Jul 24, 2009
Executives
Timothy Wesley – Vice President Investor Relations Albert Newpaver – President, Chief Executive Officer Alvaro Garcia-Tunon – Chief Financial Officer
Analysts
Art Hatfield – Morgan Keegan Jim Lucas – Janney Montgomery Scott Kristine Kubacki – Avondale Partners Steve Barger – KeyBanc Capital Paul Bodnar – Longbow Research [Jason Rogers – Great Lakes Review]
Operator
Welcome to the Wabtec Corporation second quarter 2009 earnings release conference call. (Operator Instructions) At this time I would like to turn the conference call over to Tim Wesley, Vice President Investor Relations.
Timothy Wesley
Good morning everybody. Welcome to our second quarter earnings conference call today.
I just want to apologize briefly for a slight delay in the start here. We were having some trouble with the webcast and we were hoping to get that fixed before we got started so we apologize for a little bit of a delay.
Let me introduce the rest of the Wabtec team who's here; our President and CEO, Al Neupaver, our CFO Alvaro Garcia-Tunon and our corporate Controller, Pat Dugan. As usual we will make our prepared remarks and then we'll be happy to take your questions.
We will make forward-looking statements during the call so please review today's press release for the appropriate disclaimers. With that, Al Neupaver, our President and CEO.
Albert Neupaver
Good morning everyone. What I'll do is, I'm going to cover the second quarter results, talk about the current market conditions including how we're responding to those conditions.
We'll talk a little bit about our progress of our strategic initiatives as well. The Alvaro will cover the financials in more detail and I'll come back on for a summary, then we'll answer your questions.
Given the state of the economy and especially the freight rail market, Wabtec posted good results in the second quarter. Our transit sales were up 4%, but overall sales were down 14% due mainly to impact from the freight rail decline.
$17 million of that decline was due to FX. Second quarter earnings per share was at $0.64.
That included a tax benefit of $9.7 million and we had pre tax expenses of $8.3 million primarily related to downsizing and consolidation activities. Cash from operation was really good at $44 million.
This was a result of a number of things but improved working capital performance as well. Our backlog remained over $1 billion which will help to provide a base for revenue in the future.
We are pleased that we achieved these numbers in a weak global economy and a very weak U.S. freight rail market.
This shows 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. Let's talk a little bit about the current market conditions.
First of all the transit market, we continue to see a good transit market driven by Federal funding and passenger ridership. The current Federal spending bill expires September 30 of this year.
The Obama administration wants to extend that bill for another 18 months and a current Senate bill backs that proposal. However, the House strongly favors a new six year bill with a substantial increase in funding so that the transit agencies have the funding and the lead time they need to plan future investments.
If nothing passes by September 30, it's likely that the funding will be maintained at the current levels until the new bill passes. There's been a lot of talk about stimulus money in high speed rail.
Money is starting to trickle into the transportation projects. About 20% of the funding has been awarded.
We have seen some additional bus orders and locomotive orders as a result, but the real transportation money has yet to be spent. The same with high speed rail; the government has to decide the location of the high speed rail lines before any project can begin.
Clearly, Wabtec is in a good position to take advantage of what seems like a strong commitment in the U.S. to expand the country's mass transit capabilities.
But, it will take some for us to realize meaningful benefits. Ridership remains strong, but has been slightly affected by the economy.
Two-thirds of the trips taken are work related. Nationwide, ridership is down only 1% in the first quarter despite the sluggish economy, lower gas prices and higher unemployment.
Some cities still see an increase of 4% to 5%, Boston, Chicago, D.C., Philadelphia and L.A. The positive of the long term trends in transit should continue to drive growth and investment in this area.
This is a compelling market based on population growth and urbanization, long term concerns about fuel prices and the environment, and reduced dependence on foreign oil. In addition to this good NAFTA market, Wabtec has ample growth opportunities in the international transit area which have remained strong even in this economic turn down.
We are currently a small player in large markets such as China and Europe, but are working very hard to change that. The freight rail market; for us the freight rail market softened further in the second quarter and remains very weak due to the economy.
North American rail traffic is off significantly and continues to decline throughout the second quarter, but bottomed out in recent weeks. Year to date 10 miles are down 18% while loadings are up 19%, intermodal traffic is down 17%.
These figures are worse than we had previously projected. Even coal traffic is off 8% as electricity production in the U.S.
has fallen off due to the recession. We can't predict when traffic will pick up, and it depends mainly on the overall economy.
With traffic down, the railroads have parked perhaps one-third of their freight cars and locomotives which has a negative impact on both our OEM business as well as our after market demand. The industry has not released its second quarter rail car numbers, but our estimates for the delivers are about 6,000 and orders of only 2,000 versus 15,000 cars being delivered a year ago with 12,000 ordered.
Second half deliveries will be weaker than the first. We have seen a similar slow down in the locomotive OEM market which occurred later in the cycle due to longer term contracts that were being fulfilled.
We are seeing some signs of recovery and have heard that some of the railroads are actually bringing a few rail cars out of moth ball. We have especially seen some recovery in the international freight markets such as Australia.
We do expect these markets to come back faster than the North American market. Overall however, the conditions remain difficult.
Due mainly to these market conditions and our second quarter results, we are updating our guidance for 2009. The initial guidance this year was for sales to be flat to slightly down with EPS between $2.45 and $2.75.
Based on the following assumptions rail traffic down 5%, freight car production at around 30,000, NAFTA locomotive production around 1,200 and no further weakening in the economy. Market conditions are in fact weaker than we anticipated.
Rail traffic is down around 20%, freight car production for the year is estimated to be around 20,000, locomotive production will be about 700. The economy most likely will not recover in the second half which most analysts had hoped for.
As a result, we have updated our guidance. Sales now are expected to be down around 10% for the year with earnings per share range of $2.35 to $2.55.
Considering the steep declines in some of our key markets, we feel that our team has responded extremely well. In fact, if you take a look at the first half revenues, they were down $62 million while operating income is only down about $3 million after you add back about $14 million of expenses that we have taken for downsizing this year.
So in this environment, we are focused on applying our lean principals and managing what we can manage by reducing costs and driving down working capital to maximize cash, and we've accelerated these efforts. With the actions taken year to date, we are targeting annualized cost savings of $35 million to $40 million.
The cost of these actions has been around $14 million with about $8 million of that taken in the second quarter. The theme of these actions is the Wabtec performance system which is based on lean principals and continuous improvement.
Actions have included a work force reduction from all levels of the company, planned consolidation and increased emphasis on lean events and sourcing activities. The goal is to balance our continued investment and growth opportunities with the need to take prudent action that reflect the economy and business realities we face.
I believe we're reaching and achieving that balance. In this environment, we're staying focused on two areas; strategic growth and cash generation.
We continue to invest in strategic growth opportunities. New products such as positive train control where our market position continues to strengthen.
There's been a lot of activity in the PTC arena and we are in the front and center. Global expansion, we're working on our third joint venture in China and just opened an office in Munich to serve Europe.
In the after market area, we are finalizing a service platform for Brazil. As for acquisitions, we're being disciplined in a difficult market, staying focuses on building a more global and diverse footprint.
The second focus; cash. Cash provides the opportunity to invest in acquisitions and growth strategies, and we are renewing our efforts to increase free cash flow with cost reductions driving down working capital, and squeezing CapEx.
We reduced the debt by $11 million in the quarter and bought back $12 million of stock. At this time I'd like to turn it over to Alvaro.
Alvaro Garcia-Tunon
Good morning everyone. Like Al said, it is a difficult environment out there and we see that every day.
However, we are very optimistic about the future and our ability to grow long term. Al touched on a few of these, electronic braking, international growth, and we remain very optimistic that as the markets recover, we'll be able to exploit those opportunities and continue our long term growth.
However, in the short term, we do remain cautious about the future of the economy. We do face challenges really that are unprecedented in our industry and we're trying to react appropriately as we go along.
In terms of specifics and getting more specific as to our financial results, sales were down 14% to about $334 million this quarter. About one-third of the increase was due purely to FX, not really an operating issue, but just the changes in FX.
That had a minimal impact on our EBIT of about $1 million or so. The transit group sales were actually up 4% reflecting the continued strength in that market, mainly due to increased sales of subway car components and the POLI acquisition and the net decrease was down in the freight group.
We did have higher sales from an acquisition of Standard Car and Truck, but this was more than offset by the negative affects of lower rail traffic and reduced demand for new freight cars and locomotives. The acquisition, for those of you who want to keep track, added about $30 million in sales when you compare it to the prior year.
Margins, as you know we are very focused on margins and margin improvement with particular attention on the operating margin, and we feel we had a very good performance this quarter in light of the decreasing markets. Operating margin for the quarter was 11% versus 14.3% last year.
However, this includes a significant amount of restructuring expenses. Once you factor in the $8.3 million restructuring, the operating margin was $13.45, again compared to 14.3% which in light of the declining volume, we think is a respectable number.
We're not happy with that. We're going to continue to try to improve it, but we think it's a good performance.
Other fluctuations from quarter to quarter, interest cost was higher because of the Standard Car and Truck acquisition. The effective tax rate obviously, much lower in this year's quarter with the tax benefit of $9.7 million.
This was due to a resolution of open items and open position from prior years that either the statute closed or the audit for those prior years closed during the current period. And you really can't forecast these items.
You basically take them into account as either the statute expires, or like I said, the audit closed. Working capital, we have made some progress on working capital.
We think we can do more. Receivables were about $252 million, down $8 million from the prior quarter.
Inventories were $250 million, down about $4 million from the prior quarter. This benefit of this was partly offset by payables at $117 million, down from $126 million.
Basically as you reduce your purchasing and as you reduce your expenses, your payables naturally follow and so the payables aren't quite as high. In terms of cash balances and cash generation, at June 30, we had cash of $121 million up from $98 million at March 31.
Cash flow from operations was $44 million. I think Al previously referred to that number.
We're about 13% of sales, so we are happy that we're generating an appropriate amount of cash which we can use for debt repayment, stock repurchases, we actually repurchased about $12 million of stock during the quarter as well as investment in our growth strategy. At June 30, we had total debt of $352 million versus $363 million at March 31 in the first quarter, so we paid down about $11 million of debt during the quarter.
And really, considering our cash flow generation, our earnings and our assets, the balance sheet is in great shape, and that does give us a considerable amount of flexibility and ability to grow in the future using our balance sheet. To go forward with a few miscellaneous items which we always read out during the call, depreciation was $6.8 million during the quarter versus $7.5 million last year.
Amort was $1.8 million versus $.9 million, so $900,000 last year. The difference was due to the acquisitions and the increased amortization they generate and CapEx for this quarter was about $5.3 million, well within our estimate for the year.
In terms of backlog, I think Al referred briefly to this. The backlog does remain over $1 billion which gives us substantial stability and especially in the transit market, it gives us greater visibility in the future.
The rolling 12 month backlog, what we expect to execute during the next 12 months compared to last quarter, in this quarter the 12 month backlog is $565 million in total versus $560 million at the end of last quarter, so it grew slightly. The transit number which is the much more significant one was $468 million versus $450 million last quarter, so that grew.
And the freight decreased slightly $97 million versus $110 million last quarter. In the multi-year which is executable in the next 12 months as well as in future months, like I said, it was just over $1 billion for both periods.
In transit it grew slightly $825 million versus $800 million in the prior period and in freight decreased slightly to about $179 million from $192 million. With that, I'll turn it back to Al and he can give you a quick summary, and we'll do Q&A.
Albert Neupaver
Once again, we had a good performance in a very difficult environment. Like most companies, we continue to face very challenging market conditions and uncertainty due to the economy, and we've updated our sales and earnings guidance as a result.
We're fortunate that we have the diverse business model that we have and our transit business is very strong at this point, now more than half of our revenues. The Wabtec performance system provides an established culture for lean manufacturing and continuous improvement and gives us the tools we need to reduce costs and generate cash.
We have an experienced management team that is committed to managing proactively and aggressively through these tough times. With that, we'll be happy to answer your questions.
Operator
(Operator Instructions) Your first question comes from Art Hatfield – Morgan Keegan.
Art Hatfield – Morgan Keegan
As we look at the numbers for the quarter, and Alvaro I appreciate you talking about the adjustments on the operating numbers. I would assume that the $8.3 million in severance and other costs, was that primarily in the SG&A line?
Alvaro Garcia-Tunon
No. Actually primarily in cost of sales.
And that's when I did the pro forma, adding back the $8.3 million, I went all the way to operating margin so as not to get confused between the cost of sales. But I'd say probably $6 million to $7 million of that $8.3 million is in cost of sales.
Art Hatfield – Morgan Keegan
When I think about going down further, and the tax line is a little bit hard to look at this quarter/.
Albert Neupaver
Not for us, the tax line is pretty easy to look at in the quarter.
Art Hatfield – Morgan Keegan
Theoretically, yes. I'm all for no taxes whatsoever, but to kind of look at it more normalized, if we adjust for the severance costs and add back the tax benefit, what would the effective tax rate have been in the quarter?
Alvaro Garcia-Tunon
The severance costs are deductible, so basically what you have to do is add back the effect of clearing up the additional items which was the $9.7 million. And once you do that, then the tax rate should be about 36% to 36.2% I think, in that range which is our normal tax rate.
Art Hatfield – Morgan Keegan
I thought it may have been, but I just wanted to ask. Al, as we kind of look out, and it looks with some of these key freight markets in the U.S., it's possible that we could see build rates bottom out in the back half of this year.
No telling when they'll start to grow again, but we could see them fall off further from where they're at in Q2. When you look out to '10 and I'm not asking for you to pin you down to guidance, but if you think about trying to grow earnings next year, what do you think has to take place in the markets that you serve or what could you do internally to accomplish a goal like that?
Albert Neupaver
I think if you look forward, and I think we agree with you that we're going to see in the third and fourth quarter hopefully a bottoming out. There's not much more room for deliveries to go down, so that's going to bottom out.
And, we don't know when the recovery is going to be. So what we're doing is, I mentioned in the prepared remarks, we're really trying to focus on growth in other areas.
We're building platforms in our international arena. We're looking at ways in the freight market to expand some of the things we have to offer.
So global expansion, and I'm only talking about freight now, and I'll talk just a few minutes about transit. We still think we have a lot of opportunities globally.
We're just establishing the platform in Brazil. We only just last year established a joint venture in China.
Our European acquisition of POLI gives us some opportunity there to look at freight markets, and Australia, a growing presence there. The second part of freight is the new technology.
We expect to see some more activity in the technology area, especially the positive train control area. So those are two driving factors for the freight markets, and what we have to assume is that recovery may not be there, and we're going to focus on what we can control, and that's the other opportunities.
In transit, we think it's going to be stable at a high pace and hopefully the stimulus money will start generating future contracts that we could take advantage of. That's the North American market, but if you look at an international basis, as I mentioned, we're such a small player in a gigantic market.
Those markets, the specific market in Europe is five times the North American market, as it is in China, and we're getting established in those areas and seeing a lot of activity. We're getting our products developed so we can offer braking systems, not just components, and we're going to stay focused on that.
Art Hatfield – Morgan Keegan
When you look at the international growth that you see, do you have the corporate management in place to effectively oversee that growth or as you expand geographically, do you needs to expand your management ranks?
Albert Neupaver
I think there has to be an expansion over time, and what we've done is, we've tried to it incrementally. What the corporation does is establish a platform to operate out of either through an acquisition or a green field site.
A good example of that is, year's ago we established an after market service business in Australia. Today, that particular business is a key to OEM after market sales and a source of good growth for us.
We're going to do the same thing in Brazil. We established the manufacturing site in South Africa, which has led to growth in that particular area.
In China, it's a different approach. Every country really, every portion of the world has a different approach and that's what we've been focused on, is getting those platforms in place that we can build from.
As the opportunities grow, we can incrementally add the management to do it. Typically you have to start with a key manager in that particular part of the world, and that we've been very focused on getting good people up front that help lead the growth of the various products.
We also try to share that platform. We do not go in there with just one product.
We'll even offer transit and freight product out of that same platform if it makes sense.
Art Hatfield – Morgan Keegan
That's helpful but I guess I was trying to understand, would you have to grow the corporate staff to manage that or can you do that more on a country by country basis?
Albert Neupaver
I think you could do it on a country by country basis. We have a pretty good international team here at corporate.
I do not think that we have to add that much corporate costs.
Art Hatfield – Morgan Keegan
Can you update us on Standard Car and Truck, where that is and any benefits that you've started to derive from that acquisition?
Albert Newpaver
The integration is totally completed. It's been an excellent integration.
The team have done a great job in becoming part of the company. We see tremendous amount of opportunity for that particular business as we've really built it into our OEM rail car business.
Obviously the timing of the acquisition was not great. However, the division is performing to our expectations based on the volume.
I'll give you an example. Two of their small divisions were recently integrated into one of our operating plants out in Ohio.
Those two divisions had about 50,000 square feet. By applying lean principals, we've got it in a 10,000 square foot new building.
It would be a perfect example of lean manufacturing. We just made a recent visit to that plant and we're totally impressed with what the capability was.
They have half as many employees with the capacity to produce twice as much product. And I think that's a good example of how we were able to integrate Standard Car and Truck.
So we're very pleased. It strategically has done everything that we thought it would do, and it's going to be a lot of fun when the recovery comes.
Operator
Your next question comes from Jim Lucas – Janney Montgomery Scott.
Jim Lucas – Janney Montgomery Scott
First question here on the backlog, could you give us an update on where the options stand?
Albert Neupaver
The options are not in the backlog. We have about $125 million of options that we think will be headed our way mostly in the locomotive area.
Jim Lucas – Janney Montgomery Scott
How much of that would be dependent upon potential stimulus?
Albert Neupaver
I don't think any of that. If any, just a little bit.
Those options are already funded. What we did see is a couple of agencies were able to increase the number of options because they were able to get some stimulus money.
Jim Lucas – Janney Montgomery Scott
Number of orders or options?
Alvaro Garcia-Tunon
Number of orders. What I was getting at is, we have seen some cases where they might have ordered X and now they're ordering.
It's not really the options of X plus Y because they got a little stimulus. But most of these options, they're with contracts that were executed awhile back and so they're not dependent on stimulus money.
Jim Lucas – Janney Montgomery Scott
Following up on the geographical expansion part of the growth strategy longer term, you referenced in prepared remarks about the transit market internationally being substantially larger than the U.S. POLI gives you the toe hold into getting in the braking standard in Europe and now entering into Brazil with the service center, and you're talking about pulling some transit in with freight.
As you look at the opportunities to expand the transit business, particularly meeting the braking standards, Europe in particular, what else do you need to do at this point?
Albert Neupaver
It's a matter right now of getting credibility in the market place, establishing an organization that is substantial, that can support our product. You do have to go through testing and in some cases that testing could last up to two years, and many of our products right now are in that testing phase at different stages.
It really is building the confidence of the car builders as well as the authorities over there, and that just takes time. We've got a good product.
We were able to match the technology that we had at our North American transit division with the POLI organization and now we are offering a full, complete braking system. It's taken us a little over a year to get that into test, but we're moving along at a good pace.
It's never fast enough, but it is a process that will result in substantial business into the future.
Jim Lucas – Janney Montgomery Scott
On the margin side, gross margin number is you back out the restructuring nearing 30%, that's a pretty impressive number no matter how you cut it, especially with the volume decline, but we see SG&A in terms of absolute dollars relatively flat year over year. I'm just wondering, has there been any sort of structural change in the cost structure with mix of gross margins being higher but SG&A being inherently higher, and as you come out of this downturn, whenever that may occur, what does the margin structure look like for this company?
Alvaro Garcia-Tunon
You've got at least two questions in there. I'll try to tackle them in order.
In terms of SG&A, when you look it flat year over year, it's about $42 million both year over year. But one thing is between Standard Car and Truck and POLI and this is after the reductions that we put in place right now, so it would have been actually higher but that added about $5 million of SG&A.
The current period includes $1 million to $2 million of restructuring as well so actually when you do the comparison year to year, between those two factors, SG&A would probably been about $6 million to $7 million higher if we hadn't done our cuts. In terms of what it should be going forward, SG&A is always going to vary.
We have a large number of items in there; medical costs, compensation for the entire management team, a number of different items and it's always going to vary some. But I'd say as a run rate, you could probably use somewhere about $4 million give or take going forward.
Jim Lucas – Janney Montgomery Scott
With regards to the gross margin aspect?
Alvaro Garcia-Tunon
Gross margin depends very much on mix and freight is our higher mix business and that's the one that's been down, so when you talk about performance and the things that we're honestly pleased with, we've been able to maintain margin in spite really of the mix working against us. Where we think the margin's going to be in the future, it's tough.
The only thing we can say is we're not happy with where we are, and we're going to improve them. That's the constant goal and we're constantly working on that.
Jim Lucas – Janney Montgomery Scott
Any updates on the capital allocation strategy? We saw you bought back some stock, but how are you thinking about the M&A environment these days?
Albert Neupaver
We are seeing a lot less activity than a year ago obviously and some of the things that you do see are more distressed. We're continuing to be opportunistic.
We're going to be very disciplined in our approach and as usual, we're always working on something. But there is less activity in that particular arena.
Operator
Your next question comes from Kristine Kubacki – Avondale Partners.
Kristine Kubacki – Avondale Partners
With the extreme drop in equipment in the second quarter on the class one railroads, what was the freight after market down in the second quarter?
Albert Neupaver
It was probably down around the 20%.
Kristine Kubacki – Avondale Partners
Are you kind of making that the run rate for the rest of the year, kind of assuming a flat assumption there?
Albert Neupaver
We're assuming that we're bouncing on the bottom right now.
Kristine Kubacki – Avondale Partners
So you're not really forecasting, I took it as rather bullish comments on some of the equipment coming back onto the rails yesterday from the western railroads.
Albert Neupaver
We saw that and it was encouraging but we're assuming we're bouncing on the bottom.
Kristine Kubacki – Avondale Partners
Clearly not changing the guidance at this point.
Albert Neupaver
Right
Kristine Kubacki – Avondale Partners
I just want to clear up something. When you say stability in terms of the transit operations, are you looking at revenues to be kind of steady with the first quarter or the first half of the year or are we looking at kind of a year over year comparison.
Maybe just explain what stability means.
Albert Neupaver
We're talking year over year, but you also have to realize there's large contracts that you complete one, then there's a little lull before another. There's large shipments in one quarter that isn't in the next.
But it is year on year.
Operator
Your next question comes from Steve Barger – KeyBanc Capital.
Steve Barger – KeyBanc Capital
I want to follow up on the guidance question from before. If you're extrapolating out that kind of recent 20% rail car loading rate, if you start to see sequential increases in the back half, which we have seen over the past couple of weeks, how much of a positive impact would that have on results, or how should we think about the sensitivity of earnings to rail loadings on the freight after market side?
Albert Neupaver
That's exactly why in the guidance we have the range, because you really can't predict. One thing that we're hoping for is, when you have a number of vehicles parked, that once the economy turns and they start bringing this equipment out, hopefully we'll see a little spike.
The first thing we're going to see is our after market will pick up and we may see a little bit of a spike there because there may be more work to be done, especially if any cannibalization was taking place while it was in moth balls.
Steve Barger – KeyBanc Capital
It's been a couple of quarters now that we've had hundreds of thousands of parked cars, presumably there has been some scavenging there. Have you factored that into your thinking with respect to second half '09 production?
Albert Neupaver
All we're doing right now, the assumption is we're bouncing on the bottom.
Steve Barger – KeyBanc Capital
If that sequential improvement in rail loadings were to continue, and if transit stays flattish and we know the OE side of freight is at very low levels, so it's not going to get a lot worse, and you're going to get presumably traction from your cost activities, why would quarterly results be worse from here, which is kind of what the guidance implies at the midpoint?
Albert Neupaver
Worse than the first quarter?
Steve Barger – KeyBanc Capital
The first quarter is exceptional, but essentially worse from Q2.
Albert Neupaver
I think it's pretty consistent. Maybe you could follow back up with Tim after the call, but I think it's pretty consistent with the second quarter.
You've got to look at operating earnings.
Alvaro Garcia-Tunon
Seasonality, we always do have a little bit of seasonality in the sense that, and in this year especially, seasonality usually occurs during plant shut down, normally planned shut downs in a normal year. So there's only a little bit of seasonality in the third quarter, but I would say overall, the third and fourth quarter, once you factor in the special items that we've mentioned, are relatively consistent with the second.
Steve Barger – KeyBanc Capital
So if anything, if you saw the rail car loadings start to get better, you would expect some potential upside or may towards the high end of the range just based on the sensitivity of earnings to that specific part of the market.
Albert Neupaver
We don't want to predict it, but we would hope so. That's part of my daily prayer.
Keep in mind, it is one factor in the big matrix here.
Operator
Your next question comes from Paul Bodnar – Longbow Research.
Paul Bodnar – Longbow Research
Question the transit market, thinking about the mix, 18 months in North America and low in stock. We've had the same budget pressure with all the things going on, but on the positive side you have the stimulus money.
Some of that will go into refurb, flat Federal spending and it looks like MBTA may kind of be in a period of declining deliveries coming in the next 18 months. Doesn't that seem like it's going to be flattish market, down, up?
What are your thoughts on what we're looking at here in the near term?
Albert Neupaver
There's probably 50 different projects that we're tracking right now, either supplying or quoting on and that's a normal situation in transit. You're going to see some peaks and valleys in some of the projects.
The last option was just awarded out of New York City just a few months ago, so that will be the last area there. Actually, for MBTA there could be some good activity for us because there's a possible tender coming out for new locomotives.
So you really have to look at each one. The other thing the Obama administration has done to help on the operating side is, they passed a law allowing the 10% of that stimulus money can go toward the operating budgets to relieve some of that pressure.
That's bad for rolling stock, but it's probably good that they maintain their service, because with good service, that's how that ridership is going to stay up there.
Paul Bodnar – Longbow Research
It sounds like kind of almost a wait and see how all this shakes out?
Albert Neupaver
It's a little more than that. I think a lot of the projects that are on the table are going to come to fruition.
I think the long term trend in the market is compelling. By that, I think it’s a very favorable market long term.
I mentioned in the text that the House was recommending a new funding. To give you an example, what they're talking about, the proposal they're thinking about would almost double the amount of money that goes to transit.
The current bill that's passed, it's about $10 billion a year. What they're recommending is $20 billion over the next six years, each year.
They're going to suggest that you get about $10 billion towards high speed rail. That amount of influx into that market place is only good for Wabtec because we're basically a North American supply with content on equipment.
Not every project they start, not every stimulus project has to do with Wabtec, but if the transit industry is growing, then we're going to grow with it.
Paul Bodnar – Longbow Research
If they did do something like that, I would guess a 12 to 24 month horizon before you see a benefit?
Albert Neupaver
That's right. There are a lot of projects that are in the works now but it takes time for some of those projects to come to fruition for us.
Paul Bodnar – Longbow Research
U.K. refurbishment business, would you care to talk about what's going on over there at this point?
Albert Neupaver
What we're seeing in the U.K. is very similar to what we're seeing here.
The freight markets are off drastically. The transit markets are good but somewhat depressed because of the recession and almost years, but it was a later decline that we saw here in the States.
They still had some strength in the fourth quarter and even a little bit in the first quarter and the second quarter, they've kind of mirrored the same type of activity as we have here in North America.
Paul Bodnar – Longbow Research
So that transit market still looks pretty steady?
Albert Neupaver
Yes.
Operator
Your next question comes from [Jason Rogers – Great Lakes Review]
[Jason Rogers – Great Lakes Review]
I just wondered if you have a number for the equity for the quarter.
Albert Neupaver
It's about $700 million.
Alvaro Garcia-Tunon
It's very close. Right now on a preliminary basis, it's $703 million.
[Jason Rogers – Great Lakes Review]
I think in the past you might have given a number for the percent of backlog that you expect to roll off over the next year.
Alvaro Garcia-Tunon
The total backlog is just a little bit over $1 billion and what we expect to roll off over the next 12 months is $565 million, just about 55% to 56%.
Operator
Your next question comes from Art Hatfield – Morgan Keegan.
Art Hatfield – Morgan Keegan
I noticed that the expense line dropped off precipitously from Q1, but could you tell us what happened in Q2?
Alvaro Garcia-Tunon
When you're talking about the expense line dropping off precipitously, are you talking about SG&A?
Art Hatfield – Morgan Keegan
The interest expense line.
Alvaro Garcia-Tunon
We repaid some debt, and in a couple of our foreign locations, we're actually getting slight losses on net of interest income, and we're getting slightly higher interest income in a couple of foreign locations that helped to offset.
Art Hatfield – Morgan Keegan
So the Q2 number is kind of a closer place where that will be going?
Alvaro Garcia-Tunon
Yes. If you're trying to model it, we have $150 million of bonds that we're paying 6%, 7% and 8% on, and right now on our debt we're paying about 2.25% to 2.5%.
We're pretty pleased with the interest rates we've been able to negotiate on. So everything but $150 million, we're paying about 2.25% to 2.5%.
And then interest rates in general on our cash are at about 1%. So if you want to model it like that, that would probably get you in the ball park.
Art Hatfield – Morgan Keegan
Did you give us what the debt balance was for the year?
Alvaro Garcia-Tunon
Right now we're about $352 million total debt and cash is $121 million.
Operator
There are no additional questions.
Timothy Wesley
Before we sign off, since we had some trouble with webcast at the beginning, I know we got it working about half way through the call. I just want to give everybody on the line the digital playback instructions for the phone call.
The replay will be available an hour after the conference ends, so about an hour from now until August 1. To access that replay, dial 412-317-0088 and then pass code you need would be 466#.
Albert Neupaver
Thanks very much for participating today and we will talk to you again in about three months.