to add it back until ‘011. Your tax rate is probably going to go up from that 1.4 to about 1.5 in the fourth quarter and again for your – well that’s not a great big number, I’d say for your purpose you can probably split it between cost of sales and SG&A and then in the first quarter of next year we’ll still have some amount but it’ll probably be about half of that and it will start to peter out in the second quarter of next year.

Arthur Hatfield - Morgan Keegan

Just a couple more questions Al if you have some time. Gross profit or even we can focus on operating income and I know you guys get this question all the time, but is there – how should we think about it going forward? Two things, one, what are the things that can help you get that number to move higher and two what are the kind of natural forces that maybe prohibit you from improving the margins going forward.

Al Neupaver

Well as you know our goal is to continuously improve and apply our Wabtec performance system and the things that we focus on are that we’re looking at sourcing opportunities, we’re looking at making sure we’re manufacturing the lowest cost platform, we’re looking at pricing opportunities, we’re looking at applying the lean manufacturing techniques and these acquisitions that we have, we look to apply that.

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

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

Arthur Hatfield - Morgan Keegan

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

Al Neupaver

Keep in mind that the Amsted Faiveley cooperation agreement is really two people that we’ve competed with in the past and that’s Alcon and Amsted both. So it’s not like an introduction of another competitor. We like everyone else has competitors in the marketplace and our focus is on the things we could control and that’s to have the best quality product delivered at the lowest cost and we’ll continue to focus on that.

As you can see from my explanation is not a new entrant into the marketplace. They’ve joined forces probably to maybe consider bundling their products a little better and their offerings, something that we’re able to do because we have a large content especially in the freight car area. When you look at the diversity of product that we have and the breath of product that we have right now.

Arthur Hatfield - Morgan Keegan

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

Al Neupaver

That’s correct.

Arthur Hatfield - Morgan Keegan

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

Al Neupaver

Okay thanks Art.

Operator

Thank you and the next question comes from Jim Lucas from Janney Montgomery Scott.

Jim Lucas - Janney Montgomery Scott

Thanks. Good morning guys.

Al Neupaver

Morning Jim.

Jim Lucas - Janney Montgomery Scott

First question, could you just bring us up to date on the overall China strategy. You highlighted you’re now up to four JV’s with another one coming. Just talk a little bit about what exactly these different JV’s bring you and how you’re thinking about the Chinese potential.

Al Neupaver

Okay, good question Jim. We right now have four completed joint ventures. The first joint venture that we completed is with a company called Changchun Rolling Company which really is the ministry of the railroad and when we first went into China, that was the partner that they suggested we get involved in and they are strictly focused on the freight rail market and we truly are the world leader in that particular area and there’s been a tremendous amount of focus right now on how they improve their freight marketplace and we are the only one that’s really working in that area and that JV is a 50-50 because that is the requirement they have if you’re going to be involved in the government industry there.

It is growing nicely, we expect to continue to work with them and develop our products in their market. The second JV was in the freight friction area and that’s a JV that is not really regulated by the Ministry of the railroads since the friction products are considered more of a commodity. This is a company that our Beckwith division had worked with for a long time and had a number of products in their portfolio and we are growing that business in the friction area.

The third focus was on the transit area and we have a JV called Golden Bridge that is focused on couplers and other transit products. We started, that JV was completed earlier this year. We have two major orders with Metro in China and also an exported product. The fourth JV is really one that Unifin, the acquisition we made a year ago, a company they had worked with when they were still with Coke that had broken off and we just re-established that opportunity because as you know there is a lot of power generation activity in China and that gives us an opportunity to play in that market.

The next couple of JV’s we’re focusing on is another one in the transit area for some of the other products that are not on the portfolio of Golden Bridge and a second thermal management type JV that we’re working on to expand our heat exchanger business. The focus is to grow that business. Right now we have probably in the range of 60 to 70 million dollars of sales in that arena and it will be growing rapidly over the next couple of years.

They continued to spend a lot of money not only in transit but also in the freight market and we want to take advantage of that window of opportunity.

Jim Lucas - Janney Montgomery Scott

Great, that’s very helpful and on the PTC side, in your prepared remarks you talked about Xorail bringing other opportunities on the PTC side and was hoping you might be able to expand upon that other opportunity comment.

Al Neupaver

What Xorail does is they give us a group of engineers that do the design and engineering work and some construction work related to the wayside. Their focus has been in the positive train control area because that’s where a lot of the business is. Joining that up with our capability that we have on the locomotive as well as the back office, we now are involved in what you would consider a system, more of a turnkey type of offering.

There are two projects that are out there right now that have funding. One is with Metro Link and another one is with Denver and both of those we will play a role from the PTC side as well as the engineering design side. That’s the kind of opportunities that I’m talking about.

Jim Lucas - Janney Montgomery Scott

Okay and finally just on PTC sticking there, you had said you expect a ramp in 2011 and can you just give us an update on what you’re seeing in your order block, your conversations with customers about what gave you confidence that you’ll see a ramp in 2011 as opposed to it being pushed out for another year?

Al Neupaver

As far as orders, what we’re getting right now is still mostly development orders and orders related to testing. We feel that in order to meet the demand of completing the systems in the 2015 timeframe that it’s going to require that hardware and some of the other activities are going to have to start flowing up. We do not have any firm orders related to that.

Jim Lucas - Janney Montgomery Scott

Okay, great. Thank you very much.

Operator

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

Scott Group - Wolfe Trahan

Good morning guys, how are you doing?

Al Neupaver

Good, how are you?

Scott Group - Wolfe Trahan

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

Al Neupaver

Yeah we’ve been monitoring closely the aftermarket business on the transit side and as you can only go so long with delaying some of the work that you would have and I know that they run down their inventories and they’ve put off whatever they can and they’ve taken some service cuts in order to meet their budgets.

We think this is really, we’re seeing a stabilization of that. On the OEM we’ve seen some contracts that they’ve let go to the car builders. We’ll be working to get our portion or some share of the business as well and we expect more of that to happen here into 2011. So we kind of feel that it has bottomed up, it’s stabilized and we also have about half of that business is outside of the US where the marketplace really is not down and up and we continue to make progress in that area as well.

So you’ve kind of got the bottoming out of the US aftermarket and the opportunities that exist on a global basis that we talked about and we’re making good progress. We talked about some of the wins that we’ve had. That’s what was really behind the comment that Alvaro made during his prepared remarks.

Scott Group - Wolfe Trahan

That’s good color and so just to sum up if we’re thinking about it, directionally from 157 million of revenue, directionally should be flatter up from here, not down more.

Al Neupaver

Well, we’ll see. There’s always fluctuations quarter to quarter and we feel that the business has bottomed up but there are fluctuations quarter to quarter. So the long term trend will be up. I can’t comment on what will happen next week or the next three weeks because really depends on larger contracts in transit than it does for the freight markets.

Scott Group - Wolfe Trahan

Okay, great and wanted to follow up on the last question about PTC. One of the big rails, they cut their spending by about half four [2,000]. Just generally, what are you hearing from them about any technology or design implementation delays and how does this impact your timing for when you think PTC spending will ramp up? I know you said that you think it will start next year but is it coming in slower for next year than maybe you were thinking a few months ago? It just feels like the rails have been slow to really ramp up their spending.

Al Neupaver

The rails are trying to make sure that all the specifications related to the interoperability and their implementation plans are totally accepted and understood so that you don’t get too far down the line and have all the hardware and some of the specifications change. So I think this is in due course the railroads are working very diligently and hard to get these specifications agreed to and we’ll be moving into the testing phase here shortly.

Once we’re in the testing phase then we talk about getting our product safety plan approved for the implementation of the vital portion. We already have it on the overlay system. I think it’s a progression of time and we’re working very closely with them. We’re not aware of any technology issue. It’s a matter of making sure that we have the right specifications and protocols and that it’s been tested properly and that’s what we’re going through.

Those things never happen as fast as you want but we do expect that this will start ramping up in 2012. If there’s anything I can tell the railroads are spending a lot of time and money on this right now.

Scott Group - Wolfe Trahan

So you think ‘11 or ‘12 is when it starts to ramp up?

Al Neupaver

Next year is ’11.

Scott Group - Wolfe Trahan

Okay, sorry I thought I just heard you say ’12. And just directionally then when we think about having a PTC network by 2015, should the onboard computer be something that happens in the first three innings or the last three innings when we think about getting a full network up and running?

Al Neupaver

It’s a complex system. The locomotive portion, the onboard portion of the system, when you talk about the total expenditure you’re talking about 15 to 20% of the total expenditure. So you can almost correlate that to the amount of work and that’s an item that is developed and you install it. The wayside, there is a tremendous amount of work. The revenues that go in that area could be 40 to 50% of the total spend and then you have a communications system and you have an office, a back office dispatch and then there’s also going to be opportunities from installation and maintenance associated with the system.

But rest assured in order to get the system started and running you have to start at some point installing the brains of the system which is on the locomotive and get it out there and so would I say it’s in the first inning? No, is it in the middle innings? Yes, it’s definitely not the last innings.

Scott Group - Wolfe Trahan

Okay great and then last quick one if I can for Alvaro. I know it’s early but just given where discount rates are, what are you thinking could be a pension expense headwind for next year?

Alvaro Garcia-Tunon

And you’re absolutely right. The discount rate does have an effect on pension expense and for those uninitiated in GAAP accounting, basically you set your expansion expense at the beginning of the year and then regardless of changes you keep that up and then you do one for the next year. Right now it’s difficult to estimate because we haven’t gone through the actuarial process. The benchmark for the discount rate is about December of ’10.

I’m not sure it’s not going to be that much different from the prior benchmark until we see the actuarial calculations come out though I’d rather not comment one way or the other apart from that. I’m not an actual, okay.

Scott Group - Wolfe Trahan

You sound like one though. Alright, thanks guys.

Alvaro Garcia-Tunon

I’m _ I hope we don’t have anything in the audience.

Scott Group - Wolfe Trahan

Alright, thanks for your time guys.

Operator

Thank you. The next question comes from Paul Bodnar from Longbow research.

Al Neupaver

Good morning Paul.

Paul Bodnar - Longbow research

Hey, good morning. Quick questions on the intermodal market, obviously it’s been one of the areas that’s really picked up and if I remember four years always had a little more content in those cars, if you could just kind of comment on what additional contact you have in that car type is and if you have any dollar differences versus the regular railcar?

Al Neupaver

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

Paul Bodnar - Longbow research

It doesn’t make any difference, it’s just the articulated?

Al Neupaver

Yeah, it’s the articulated. That’s the only thing that makes it any different.

Paul Bodnar - Longbow research

Okay and then I guess you talked a little bit about the – I don’t know what you would say but in terms of margin expectations this quarter and also in ’11, I mean you don’t release your transit margins along with your quarterly release into the Q. Can you just directionally tell us maybe a little bit more where that’s going from last quarter, if it’s kind of in line with where that is or if that pullback is obviously felt down a little bit further then also should we expect it to kind of stay at these levels or your current levels headed to next year?

Al Neupaver

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

Paul Bodnar - Longbow research

If there is a shift as you’re saying but some of the aftermarket work is kind of – there’s some pent up demand there, is that something we should think of, should there be some positive margin contributions (inaudible) higher margin products?

Al Neupaver

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

Paul Bodnar - Longbow research

Okay, thanks a lot.

Al Neupaver

Thank you.

Operator

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

Steve Barger - KeyBanc Capital Markets

Hey good morning guys.

Al Neupaver

Morning Steve.

Steve Barger - KeyBanc Capital Markets

I hear what you’re saying on the aftermarket. We know the railcar orders on the OE side have been ramping sequentially. Are you seeing the builders come in yet in a big way to as they’re starting to increase build rates or is that yet to come and then are you also seeing from a pricing starting to firm up in the marketplace?

Al Neupaver

I think that on the railcar area we gave the 3700 was the delivery. So that’s what we see now. The good news is that the 92 or 9300 of orders placed obviously is a good indication of what’s coming down the road and the fact that the backlog has come up to 19. But keep in mind just in 2008 we were at 59,000 deliveries and if you analyze the 37 that we’re talking about you’re talking 14ish.

So when I talk about historical lows this year will be probably the lowest delivery of railcars all the way back to the 1980s. I mean I think it was 17,000 in 2002 timeframe. So it is still that low. The positive is that we are seeing this railcar build pick up and we’re seeing primarily in specialized cars with this intermodal coming up 14%. Obviously there’s been some demand in orders in that area.

Of this parked car no one really knows how many stay parked forever and I’m hearing that that could be 100,000 or more. So all the trends are going in the right direction. What we are seeing is I don’t think anyone is acting irrationally out there as far as a railcar builder or they weathered the storm pretty well. They’ve been through that before and they’ve done a great job of managing through it.

So I don’t think anyone is going to go out there and be irrational just to get a few orders at this point.

Steve Barger - KeyBanc Capital Markets

Yeah I hear you but it means to me that you guys have taken some capacity offline; I would guess your competitors have as well. Does that give you the ability to drive pricing a little bit now that you’re seeing the backlog back at 20,000 and that implies certainly a higher build rate in ’11 than we’re seeing in ’10?

Al Neupaver

We run a asset light business and we’re going to compete in the market. Our goal is to get our costs down and we’re going to get our share of business. Are we going to act irrationally? No.

Steve Barger - KeyBanc Capital Markets

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

Al Neupaver

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

Steve Barger - KeyBanc Capital Markets

No, I agree that you guys have done a great job of keeping margin in a terrible volume environment. The implication for me is that if pricing has been depressed and you that all in the operational side, then when pricing comes back your cost structure is going to remain leaner than it was and you should have higher margins coming out of this as volume comes back.

Al Neupaver

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

Steve Barger - KeyBanc Capital Markets

Got it. Okay and…

Al Neupaver

I’m sorry but I think the question is a little too focused on – okay, go ahead.

Steve Barger - KeyBanc Capital Markets

Well I guess there’s no reason to think that given the dynamics that we’re talking about that you wouldn’t see margin expansion as volume comes back just based on how you maintain margins through the downturn. Is that a reasonable assumption?

Al Neupaver

I could answer that, an astounding yes.

Steve Barger - KeyBanc Capital Markets

Alright then finally as I look at your prepared comments you said railcar and locomotive builds as they start to recover you’re going to see good growth. That makes sense. How do you see that railcar build progressing in FY11 and FY12 and I guess what do you consider the normal rate and I know it’s a boom and bust kind of business, but just going forward where do you think the business gets back to you on an annual build rate?

Al Neupaver

There’s a lot of forecast out there but it’s going to probably take a couple of years depending on how many of the parked cars have to come back. What we’re seeing right now, if you track the scrap rates, they’re up there pretty high at 3, 4% of the total fleet. So normal rate if you average everything out you should be between 40, 45,000 car build. Locomotive should be in the 1,000 to 1,200. So we’ve got a good way to go. I think some of this last quarter gives you a little more optimistic view on how long it would take.

But one quarter doesn’t make a trend so we’re going to maintain – and I’m not sure the delivery on those orders that come in and we have to understand that as well. So we’re going to remain very cautious but optimistic about the future. The trend is the way we want it right now.

Steve Barger - KeyBanc Capital Markets

Got it and one last question and sorry if I missed this earlier, are you seeing any import price inflation yet or are your costs remaining pretty stable?

Al Neupaver

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

Steve Barger - KeyBanc Capital Markets

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

Al Neupaver

Thank you.

Operator

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

Scott Blumenthal - Emerald Advisors

Good morning gentlemen.

Al Neupaver

Hi Scott.

Scott Blumenthal - Emerald Advisors

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

Alvaro Garcia-Tunon

I’ll try and study up for the next time and see if I can’t pass the first level of test.

Scott Blumenthal - Emerald Advisors

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

Alvaro Garcia-Tunon

You’re a gentleman,

Scott Blumenthal - Emerald Advisors

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

Al Neupaver

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

Tim Wesley

I think it was the second quarter of ’05. It was a bit higher.

Scott Blumenthal - Emerald Advisors

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

Al Neupaver

Not actuarially speaking I can guarantee you that back then we didn’t have deliveries for 3,500 cars.

Scott Blumenthal - Emerald Advisors

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

Al Neupaver

I’m not sure we throw all the engineering, we don’t throw all the engineering expense in there, do we Pat?

Pat Dugan

Yes, some of the engineering gets charged to contract and cost of sales.

Scott Blumenthal - Emerald Advisors

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

Al Neupaver

Well we’ve had as you know a lot of focus on our international expansion it being our number one. The first strategy that we talked about from a strategic thrust standpoint and what we’ve been able to do is we’re growing in those emerging markets, in Australia. We’re growing in China. I gave you some numbers related to China. We started up a business in Brazil and now we have a manufacturing platform.

That’s always been a pretty difficult market for us because of the import duty of 35, 36% and now we’re able to localize some of that business and we’re growing there. In the last few years we started up a platform in South Africa. That has really helped us grow. We’re doing business in India as well which is an emerging market and an opportunity in both transit and freight.

We’ve got business now in Russia which we didn’t have 12, 18 months ago. So it really is not one area, not one focus, not one product but a tremendous amount of effort on expanding our platform and creating a platform that we could build from instead of just exporting the product and I think that’s been very positive for us.

Scott Blumenthal - Emerald Advisors

Okay, that’s really helpful and Alvaro, can you maybe help me with the SG&A number? You did a tremendous job.

Alvaro Garcia-Tunon

We’re getting a little deep in here.

Scott Blumenthal - Emerald Advisors

A tremendous job there on – it looks like you’re down sequentially about 10% on an increase in sales. Kind of what went on there with your sales mixer?

Alvaro Garcia-Tunon

Sure. What really impacts SG&A is acquisitions and like Pat mentioned earlier sometimes some of the acquisitions costs like say in Xorail which is primarily an engineering company. So their costs get charged, their engineering costs get charged to cost of sales rather than engineering or SG&A. But basically in this quarter we had about $1 million extra in SG&A from acquisitions from the second quarter of ‘010.

In the second quarter of ‘010 we had a couple of items that we didn’t have this time. I think we mentioned in the last conference call there was one, we settled a litigation in Texas for about a couple of million and we also cleaned up, did some reserves and some bad debts and cleaned up a little bit there that impacted SG&A and that’s why you really see it if you compare to the second quarter actually going down which is always our goal actually.

I think going forward, once you have the acquisitions in there for a full quarter going forward, you can – and again SG&A is kind of a catchall for all these expenses that don’t fit in any of the other categories. Some of the purchase price amortization goes in there; some of that PPA that I referred to goes in SG&A as well. But I think all in run rate going forward should be somewhere between 48 to 50 million in the future.

Scott Blumenthal - Emerald Advisors

Okay, great.

Alvaro Garcia-Tunon

Hope that lived up to the billing there.

Scott Blumenthal - Emerald Advisors

Everybody did a terrific job. Thank you.

Al Neupaver

Alright, thanks Scott.

Operator

Thank you and we have another question from Jim Lucas with Janney Montgomery Scott

Jim Lucas - Janney Montgomery Scott

Yes, just a quick housekeeping question. What is the total year to date spend on acquisitions?

Al Neupaver

Year to date I think it’s just, because Xorail and Unifin were last year so it’s just – Xorail was this year and GMB and Bock Simpson. So you’re looking at 85 million.

Jim Lucas - Janney Montgomery Scott

85. And goodwill at the end of the quarter?

Alvaro Garcia-Tunon

Goodwill at the end of the – hold on one second, let me take out balance sheet. It should be somewhere in the 515, 520 range. It’s goodwill. There are intangibles most of which are associated with acquisitions but just the pure goodwill element is like I said 515, 520.

Al Neupaver

Jim it was 93 counting a few small ones that some of the JV’s and stuff. So we’d have to add probably another 8 million that’s part of that – that would get you up to 93.

Jim Lucas - Janney Montgomery Scott

So that’s what you’ll see in the statement of cash flow?

Al Neupaver

Yes

Jim Lucas - Janney Montgomery Scott

Perfect, thank you.

Al Neupaver

Okay, thank you.

Operator

Thank you. (Operator instructions). Alright there are no questions at the present time so I’d like to turn the call back over to Mr. Wesley for any closing remarks.

Tim Wesley

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

Operator

Thank you and that does conclude today’s teleconference. You may now disconnect your phone lines.

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