美國西屋制動公司 (WAB) 2012 Q1 法說會逐字稿

Good day and welcome to the first quarter Wabtec's 2012 earnings conference call. (Operator Instructions).

I would now like to turn the conference over to Mr. Tim Wesley, Vice President Investor Relations. Mr. Wesley, please go ahead.

Thanks, Amy. Good morning, everybody. Welcome to Wabtec's earnings call for the first quarter of 2012. Let me introduce the other people we have here in the room. Our President and CEO, Al Neupaver, Alvaro Garcia-Tunon, our CFO, Ray Betler, our Chief Operating Officerand Pat Dugan, our Senior Vice President of Finance and Corporate Controller.

We've got some prepared remarks that we'll make,then we'll be happy to take your questions. Of course, during the call, we will make some forward-looking statements. Please review today's press release for the appropriate disclaimers. Al, go ahead.

Thanks, Tim. Good morning. We had a strong operating performance in the first quarter, with record sales of $583 million and record earnings per diluted share of $1.22. The Company really hit on all cylinders during the quarter, which led us to pre-announce the results and increase our guidance for the year. As we'll discuss, our performance was driven by strong growth in our freight group. Our overall business is performing very well, thanks to our diversified business model, our strategic growth initiatives and the power of our Wabtec Performance System, which I'll talk a little bit about today. We're in compelling growth markets around the world,but we remain excited about our future opportunities.

As I mentioned, a couple weeks ago, we increased our guidance for the year. Today we affirmed that. Based on our first quarter results and current outlook, we expect our full-year earnings per diluted share to be about $4.80, with sales growth now expected to be about 15% for the year. This EPS guidance is about 35% higher than our GAAP EPS last year, and 12% higher than the guidance we announced earlier this year. Our guidance had some assumptions. Our assumptions are the global economy grows modestly, the freight rail traffic improves with the economy,our transit markets remain stable. and no major changes in foreign exchange rates.

As always, we will be disciplined when it comes to controlling costs, focused on generating cash to invest in growth opportunities, and ready to respond decisively to any changes in market conditions. Let me talk a little bit about the freight rail market. In North America, rail traffic is mixed so far this year. Through mid-April, car loadings were down 1.8%, but if you exclude coal, car loadings were actually up 2.9%. Intermodal, meanwhile, was up 3.6%.

Of the 20 traffic categories that are tracked, 13 are up so far this year, with particular strength in autos, metals and petroleum products. The OEM market drivers are positive in 2012. Forecasters are now expecting that about 55,000 new freight cars will be delivered in 2012. That compares to about 48,000 in 2011. Nearly 17,000 cars were delivered in the first quarter, the backlog remains at about 60,000 cars and itappears that new car orders have stabilized.

As for new locomotives, including kits, the industry should surpass 1200 units this year, compared to almost 1,100 in 2011. Globally freight markets remain fairly healthy as well. In China, for example, railway cargo hit a record high in March, with tonnage increasing by 4% in the first quarter. In the UK, freight traffic was up about 13% in the most recent quarter. In Brazil and Australia, also continue to be strong, although future growth depends heavily on China's economy. Let's switch now to the transit market.

We continue to see stable markets in the US and abroad. In the US, ridership was up 3.7% in the fourth quarter, and 2.3% for all of 2011. In 2012, transit car deliveries will be about 1,000, slightly up from last year, and bus deliveries will be about 4500, slightly down from last year. Looking at US federal funding, Congress passed another extension for the existing Transportation Bill, this one will last until July 1st. We must remember that the Transportation Bill expired back in September of 2009, and what we have seen is just extension after extension.

It's really very uncertain when a new Transportation Bill might be passed, it seems very unlikely to happen this year. However, you must remember that the funding has remained at about the same during these temporary extensions. But a multi-year bill would give transit agencies the planning horizon they need to dust off long-term projects. It would also be a positive indication when a long-term bill is passed for transit. Many agencies are faced with a dilemma, as ridership is increasing, state and local funding remains tight. So some have been forced to make service cuts.

Outside of the US, transit is more a part of the culture and the economy and we're seeing growth in some of the key markets. China's passenger traffic increased almost 3% in the most recent month. Traffic was up 8% in the UK, even during these difficult economic times in Europe, funding for transit projects has remained steady. We will continue to focus on growth and cash generation. Cash remains a priority for us. We are focused on increasing free cash flow by managing costs, driving down working capital, controlling capital expenditures.

Cash provides the opportunity to invest in our [dranic] growth and acquisitions, and return money directly to the shareholders in a variety of ways. At the end of the first quarter, our balance sheet remained very healthy, with net debt of only $117 million. Going forward, we'll continue to invest in our four strategic growth opportunities. Global and market expansion, after-market expansion, new products and technology, acquisitions.

Let's talk about a little bit of progress on those growth strategies. The global and market expansion area, sales outside of the US were $291 million, $46 million higher than the first quarter of 2011. Now running at about half of our total sales versus about one third, just five years ago. Growth in the quarter was driven by sales of new locomotives in Australia, a train control project in Brazil, after-market sales in the UK, and an acquisition of Bearwood in the UK, which closed in the fourth quarter last year. If we look at after-market expansion, our second growth strategy, overall after-market sales were $321 million. That was 55% of our total revenues. This grew by 29% compared to the prior year quarter.

In the after-market expansion area, we also benefited from service growth in the US, as well as, train control project in Brazil and overall projects in the United Kingdom. As far as new products, sales of new products last year were about 35% of our total sales, which demonstrates our focus on this strategy. Our new product programs are both evolutionary, such as our next generation End-of-train device and more revolutionary, such as Positive Train Control. Positive Train Control continues to be a growth driver for us. With sales expected to exceed $200 million during this year, that compares to about $125 million in 2011.

Our fourth growth strategy of acquisitions, we completed several transactions last year. Bearwood, Fulmer Traction, Brush Traction, and an after-market transit business. We continue to review an active pipeline of candidates. Acquisitions not only help us to drive top-line growth, but they also offer the opportunity for margin improvement as we fully integrate them and apply the principles of the Wabtec Performance System. Before I turn it over to Alvaro to talk about some of the financial numbers, I'd like to talk a bit more about our Wabtec Performance System. Because we think it's part of the reason we've been able to generate cash and show improved margins over the years.

The Wabtec Performance System consists of three pillars. Those pillars are lean principals, product development, quality/customer service, and we strive to improve in each of these areas. In the lean area, our lean focus is on continuous margin improvement and eliminating waste in everything we do, from manufacturing to administrative processes. As part of this effort, we look for lower cost sources of raw materials around the world, and over time we expect to migrate our production to lower cost Wabtec platforms and locations. We also strive to offset any commodity inflation with escalators and surcharges, and we selectively increase prices based on that market conditions.

Lean has been a hallmark of our culture for the past 20 years. It still provides a never ending stream of improvement opportunities, as you can see from our margin and cash generation in the recent years. We track our progress monthly, using a variety of internal metrics such as, quality on-time delivery safety. Last year we held more than 600 [keisan] activities throughout the Corporation. That's about 20% more than the prior year. We plan to hold even more this year.

In 2010, we started an internal lean certification program for all of our employees,and we expect that more than half of our workforce will be certified at level one by the end of this year. And keep in mind, you know, our employment numbers keep growing as we add acquisitions. Our focus on lean is ongoing and continues to generate meaningful results and benefits. With that, I'll turn it over to Alvaro.

Great. Thanks, Al. Good morning, everyone. We're proud of the results for this quarter andI'm pleased to be able to review them with you today. Sales for the first quarter were a record $583 million, 28% higher than last year. Of this increase, about 70% were from organic growth. Freight group sales were up about 50%, with most of that coming from internal growth initiatives, as well as rebounding markets, primarily here in the states and in North America.

After-market growth was mainly from expanding our PTC revenues and our service revenues, as well. But however, OEM sales were up 60% as well, from increasing demand for components for new locomotives and freight cars, locomotive sales in Australia and the acquisition of Bearwood, that Al mentioned as well. Transit group sales, for the most part, were pretty stable, as acquisitions and higher after-market revenues mostly offset slightly lower OE sales. OE sales were higher last year, because of a large locomotive order, which was in process in Q1. Some of this capacity in our locomotive manufacturing facility was shipped into freight this year for the orders in Australia, which are classified as freight.

In terms of income from operations, we had a strong performance this quarter, with a record $94 million of profit. This was up 42% compared to last year. Operating margin was 16.1%, versus 14.6% last year. Margin performance, the increasing margin performance was driven by several factors. Higher sales volume, a favorable product mix with more freight sales, and benefits from the Wabtec Performance System, as Al discussed.

SG&A increased due mainly to acquisitions and other factors, but it was 10.6% of sales compared to 12% of sales, in the year ago quarter. Demonstrating the benefit of leverage, as well as, our cost reduction efforts. Interest and other was about the same. Interest expense was about the same. There's a minor item in other expense, which was mostly due to paper FX translation losses. The effective tax rate was about 34.4%, alittle less than last year. That rate will fluctuate, but for modeling purposes, you can expect it to be somewhere around 34% going forward.

Cash from operations and working capital. Cash from operations in the first quarter was only $1 million, which is lower than we might expect. This result was due to a couple of factors, primarily it was due to increases in receivables and inventories, due to our sharply higher sales. But also, we had the negative effect of funding year end items in the first quarter, such as, incentive comp, federal and state taxes, benefit payments and other associated liabilities. If you look back to prior years, you'll see the cash from operations in the first quarter is usually sequentially low for these reasons. That tends to increase in the succeeding quarters. Working capital as I mentioned, increased in the first quarter.

Receivables were $396 million, up about $50 million from last year, from the year end. Inventories were $371 million, up $23 million. One item that affected inventories and it's affecting it more and more, is our expansion of sourcing programs into other low cost countries outside of North America. This causes inventory balances, obviously, to increase due to lead ordering times of shipping. However, we think there are still plenty of opportunities to reduce working capital and we've initiated some new programs, which we think will help.

Obviously, this is a continuing target for us and we'd like to reduce some of these balances going forward. Cash still has very healthy balances at March 31. We had about $269 million in cash, compared to $286 million at year end. And debt -- total debt, we had $386 million on March 31, compared to $396 million at year end. A few of the other miscellaneous items we cover as part of the discussion here, depreciation was $7.1 million, compared to $7.4 million in last year's quarter. Amortization was pretty stable, $3.1 million in both quarters andCapEx was $10.2 million versus $7.4 million last year.

For the year, we had CapEx of about $44 million, -- I'm sorry for the year we're expecting CapEx about $44 million, versus $38 million last year. In terms of backlog, we had another record multi-year in12-month backlog,so backlogs continue to increase. The multi-year backlog, which is the total backlog, was up 3%, compared to year end.

This is the total of $1.6 billion. In transit, $895 million, which was the highest in four years. In freight, it was $694 million. Then the rolling 12-month backlog, which is the backlog that we expect to execute in the next 12 months, was up 10%, compared to year end.

A total record of $1.2 billion in transit. Again, another record of $598 million, almost $600 million. And in freight, $577 million, the second highest ever. With that, I'll turn it back over to Al for a quick summary.

Thanks, Alvaro. Once again, we're off to a strong start for the year, with record sales in earnings, good margin performanceand a record backlog. Our 2012 guidance is now for EPS at $4.80, on revenue growth of about 15%. Longer term, we couldn't be more pleased with our strategic progress and the growth opportunities we see ahead.

We continue to benefit from our diverse business model, and the Wabtec Performance System, which provides the tools we need to generate cash and reduce cost. We have an experienced management team that is truly taken advantage of our growth opportunities. With that, we'll be happy to answer your questions.

(Operator Instructions). Our first question comes from Art Hatfield at Raymond James.

Hey. Morning, everybody.

Good morning, Art.

Al, you had mentioned -- walk through your guidance for the year. And you had earlier commented on that, industry analysts are projecting roughly 55,000 deliveries of freight cars for the full year 2012. Is it safe to assume that your guidance includes that number, and that if we get something meaningfully higher than that at the end of the year, that that could have a positive impact on your results?

That's the number that we have. That's the assumption that we've made for our guidance. That's correct, Art.

Okay. That's helpful. Just a couple other ones. I'm sure you saw that the industry data that came out yesterday, and the market reacted somewhat negatively to the fact that backlog was down in Q1, relative to where it was at Q4, kind of meaningfully. Can you kind of walk how you think about that? I guess the assumption that the market takes from that data, is that the market is cooling off and that demand for freight cars is starting to roll over,and we've reached the peak of the cycle in essence. Can you talk a little bit about that, how we can think about that maybe in a more positive light?

Yes. I chose the word in my prepared remarks carefully,and that is stabilized. I think that the market is stabilizing. When you look at first quarter to first quarter, last year there was an anomaly, in that 36,000 were ordered. This year it's around 12,000,last quarter it was 16,000,so the backlog with deliveries around 17,000, it did drop by about a little over 4,000 cars.

From my standpoint, and what we know, we think it's basically stabilized. If you'll look at the rate of deliveries, that would -- I'm sure that's the reason why you asked the first question. If you analyze the 17,000, you'd get a lot more than the 15,000 we're talking about. So, I think the market's stabilized. I don't think it's anything more than that.

Okay. Final question,and you addressed a little bit, what you did with the operating margins in the quarter. Can we think about your business -- is anything change meaningfully due to what you've done, due to the Wabtec Performance System or with the acquisitions you made? Maybe, how we should be thinking about the margin capability of this business as it -- anything that's caused it to really change the range that this business should operate at?

Yeah, you know, we've continually talked about continuous improvement. That's how we view our approach to margins. Just to refresh everyone's memory, when we go into our budgeting session, we ask every division to do two things. One, they're asked to take a look at their current margin and develop a plan that would allow for margin expansion. The typical goal would be about 2%. We realize that the whole 2% is never going to flow to the bottom line, if we get maybe, a half a percent of it. Because you've got inflation, you've got wage increases, you've got other issues thatall impact that. But if we could get a small increase in margin from each of the 45 reporting divisions, then you add it up and the end result is that we continuously improve.

If you take a look back to 2005, 2006, the operating margin, which we'd like to focus on, was in, the maybe, 10%, 11% range. Now we've broken the 16% operating margin range,and we hope that we can continue to improve that. That's why I really focused on the Wabtec Performance System today a little bit. Because that's the result of it. So a lot of little things. There's no one drastic change. There's no one fundamental change in our business structure. It's just trying to continuously to do -- get rid of waste and the things I talked about.

Great. Thanks, and I apologize, butI have got one last one. Alvaro, did you mention what your CapEx budget for 2012 is?

Yes. I think I mentioned that we expect about $44 million this year, versus about -- let me check just to make sure, $44 million versus $38 million. Yes.

Okay. I'm sorry I missed that. Hey, thanks for taking my questions.

Thank you.

Thanks, Art.

The next question comes from Kristine Kubacki at Avondale Partners.

Hi, good morning.

Good morning.

Good morning, Kristine.

Just a quick question on the sales guidance, up 15%, which is very robust. But given that what you did in the first quarter, and if I, kind of, look out over the next three quarters, it looks relatively flat to down. Can you tell us how much this is due to a conservative view, maybe on the economy? Or is this something unique about the first quarter, why is surged ahead?

It has to do with conservatism. I don't know if it's conservatism about the economy. I think it's more of our conservatism. When you look at the performance in the first quarter, we did hit on all cylinders, as we said. It is the first quarter and we just don't want to get ahead of ourselves.

Nothing wrong with that. Can you give us a little -- I would have thought that maybe the after-market, in terms of freight after-market -- I know you ran into the after-market numbers. But given that coal traffic was down so significantly in the quarter, did that impact the freight after-market any way or was it just purely offset by the rest of the rail traffic out there? I would have thought that maybe heavier car loads and slower car loads, like coal traffic, would have been a higher user after-market.

We did see the impact because of the warm winter. If you look at first quarter 2012 after-market for freight, it was about 52% of our sales, this year was 47%. But some of that is because we had so much growth in some of the OE markets. We did see an impact. That's normally our best quarter of the year for our global services group. We saw the impact that there just wasn't as much traffic, related to coal. The warm weather, when it's colder, there's a lot more damage and repair that is necessary.

Okay. That's helpful, and then you brought up Europe and the spending there is stable. I was hoping you could give us a little bit more color about what is going on in Europe and, specifically, how your penetration into that market, if there's been any breakthroughs on any significant contracts over there?

We continue to make progress. I think last time we talked about some of the orders that we landed. We have a small order that we received, that'sgoing to go on the transit system in Warsaw. It's a Siemens project. We've been actively quoting on some of the new platforms. We've got continued component sales. We're pleased that we're making progress, we'd like to make a little more progress, faster. But I think it's going to take time, as we've always said, in order to penetrate that market and we're pretty happy with where we're at today.

Okay. Perfect. Thank you. Very good quarter.

Thank you.

The next question comes from Steve Barger at KeyBanc Capital Markets.

Hey, good morning, guys.

Good morning.

I heard you say that PTC is going to run around $200 million this year. Did you say what it was in the quarter?

In the quarter it was $50 million.

Okay. And you did $125 million last year, $200 million this year is your guidance, that suggests there's only about $175 million left for 2013, 2014 and 2015. Is that right or is there any update to your guidance? How should we think about that?

As far as guidance -- what do you mean by guidance?

You said $250 million to $500 million--

Keep in mind that $250 million to $500 million was related to onboard equipment only. We talk about three different areas of PTC revenue. One, is from the onboard computer, and that's really where we got the $250 million to $500 million. Last time, we actually went through this on the call, but I'll try to do it again for you. If I can find my PTC files.

Basically, the three component market segments we talked about was the US freight railroad opportunities, $250 million to $500 million. The second, was the US freight opportunity from transit agencies,and keep in mind, we've already announced that we have two major contracts. One for, I think, it's $63 million at Denver and Metrolink Los Angeles, $27 million. A third component of that number, is a PTC market internationally, and we had inked the contract for the MRS railroad in Brazil for $165 million. And we've been, actually getting revenues from that. I think of the $50 million, $15 million of that was related in the first quarter, related to the PTC sales. So when we talk about $250 million to $500 million, I want to remind everyone that that wasn't total, using your term, guidance or opportunity. Opportunity was larger than that. It's just separated into those three segments.

Of the $15 million that was international, so the remaining $35 million, was that more US freight or coming through on the transit side? I guess I'm trying to understand how the class of ones are structuring the cadence of that revenue spend.

It was through both. What was the second question, Steve?

I was just trying to get a better sense for how the class ones are thinking about their revenue spend over in 2012, and in 2013, and 2014, for the big PTC project that we typically talk about in the US freight?

I think that the railroads have put out numbers relative to PTC,and I can't remember the exact numbers on each of them. But they don't expect the number to be that much greater this year than they were last year, and it would go up in 2013 and 2014.

Okay. So for that project, the bulk of it is yet to come?

That's correct.

Okay. Thinking about the freight segment, specifically, are there any big puts and takes that will cause a sequential drop in revenue in Q2? Or should we be thinking that this run rate of around $400 million is the right ballpark, relative to volume, price, mix, PTC, acquisition benefit?Is that where you're going to come in, plus or minus do you think?

Yes. I think relatively speaking, Steve, Q2 will be relatively flat, relatively stable in comparison to Q1 in terms of freight production. But like Al mentioned, and you've mentioned as well, the freight market is stabilizing. Which, actually, we think is a positive because they were basically ordering at an unsustainable rate before. And it's nice to see them go down to a nice level ordering pattern. We actually view that as a positive, and we see relatively stable revenues Q2 to Q1.

Okay. Just thinking about your guidance, broadly speaking, do you think that EPS is basically level loaded across the quarters? Do you think Q2 is going to look basically like Q1?

The only thing we see is quarter three is normally our weakest quarter. Other than that, that's the only seasonality that we would expect.

Okay. But still you must be thinking about some margin expansion in the back half, if your guidance is predicated on 55,000 deliveries that's a pretty nice drop-off in the back half. So you should be thinking margins go up?

You could make up your own model, we have ours.

Okay, one more and I'll just get back in line. Did you give the mix of international sales in the quarterand can you tell us what the growth rate is for international right now?

Yes, international was about 50% for Q1 of 2012, and that's pretty stable again. In the fourth quarter of 2011, it was about 47%. Last year it was about 51% in the first quarter. So, it's hovering right around that 50% level.

Okay. Any change in growth rates or is that relatively stable, too?

That's relatively stable as well.

All right. Thanks. I'll get back in line.

The next question comes from Alison Poliniack at Wells Fargo.

Hi, good morning, guys.

Good morning.

I was surprised to see transit backlog growing so nicely sequentially. Can you talk about what drove that this quarter?

Some of the things that we were able to book, were related primarily to locomotives in the transit area. That's what's driving that backlog.

Great,and then Alvaro, you had touched on some programs to work on working capital. Is there any things that you can elaborate on with those?

Sure. Actually, I think give you a lot of detail. We're a little out of work. Somehow it ended up on my plate. But basically what we're trying to do is do a micro-level effort on a unit by unit basis. Trying to determine why working capital may increase, or why working capital is not at an optimal level, and what we can do to get it there. What we're trying to do, a very detailed answer, but this way -- this is what we're trying to do.

What we're trying to do on a unit by unit basis, is determine what their optimal working capital balances should be. And obviously, with the number of operating units that we have and the variety of markets they serve, each one is going to be different. But each one should have an optimal working capital level and then we're going to try and drive each unit to that working capital level. And it's going to take some time,it's not going to be an overnight success. We believe, over time, it should reduce working capital balances and strengthen our cash flow, which obviously is a key component of our success.

Great. Thank you.

Thank you.

The next question comes from Scott Group, Wolfe Trahan.

Thanks. Good morning, guys.

Good morning.

Just a quick follow-up on one of the last questions on the transit backlog. Should we expect the transit revenue to start improving right away, in the second quarter with the improved backlog? And then just maybe a little bit of color, within the 15% total revenue growth for the year, how are you thinking about that in terms of freight versus transit?

Okay. We don't expect the transit to pick up until the second half. Most of that backlog will start flowing out in the third, with the fourth quarter being the strongest. When you look at the growth, we still think we're going to get growth in both segments. The freight segment will be much -- we'll get more growth from the freight segment than we will transit,but transit will grow during 2012.

Okay. That's helpful. In terms of PTC, I understand that the rail spending should accelerate in 2013 and 2014, assuming that we don't get a delay in PTC spend. However, do you think that your PTC revenue will track the rails and that 2013 is a higher year than what you're going to see in 2012?

I think for that segment of our PTC revenues, you're exactly right. What we've seen so far is that, there's been some ordering for the onboard equipment, but they've got a long way to go to outfit the 18,000 to 20,000 locomotives. I would think right now, that probably no more than probably 3,000, 4,000 cars have been equipped or locomotives have been equipped.

Okay. That's helpful. Are you hearing anything new or different out of D.C. with respect to possible delays in PTC? Is it your sense that if this thing gets addressed, it's whenever they do a longer term Highway Bill.?

It will be tied to the Highway Bill, if anything. I think there's still a lot of fact finding going on right now, because of the statements that were made and they're trying to determine exactly where -- how much progress has been made and how far along we are. There's a lot of work being done to get this done by the dead line. No one has quit their effort to try to do that. I think any kind of delay is going to be more of a political type of decision if this Transportation Bill ever gets passed.

Yes. That makes sense, and then just last thing. So you guys have had great success on the acquisition front. Averaging, give or take five per year, for the past couple of years. What's your level of conviction that we'll see a couple come in at some point over the course of this year?

Yes. We stay very focused on acquiring companies. We're definitely going to continue to be very particular about the company's we acquire. We're going to be opportunistic and make sure it's a good strategic fit for us, and I'm sure you will see additional acquisitions into the future.

Okay. Thanks for the time, guys. Appreciate it.

Okay. Thank you.

Your next question comes from Liam Burke at Janney Capital Markets.

Thank you. Good morning, Al.

Good morning.

You mentioned China in both transit and freight. Obviously there have been several revisions on the prospects for the Chinese economy. How is that translating into how you're seeing the business in 2012?

For China specifically?

Yes.

Yes. What we've seen in China is that -- let me give you a little bit of data that maybe this will help shed some light on it, but if you look at what they spent in the railway infrastructure, construction railway area in 2010. In 2011 they cut that back by 42%. When you go from 2011 to 2012, they're going to cut it back another 15%. But that number is still $63 billion equivalent. Okay?

The US, if we're lucky, out of the spin, is around $10 billion for the US transit market. So, you can see that their investment is still huge and there's a good opportunity there. Now their investment is down in that area. They also have lowered the speed of the trains that we're running at -- I think it was 300 kilometers per hour. They've lowered it down closer to the 200 kilometers per hour.

The impact that's had on us is that we sell a lot of friction products in that market, so if they run the trains slower, we see less usage of the friction products. The expenditures in the transit area, as well as the freight area, continue to go at a pretty high pace and we still see opportunities for growth in that market.

Has the corruption problem and the issues they have, have an impact and made them reset some of their goals and objectives? Yes,as I tried to explain in the investment area. But it's still a massive market with a great opportunity, and we're in a position to hopefully continue to take advantage of that opportunity.

Great,and on one of your focuses on the continuous improvement initiatives, have been to move the price needle upward where you can see that. In general, how has the pricing been in the market?

It's been tough. You know, you have to really be selective. It's in areas where you really are offering a product and a benefit that the customer sees the value in that. But the market has been tough to get those price increases. That's why we need to be so disciplined on the cost side. Especially when you look at the commodity inflation changes and some of the cases we've seen in the last year or two years.

Great. Thank you, Al.

Thank you.

The next question comes from Thom Albrecht at BB&T.

Hey, Al and team. Good morning.

Good morning, Thom.

Hey, a couple housekeeping items and then I want to go back to the revenue discussion. First of all, Alvaro, did you give the shareholders' equity? Then Al, I heard you give a 2011 ridership, but I couldn't tell if there was a Q1 ridership figure. And then your latest loco forecast for 2012?

Okay. In terms of shareholders' equity, I'll take the easy one and leave the other ones for Al. It was about $1.124 billion. Obviously, that may be subject to some minor adjustments when we release the Q, but right now that's the preliminary number.

Yeah. We don't have any 2012 ridership numbers. The numbers I gave were all 2011.

Yes.

They haven't been released. And the locomotive build is 1200 units this year, compared to 1100 in 2011.

Okay. Great. Thank you,and then let me explore that 15% growth rate for revenues. What sort of an organic growth rate are you thinking about in that number? Last year your organic revenues grew a little over 22%. Just trying to understand how much of that -- I think you gave a number, Alvaro, I wasn't sure it was freight or total. That 70% of the --

Actually I was comparing to last year, Thom. This is obviously --

Quarter on quarter, we had 28% of our growth was related to acquisitions. Okay?That's first quarter of 2011 to first quarter 2012. We only had -- if you look at our acquisitions that we had last year, there was one in the first quarter that would not be included at all in the 15% basically. We had two smaller ones that were maybe $15 million a piece. The only one that would contribute much to the 15% growth is the Bearwood, which was maybe $70 million and we closed that in the fourth quarter. So some of that is in that 15% growth. Obviously there's no new acquisitions in that number. So really the only -- I would think that a we're going to be seeing mostly internal growth, would be very similar as we look quarter to quarter, as we go forward.

Let me put a slightly different slant on it, Thom. If you compare the first quarter of 2012 to Q4 of 2011, we only had about $11 million of incremental revenues from acquisitions. So what happens is, you make one midway through the prior year's and as yougo through the succeeding year, the incremental difference obviously decreases. So I think you're going to see most of that 15% is organic. Again, just from the Q4 last year to Q1 this year,we only had about $11 million of acquisitions. I'm sorry revenue from acquisitions.

Right. No that's helpful. And then over the years, it's always been a little bit tricky to figure out transit in the June quarter. I know you had spoke about the second half, resuming growth, particularly by Q4. Last year's transit revenues did rise in the June quarter from the March quarter. I can't tell how much of that was maybe weather impacted systems and it carried on, how much of that was ridership, et cetera.

I think, you know, one thing you have to be careful with in transit, we have a lot of big contracts. We get some locomotive orders that will come through in a particular quarter. That's some of the things that will drive some of the revenue that we'll see in the third and fourth quarters.

That's what I alluded to in my comments, Thom, as well. Because we have a certain capacity to build locomotives. Sometimes that can be freight, as it was in this quarter, when we delivered freight locomotives to Australia. And then other times it can be transit, when we deliver locomotives for transit agencies. So you can see a switch back and forth and it's not really that the business is increasing or decreasing. It's just you're having a slight switch in some of these from transit to freight. Vice versa.

If you look at our transit revenue over the last couple of years, it really has been pretty stable. You know, within a 10% range or so.

So in your comment about the third quarter, has always been your seasonally weakest. That applies from your comments to both freight and transit, is that correct?

Yes, that's correct, Thom.

Okay. That's all I had. Thank you.

Okay. Thanks a lot.

The next question comes from Greg Halter at Great Lakes Review.

Good morning.

Good morning, Greg.

I wonder if you could provide where you think the amortization expense will go for the next couple quarters? It's been sometimes $4 million, sometimes $3 million. Just wanted to get a handle on?

Basically what happens with amortization is, as you have acquisitions, you basically have to write up intangibles in connection with those acquisitions. So it's hard to give a number without being able to forecast acquisitions, obviously. But given where we are right now, you should see -- you know, should be relatively stable to a gradual decrease at some of these assets are fully amortized and taken off the books. But from modeling purposes, I think you can assume the current number with maybe a slight decrease, you know 5% to 10% maybe or something like that. Not a whole lot. You might have to recalculate when we do the next acquisition, assuming it's of substantial size.

Okay, great. And wonder if you could provide some comments on the non-rail products and how those are performing?

Yes. Non-rail makes about 15% of our revenues. They're performing quite well. There's been a lot of activity and growth as you know, the Bearwood acquisition was part of that non-rail group. They produced heat exchangers that are sold in the power generation area. And that has been -- we've seen some nice growth in that particular area. We've seen growth in some of our friction applications outside of rail as well. So it is contributing to our growth and success.

Okay. And any comments that you may have on the ECP initiative?

ECP continues to be making tremendous progress in Australia, and is under test in the Brazilian market as well. I think on the US, with all of the investment that's being required by PTC in other areas, it's been -- although they still run the pilot trains, there's not been a lot of enthusiasm to go beyond that.

Okay. One last one on the PTC side, there is a -- some sort of residual, either software gun grades or service, et cetera, that would be related to that. Which would carry on for years I would presume, correct?

Yes. Anytime you have an installed base of whether it's a electromechanical device, a electronic device or mechanical device, there's a going to be a certain amount of follow-through and service and after-market opportunity. A lot of the electronic after-market -- if you use the thumb rule, it usually is a higher percentage of the installed base. So this particular installed base that we'll have at the end of this program, should be able to generate revenue for years to come.

And I presume at nice margins, as well?

I would sure hope so.

Thank you.

Thank you.

The next question comes from Thom Albrecht at BB&T.

I just had a follow-up there.

Sure.

I think one of the questions that people are thinking about, even though it hasn't been asked is so you raised your revenue guidance from 12% to 15%, but didn't have an increase in the earnings. I know you're trying to be conservative. But was there anything more to raising your revenues, but not raising your earnings beyond being conservative?

When we put out the pre-announcement, we had not received all the forecasts from the various divisions. Once we got everything in and took a strong look at it, with the given earnings increase that we had a better view of, we thought it was prudent to increase the revenues proportionally. I think that has a lot to do with what you would expect in the future quarters, relative to margin and growth. And there is some conservatism that's built into those numbers.

Okay. That's helpful. Thank you.

Thank you.

Our next question is from Thomas Wilkins at Joseph Jekyll Advisers.

Hello?

Yes. Hello?

Yes.

Is this where I ask a question?

Yes. Thomas, you can ask a question.

Yes, this is Thomas Wilkins of Joseph Jekyll Advisers and I'd like to ask what is the correlation between what's happening in the gasoline prices and the Company's business?

I think the one correlation is that we are in the transit markets. And when you look at mass transit and ridership, there's a direct correlation between the price of gasoline and the number of people that choose to use mass transit, versus utilising their own vehicle to get to their place of work, or even to any kind of trip they're making. So that's the correlation there. The other correlation to the price of gas, would be the price of oil. Locomotives are big users of oil, diesel fuel. But trucks are a lot less efficient than a railroad. So you also see some of the freight being transferred from trucks, because of the high price of diesel fuel, to the railroad. So there is a correlation between the two, sir. Any other questions, Thomas?

This concludes our question and answer session. I would like to turn the call back over to Al, for any closing remarks.

Okay. Well, we thank you very much for the participation. We look forward talking to you in a few months.

Thanks, everyone.

Thanks.

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