美國西屋制動公司 (WAB) 2012 Q2 法說會逐字稿

Good day and welcome to the Wabtec Second Quarter 2012 Earnings Conference Call. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Tim Wesley, Vice President, Investor Relations. Mr. Wesley, please go ahead.

Thank you, Steve. Good morning everybody. Welcome to our earnings call for the second quarter. May I introduce the people from Wabtec who are here with me?

President and CEO, Al Neupaver. Alvaro Garcia-Tunon our CFO. Chief Operating Officer, Ray Betier. And our Senior Vice President, Finance and Corporate Controller, Pat Dugan.

Al and Alvaro will make their prepared remarks as usual, and thenwe'll be happy to take your questions. We will, of course, make forward-looking statements during the call so please make sure you review today's press release for the appropriate disclaimers. Al?

Thanks, Tim. Good morning. As you saw from our announcement earlier today, Wabtec had another record quarter. Our sales come in at $610 million, and our earnings per diluted share was at $1.33.

The Company is operating well, and this continued good performance along with our outlook for the second half led us to increase our guidance for the year. As we will discuss, our performance was driven by strong growth in our freight group.

Overall, our business is performing very well thank to our diversified growth model, our strategic growth initiative, and the power of our Wabtec performance system. We are in compelling growth markets around the world, and we remain excited by our future growth opportunities. Based on our second quarter results and current outlook, we now expect the full year earnings per diluted share to be at between $5.10 cents and $5.15 with sales growth now expected to be about 20% for the year.

This EPS guidance is about $0.40 higher than our adjusted EPS was last year. Our guidance assumes the following; the global economy grows modestly,U. S. freight rail traffic is stable with car delivery rate slightly down compared to the first half.

The transit market remains stable with our transit revenues growing in the second half, driven by our existingbacklog of projects. No major changes in foreign exchange rates and our recent acquisitions, Mors Smitt and TecTran, are included. As always, we will be disciplined when it comes to controlling cost.

We will be focus on generating cash to invest in growth opportunities, and ready to respond decisively to any changes in market condition. We'll first look at the freight rail market. In North America, rail traffic is mixed, so far, this year.

Through mid-July car loading are down 1.4% however, if you exclude coal these car loadings are actually up 2.8%. Intermodal by itself is up 4.5%. Of the 20 traffic categories that are tracked, 13 are up so far this year with particular strength in autos, petroleum products and lumber.

In the EOEM part of the freight market both drivers are very positive. We expect more than 1,200 new locomotives to be delivered this year, comparing to almost 1,100 in 2011. Forecasters are now expecting about a 60,000 or so new freight car to be delivered in 2012, new freight cars, that is, compared to 48,000 in 2011. Nearly 18,000 cars were delivered in the second quarter.

Orders were stronger than expected at about 16.4 thousand, 32% higher than the first quarter. Backlog is at about 59,000 cars. Globally, freight markets have remained fairly healthy. Brazil MRS had a 4.6% increase in car loads in the most recent quarter, and in Australia Genesee & Wyoming saw 3.5% increase.

Other countries have announced large investments in their freight rail system. In response to a 10% increase in traffic last year, Transnet of South Africa committed to a large, multi-year capital program. China is talking about another stimulus program with the heavy rail component.

The transit market. We continue to see stable markets in the U.S. and abroad. In the U.S. ridership was up 5% in the first quarter. In 2012 transit car deliveries will be about 1,000. That's slightly up from last year.

Bus deliveries will be about 4,500. That's slightly down from last year. After 3 years of short term extensions and uncertainties, we finally have a new multi-year transportation bill. That's a two year bill. It's called the MAP-21.

The two year bill, which remains funding for the transit program at about $10 billion per year. This is a funding that we have seen in the past over the last several years. MAP-21 may jump start some programs since transit agencies now have funding certainty.

Outside of the U.S. transit is more a part of the culture in the economy, and we're seeing stability in the key markets. Even during these difficult economic times in Europe, for example. transit agencies are moving ahead with projects. The obvious exception are countries like Greece, Spain and Portugal which are not big markets for us.

As I mentioned, we expect to see growth in the second half in transitdue to our backlog of existing projects, especially in our locomotive division. We will continue to focus on growth and cash generation.

Our priorities for allocating free cash flow remain the same; fund internal growth programs, first; second, acquisition and thirdly, return money to shareholders through a combination of dividends and stock buybacks. Our growth strategies also haven't changed. Global and market expansion, aftermarket expansion, new products and technologies and acquisitions.

Some of the progress we have made in the global and market expansion. Sales outside of the U.S. with were $312 million. That's 32% higher than the second quarter of 2011. Through six months, 51% of our total versus about 1/3, five years ago.

Growth in the quarter was driven by sales of new locomotives in Australia, our train control project in Brazil, aftermarket sales in the UK, and the acquisition of Bearward which closed in the fourth quarter. In addition, we won some small international orders for Bogie equipment in Italy, and high speed break disks in south Korea.

Looking at the aftermarket expansion, overall aftermarket sales were $313 million or 51% of the total. This grew 7% compared to the prior year quarter, benefited from our service growth in the U.S. as well as train control project in Brazil and overhaul projects in the UK.

On the new product front, sales of new products last year were about 35% of our total sales, and thus far this year we are running about the same. These products range from new generation locomotives, to oil free compressors, to aftermarket services in Brazil. Most of our PTC revenue also fits into this category.

PTC continues to be a growth driver with sales expected to exceed $200 million this year, compared to about $1 million, $125 million in 2011 and $25 million in 2010. We committed two acquisition recently. Mors Smitt and TecTran. Mors Smitt is an European base manufacture of electronic components for rail and industrial markets.

From specific components are relays, measurement devices and controls for rolling stock and signal. They have sales of about $60 million annually, 50% of which is in Europe, 10% in NAFTA, 20% Asian and 20% rest of the world.

Mors Smitt adds to our product line with a Mission Critical Electronics. It expands international business and has a 25% component. The acquisition closed late in June, so it had no impact on the last quarter.

TecTran is the only U.S. owned manufacture of hydraulic breaking equipment and related components. This helps car builders meet Buy American requirements.

Sales of about $10 million. It is significant and strategic in that it adds to our product line with a technology that we don't currently have, and that is hydraulic braking equipment. This type of equipment is primarily used on light rail vehicles and streetcars, which are a growing segment of the passenger transit market.

This acquisition provides growth opportunities as part of Wabtec given our global reach and financial strength. With that, I will turn it over to Alvaro.

Thank, Al and good morning, everyone. Results for the quarter were pretty straight forward, and I am pleased to give you the details.

Sales for the first quarter were a record $610 million which is 27% higher than last year. Of this increase, about 80% was organic and the balance from acquisitions. Freight group sales were up about 46% with most of that coming from internal growth, as well as rebounding markets.

OEM sales in the freight group nearly doubled due to increasing demand for components for new freight cars, locomotive sales in Australia and the acquisition of Bearward that Al discussed briefly, earlier. Aftermarket growth resulted mainly from expanding our service and PTC revenues. Transit group sales were slightly higher than last year, and 9% higher than the first quarter of 2012 .

We continue to expect this group to have higher revenues in the second half compared to the first half. In terms of income from operation, we had a strong performance this quarter totaling a record $101 million of profits from operations. Operating margin was 16.5% versus 15% last year in the second quarter, excluding the special items we mentioned at today's at press release.

This is the highest operation margin we've had since the late 1990s, but we still believe there is room for more improvement over time.

Margin performance was driven by several factors. Higher sales volume gave us operating leverage, a favorable product mix (inaudible) brake sales as opposed to transit, and benefits from the Wabtec Performance System all helped to result in the improvement. Actually, operating margins would have been a little better but we booked a $2.4million charge in the transit group to reflect higher than expected costs on a locomotive project. SG&A was about the same if you exclude, as last year if you exclude the special item from the year ago quarter.

It was actually lower as a percentage of sales, 9.7% compared to 12.2% in the year ago quarter, excluding the special items. Interest and other, interest expense was about the same, and other income, normally we have a small amount there due mostly to paper foreign exchange translation gains. That can be a gain or a loss and in this quarter it was a small gain.

The effective tax rate for the quarter was 33.7%. This is similar to the rate in the year ago quarter if you adjust for the tax benefit we had in the quarter. If you make that adjustment the rate from the last quarter would have been 33.5%, and I think going forward you can expect it to be 34% or so, give or take a couple of basis points.

Cash from operations was about $30.5 million in the quarter, which isnot as much as we would like, and what happens is the increasing sales are resulting in increasing receivables. We'd like to improve receivable collections as we go forward, but right now they are a little bit higher and they're resulting in cash not being quite what we'd expected.

Working capital increased in the second quarter as you would expect given the higher sales and the recent acquisitions. Just to give you a couple of numbers you can jot down if you like, receivables for the quarter should be around $442 million, inventory $389 million and payables $250 million.

Adjusted for acquisition, our working capital was up about $50 million in the quarter. As percent of sales, which is for us the key statistic to keep track of working capital efficiency, our net working capital was about 15%. This has crept up a couple of percentage points since the beginning of the year. Our working capital is a percent of sales and that's one the things that we're going to strive to bring down as we go forward.

As our business has become more global in recent years as we continue to expand our sourcing program into other low cost countries outside of North American, this also effects our working capital requirements and we need to take that in to account. But we still think there are plenty of opportunities to reduce it, and like I said we will continue to focus our efforts on that.

Cash at June 30, we had $234 million in cash compared to $269 million at the end of the last quarter in 2011, at the end of the first quarter in 2011. Debt, at June 30 we had $443 million in debt versus $386 million at the end of the first quarter.

Most of the increase was due to Mors Smitt acquisition in late June, and we'll be, we'll expect to repay that with cash generated during the year as well as cash transfer from other foreign units. A few miscellaneous items, we bought back almost 300 thousand shares, about 299 thousand during the quarter for about $22 million. And we still have about $100 million remaining on our $150 million buyback authorization from the board.

A few other numbers to jot down, depreciation was $6.7 million for the quarter compared to $6.6 million last year. Pretty stable. Amortization was $3.3 million this quarter, about the same as last year. CapEx was about $6.3 million this year, versus $5.4 million last year.

I think for the year you can probably expect CapEx to be about $44 million, give or take, versus $38 million last year. Our backlog, it's still at a record high. We set a new record slightly expanding the total in the backlog. The multi-year backlog was $1.6 billion. Transit was $963 million of that total backlog, and freight was $629 million of that $1.6 billion. That's the total backlog.

Then the backlog that we expect to execute the next 12 months totals $1.2 billion, and transit is a record $646 million of that, and freight is $531 million of that total.;And with that, I'll give it back to Al.

Thanks, Alvaro. Once again we had a great quarter with record sales, record earnings and backlog and good margin performance.

Our 2012 EPS guidance is now between $5.10 and $5.15 on revenue growth of about 20%. Longer term, we couldn't be more pleased with our strategic progress and the growth opportunities we see. We continued to benefit from our diverse business model and the Performance System which provides the tools we need to generate cash and reduce cost.

We have an experienced management team that has taken advantage of our growth opportunities. With that, we would be happy to answer your questions.

Thank you. At this time we will begin the question-and-answer session. (Operator Instructions). And the first question comes from Allison Poliniak from Wells Fargo.

Good morning, guys. Al, could you just give us some thoughts on the acquisition environment given the macro concerns, or you guys have been pretty active. Are multiples starting to become more attractive or are people sort of giving up on this environment right now?

Our acquisition pipeline is actually very busy right now. As you know, we are very selective on what we try to approach, and we are very disciplined in trying to close the right acquisitions. We are seeing quite a bit of competition in that arena, but there is an ample number of acquisitions we have in the pipeline right now.

Great. And then you touch on this a little bit, butgoing back to Europe, I know it's more of a transit focus market and you guys are really active intrying to grow that region. How has the macro situation really impacted your growth ideas going forward, at least in the next 2 years?

I think we stay on track. We have a very sound strategy, and that is to build a business up in Europe in both transit and freight, although the freight market is smaller. I think there's opportunities for us to participate in that market. We're making slow but positive movements in both of those areas. I think the opportunities are still there, and I think long-term it will be a very good market growth area for us. A good example of that is the acquisition of Mors Smitt, and last years acquisition of Bearward. We continue to want to build that credibility and platform in that market area, which is a much larger market area, especially in transit, than it is here in North America.

Great, thanks so much.

Thank you.

Thank you. And the next question comes from Art Hatfield from Raymond James.

Just a question on the expense lines, the cost of sales line was a little bit higher than we would have thought, but conversely SG&A was a little bit lower. So, I think the net/net was a better overall. Keep talking a little bit about if there is anything unusual going on in those numbers. It looks like SG&A was down sequentially from Q1, just what the drivers were and if that's something that, how we should think about that going forward?

Art, I think we've tried to get everyone to take a look at the operating profit line. The reason for that is we have, because of the large project nature of some of our business, we have a lot of cost to go back and forth between cost of sales, and the SG&A expense lines, and engineering line. What we've really done, internally is, we really stay focused on the operating line. Not that the gross margins and gross profit isn't important and we do look at the metric, but what we do find is a lot of expenses flow between those two lines. And we'd like to get people really focused on that operating margin, which if you go back over the last five years, it's done nothing but incrementally improve, which is really our goal, to continuously improve on that margin.

In terms of SG&A, Art, it's actually been pretty stable and that really helps us on the operating margin, obviously, as we expand sales. If you take out the legal settlement which we accrued last year and adjust for acquisitions, we are roughly at about the same run rate that we were this quarter and last quarter, which is somewhere between 60 and 62. I think going forward, you can model the SG&A somewhere between 60 and 62. It will fluctuate between those amounts. Obviously, we make acquisitions that will change, but that is the best number we have going forward.

Now, that's helpful. we are, as well, focused on the operating margin, but just understanding what is going on with expenses is always helpful.

Yes, mix can like Al said, mix can really effect gross profit, and the classification of expenses sometimes can effect that, as well. Given the, sometimes the percentage of completion accounting can effect that. That's why we focus so much on the operating margin line rather than the gross.

No, no that's very great color. Thank you for your time, today.

Thanks, Art.

Thank you. Our next question comes from Scott Group from Wolfe Trahan.

Thanks, good morning, guys.

Good morning, Scott.

Good morning, Scott.

Alvaro, you mentioned increasing components as part of OEM sales as one of the drivers in the quarter. Can you give a little bit more color there? Is that a new trend? Is that something that you think is a secular opportunity for you guys? How should we think about the margin impact on that when you get more component per OEM sale?

Sure. No, I mean I think the main components of the increase in sales was really the rebounding freight car market, which obviously, are freight car components. And I think that the margins there are probably around the Company average give or take and then strong PTC sales as well, which have higher margins than the Company average. I think those were the two really driving forces in the components sales.

Okay. That makes sense. So when we think about the margins, I know you guys don't give guidance, but on one hand you've got the Wabtec Performance System which clearly seems to be paying some tremendous dividends. Then you have this kind of mixed benefit of freight being a lot stronger than transit. As you look at a couple of years, and maybe that mix, maybe transit starts to grow a little faster. Is the goal to still improve margins beyond that 16% to 16.5% range or at this point would it be to more maintain margins, as you look out a couple of years.

Our goal would be to continuously improve on that margin. And I think if you take a look at even during the recession in 2008/2009 time frame, even with transit taking a larger portion of the total revenue with a $150 million drop in revenue we were able to maintain the margin within 1%. So when you take the Wabtec Performance System, we apply that across all aspects of the business. In those divisions that have lower margins, we expect a larger incremental improvement. It is not just looking at (inaudible), but as we talked before we look at taking advantage of global sourcing. We take a look at taking advantage of pricing. And yes, there will be mixed changes over time but our goal is to really continuously improve on that operating margin line.

Okay, that makes sense. Maybe Al, turning to the highway bill for a second. Maybe talk about how quickly you think you'll start to see some of the project work pickup now that we have a bill. And then on the positive train control side, I know they ended up pulling the language in there that would have delayed PTC. Do you think, at this point, that a delay in positive train control you feel comfortable is not going to happen, or do you think there is still a chance for that at some point in another form of legislation the next couple of years?

On the transportation bill, I think the fact that you are taking away some of the uncertainty of the funding really are out year type of positive impact. We are seeing the impact right now of spending that was, or funding that was put forth a few years ago. So I don't see it an immediate impact in the transit area from the highway bill. It's those long term projects that we really want to see.

You are correct that the bill, there was a lot of pressure, lobby pressure, to put some type of delay for PTC into the transportation bill that never made it. I think there will be continued pressures as we would go forward to have some type of delay. As far as do I feel that there will be a delay or not. I really cant... I don't know. I wouldn't say with certainty that there isn't one,but what I can tell you with certainty is that I don't think it would have a major impact on how we see things that will occur over the next few years. There is still a lot of work to be done. Right now, the progress is very positive. We are going to go from lab testing to field testing on the vital PTC system probably late this year into next year. We've already got a product safety plan on a non vital system that has been submitted with BNSF. They have been operating in our system for five years. You will see we are going to be pushing to have the metro link system up and running on a BNSF type system sometime in 2013. In 2013 we will have committed the MRS Brazilian signalling project. One thing for sure, we are not going to be a reason for any type of delay and that is WABTEC. I can't comment on the railroad and the other participants in the area but I'm sure... I'llassure you they are working hard to try to meet that deadline, and we will see how it goes. I think the most complex thing that is still left is the fact that we have a system that inter-operates. That means that every one of the railroads can communicate with each other as well the transit authorities. That is where a lot of the testing has been focused on in the last few months.

That is great color. And just last question, when we think about the acquisition environment, I know you said it still feels very active. How many potential, what is the universe of potential acquisitions out there. I'm not saying what you are looking at now, but when you think about long-term. Are we thinking about, are there hundreds of companies, thousands of potential companies that could fit? I'm just trying to get a sense on the potential universe. And then on the...

The universe, and that's one of the things that we try to do strategically is we always try to keep that. We call it making the pond bigger. How do you make the pond bigger? First of all, you look at the markets that you're in. And I think that I've been very pleased with the amount of opportunities we've seen in the rail industry. Both transit and freight, aftermarket, OEM, wayside versus rolling stock. I think there is a lot of opportunities there. We also, as you know, we have about 15% of our business outside of the rail area. And these are technologies that we know. They are core competencies of ours. And that expands that pond of acquisition opportunities that we could look at. What we don't want to do is get into areas that we don't have competencies in. And it would distract our management team from doing what we are doing, and that is focusing on a very compelling industry, and that's the transit and freight rail industries. I can't quantify it for you, but I can tell you thatwe have been very pleased with the number of opportunities we get to look at. It is not like you got to go find one, and you are desperate to close it. That's not how we approach it. We have ample opportunities, and we are very selective what we go after.

Thanks for the time. Appreciate it.

Thank you.

Next question comes from Matt Brooklier from Longbow Research.

Thanks, good morning. I jumped up...

Hi, Matt and welcome. You are new to group, right?

I am new. Thank you for the welcome. I jumped on slightly late but was curious to hear if you provided how much PTC revenue was booked in the quarter?

We expect -- we had revenues about $50 million in the quarter, and that is on track. We expect to have $200 million of revenues in 2012.

Okay, and that $200 million number, I think in the release or I heard somewhere in call, the number is now slightly above $200 million? Has that changed, or is that similar kind of expectation to where we were previously?

It is similar to where we were. I think it will be right around the $200 million, probably slightly higher.

Okay. Getting back to the highway bill, and the bill excluding any language to potentially push out the mandate for PTC implementation, I'm just curious to see if any of your customers were maybe waiting for that bill, and waiting for outcome of that bill with respect to the timing of their PTC kind of product adaptation. Has there been a change in mindset posed to the highway bill getting passed with no delay language in it?

We didn't see a lot of delays because of that. I think everyone is feverishly working to get there. I don't think maybe of the people are holding back. Now, maybe, I think the only area would be the onboard computer. There is a question on how fast do you want to do that. I think if there is any one area that they may have held back in it would be equipping, not new locomotives but more of the older locomotives. Until you get into field testing you wouldn't need them any way. I don't think we saw any delay because of it.

Okay. Thank you for the time.

Thank you. You're welcome.

Next question comes from Kristine Kubacki from Avondale Partners.

Good morning.

Good morning, Kristine.

Can you give us an idea of how much of the PTC this year you expect is outside North America?

Yes, I think this year we have probably I would say 30% outside of the U.S. and transit would be about 20% and 50% would be freight U.S.

Okay. That is helpful. I guess my question is given that Brazil is a pretty big chunk, and you talked about that it's going to be mostly finishing this year. I was wondering as we think about the transition for next year, and obviously we didn't get the delay and we're going to more North American led PTC spending next year, do you think you can out grow that $200 million in next year given that there is no delay, and the railroads still have a lot of the spending left to do before the 2015 deadline?

Okay, first, I will address the MRS. There's a big chunk still left next year. Not only that, we are on phase one of a three phase potential, four phase potential. Although the other phases are not a guarantee at this point, I think that if the system is up and running there's other section of the railroad where there, you would expect them to apply this. There is other international projects, as well, that we are taking a look at. I think that first of all, our international PTC we hope will continue into the future and grow. As far as the U.S. spending as we have said in the past, I think 2012 is a kind of a little bit of a stepping stone into 2013 and 2014. I would imagine most of the onboard work would happen in those two years maybe towards the second half of 2013 all the way through 2014. And that is obviously a big chunk.

The other thing is what we haven't quantified and is still out there is there's 21 transit agencies that are going to need to have some form of train control that is going to have to inter-operate with the class ones. Although those projects, some are small some are large, I think we have only announced signing contracts with two of them right now, and that's Metrolink that we'll have something operating next year. And the other one is in Denver. In the Denver project, we have about $63 million in setting up the system. We also have components that add to that. That project run all the way out to late 2014 into 2015 since it's a new railroad. I guess what we are saying is that we expect it to grow.

That is great. That helps out a lot. I guess maybe you are answering my next question. In the past, you talked a little bit about competition on the PTC whether it was through licensing, but not as much lately. Do you think that there is still competitive pressure still out there that you have to do something, or because of the speed of most of these projects is that that prohibits that at this point?

I think there's always competition, and that's why I think that other people are involved in the whole PTC implementation. We are working very closely with a lot of our customers competitors. It is a total system. What we are supplying is only part of that system. We have the ability to put a turnkey installation in with our engineering and design capabilities, but we still have to rely on a lot of other people to interface with us. That interface will continue, and whether we will see some competition at some point on the specific products that we offer? That's always is a possibility. Never under estimate your competition.

Okay, thanks. Congrats, guys.

Thank you.

Thank you. The next question comes from Greg Halter from Great Lakes Review.

Good morning, guys, and congrats on the very fine results.

Thank you, Greg.

I know you've a chunk of debt. I think it's at 6 7/8...

You don't need to bring that up, okay?

Oh, yes. It is kind of high that's why I'm bringing it up. Just wondering what's going to happen with that?

Alvaro can explain that better than me, so I'll let him explain it. But I don't think it's (inaudible).

I'm not sure what the question is, Greg?

It is obviously coming due in 2013... which part of the year it is done.

Yes.

And I'm just wondering which part of the year it's due? I don't know exactly when and what you plan to do with that?

It is due in July. And we have enough room right now in the revolver to be able to basically redeem those bonds, and we expect to maintain that amount. If for some reason we did something, say a large acquisition, for example, that caused that amount to not be enough to decrease, it would actually increase the facility. We are planing for that so that we basically we don't... like you all do, we don't want that liability turning current and as long as we retain the ability to redeem those bonds under the revolver, we're okay. So, we've got that covered.

And presumably...

Well, we do that's still, obviously, we're in a very very favorable environment, and there are a number of options open to us. And as we get closer to the redemption date, then we will evaluate those options.

You mention the cash amount, $234 million. Where is that located geographically, and if it's outside of the U.S, any plans to repatriate any of that?

The benefit of that cash is it's mostly outside the U.S. We have some here in the U.S. and we will apply that against the resolver in the normal course of events. But the large majority of that is outside of the U.S., and one of the benefits of these foreign acquisitions like Bearward is Bearward utilized those euro cash balances. And Mors Smitt utilized the remaining portion for the most part of our euro cash balances. But we can take some others from other countries, and apply it there. It just takes some time to transfer it tax efficiently. But over time, we should be able to take some of that cash and use it for foreign acquisitions.

That is why we keep it over there is for our growth opportunities.

Okay, great. And one last one. There's obviously been a lot of discussion on PTC, but I think what could be bigger over the long, long-term is the ECP. Just wondered if you could make any comments on your latest contract there, and what you see going forward?

We are really excited about that technology, and I think that if you add the two contracts together that we got down in Rio Tinto in Australia, you are looking at $21 million and $29 million. You've got $50 million being invested by just one railroad in Australia. They are definitely seeing the benefits. I think the benefit are very clear. I think that this technology will eventually be adopted globally. It is just going to take time. It is a very expensive investment for the railroads, and you have to get a return on your investment. I think the biggest problem we have in the U.S. is the way we run our railroads. Where you take rail cars from one class one and you carry it so far and then you give it to another. And you have a lot of the product is leased. The person that's buying the car is not the one getting the benefit from it. The only kind of no brainer application for this technology right now is UniTrains. These are trains that would run back and forth and be owned by the operator. And we have seen pilots and some growth in that area. We are running tests now in South America on large freight trains. We've had the product has been adopted in South Africa and Australia. So, yes, I think it is going to be a bigger opportunity overtime. It is just going to take a long time. I'm talking multiple years out before this technology is adopted.

Thank you.

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

Thanks.

Good morning, Steve.

You talked about the transit growth rate being better in the back half, and getting some contribution from locomotive. Can you quantify what you expect those growth rates to be, and maybe tell us how big the contribution will be from locomotive?

What we are going to see, I can't quantify for you Steve, but I will tell you if you look at a 60,000 rail car build, and we have seen 35,000 already delivered, our forecast would indicate there be less rail cars built if you believe the 60,000, which some people are putting out. On the positive side. we've got the contribution of acquisitions which you quantify, and then we have contribution that is favorablefrom our locomotive contracts, some of which is going to flow out in the second half. You can get pretty close to figuring that out. Okay?

Okay. Just in terms of the locomotive contribution, can you tell us how that margin compares to the rest of transit, or just help us think about what the margin on that could be.

That margin would be less than the Company average.

But more than the rest of transit?

Could be about the same.

Okay. That is great. And since you brought up rail cars, you know shale plays a (inaudible) and a huge catalyst for this rail car cycle. Tank orders are now 70% of backlog. I'm just curious, has the backlog ever been this concentrated towards one car type, and does that matter to you?

Well, the only reason why it matters is the message you read into it. The type of car, really, we're agnostic, it doesn't matter. But when you see that concentration, I think you are talking about, correct me if I'm wrong, but 83% of the orders were in tank cars, I think.

I think that is right.

And if you look at the other categories. If you were an optimist, how you would view that is there was such a concentration in tank cars the other ones will catch up. If you are a pessimist, you'll say well, the tank car can't carry the load forever. And one thing for sure, we are not going to see a lot of coal cars going forward, the covered hopper, I think, got ahead of itself, and probably tank cars are getting ahead of themselves. But you still have to support the intermodal, and there wasn't a lot of intermodal activity on orders or deliveries.

I don't think we have ever done a statistical summary of like how much is any one period is one particular type of car. I know just from having been an around a little bit, I mean, I remember when coal cars were real hot because you had the aluminum coal cars supplanting, which were much lighter, and much more efficient, supplanting the older cars. Then you know, intermodal was real hot. So, you do go through periods in a market where a certain type of car will predominate over the other. And you have just a wide variety of cars, and over the long-term they tend to average out.

I think the only one that has been consistent is tank cars during my 5 to 6 years, 6, 7 years here. Tank cars have seemed to have always a been more consistent one, but intermodal, with traffic up 5% over 5%, at some point you expect that to pick up. Covered hoppers have come back. It depends on the harvest and not just on fracking. .

Right. And as you guys are well aware, there's four manufacturers of tank cars, one of which is private. Do you have an opinion on industry capacity per quarter or per year for tank cars?

We should know... I should now it better. But I don't think it off the top of my head. I have seen statistics of what the capacity was, but I would be guessing if I gave it to you.

Our preference is they don't expand capacity. Build them all, and then a bit of slump and then have to shutdown. We actually prefer a smoothing of that curve a little bit. And they seem to be able to be handling it, right now. We are not hearing that anyone has backed up that can't meet delivery dates I'll put it to you that way.

Okay. Great, thanks very much.

Thank you.

Thank you, and the next question comes from Sam Eisner from William Blair

Thanks, very much. Good morning, everyone.

Good morning, Sam. How are you?

Just had a couple of quick clean-up questions, here. Maybe if we look at the margins, obviously, you had pretty substantial year-on-year margin expansion here. Is there a way to kind of parse out what buckets you really gained that margin expansion. Is it primarily leverage. Is it pricing? Is there a way to kind of drill down and see where you guys are really getting the leverage on the margin?

Yes. We do drill down, Sam. There is no question contribution margin when you are at, I think 22% when compared to last year's quarter. That is pretty good for us. I think volume is obviously a large factor but it is not the only factor. When we get into our budgeting cycle, we look for every division to come in with some type of improvement on through our Wabtech Performance System, through sourcing and pricing. We track that ever month and it is called priority deployment. Every division has goals and objectives for those, and we plot it. We could break it down individually on how much each of those contribute to that margin improvement on a divisional basis and if you roll it up, you'll see the volume impact. Volume helps volume helps you cover up mistakes there's no question about it. The other areas are contributing and they are significant.

From a pricing standpoint? I mean how would the pricing go in the second quarter relate to the first quarter maybe last year?

I don't have that information that I could give you off the top of my head. I could tell you that pricing has improved quarter-on-quarter. It is a small amount, but it has improved. I think on an annual if basis if we were able to get a .5% out of pricing we would be very happy.

One of the benefit of the environment is you don't... this is kind of an addition by subtraction, I guess. But you are not expected to cut your prices as you would if things slowed down so actually that helps pricing as well that you are actually getting your price. You are not getting that large an increase but you are not subject as much to discounting, as well.

Understood. You mentioned on the MRS track that this is really only phase one of the... the phase one, I guess, equates to about $162 million of revenue for you guys. Would phases two, three and four be of similar size? What is the...?

It is a fraction of that. It's probably, if everything went it would be probably less than half.

So phases two, three and four would be less than half of phase one?

Pat is correcting me. Hold on. What do you think it is, Pat?

It is about equal if all those phases were.

If all four phases (inaudible).

I think that's probably closer, yes.

Okay. In terms of timing of how those projects are being bid on are those being currently looked at? What do you think...

There's no discussion. We're got to get this operating before it is even discussed, and probably why it is on the tip of my tongue, here.

We don't want to get ahead of ourselves. We want to go ahead and finish the contract. Make it... make sure we are operating properly and then we'll do the other one.

Fair enough. Thank you very much.

Okay, thanks.

Thank you and the next question is from Liam Burke from Janney Capital Markets.

Thank you. Good morning, Al. Good morning, Alvaro.

Good morning.

Al, you have two major transit competitors in the international markets. Part of the discussion has been, look, we are a viable number three and we can take share. How are you making, are you making progress in that area?

Yes we are making good progress. We've got components that are being qualified and tested and certified. We've got some systems we're selling. And they are small platforms but they will glow over time, so we are making good progress.

Great. And Alvaro, $44 million is what you you expect to come in the CapEx side this year?

Yes, somewhere around there.

Are there any outstanding projects in there or is that just maintenance to support your expected growth.

I'm sorry. I didn't catch what you said, Liam. Are there any what kind of projects? I didn't...

Do you have any one-time projects in that number, or is it just supporting your normal growth.

I'd say most of it is supporting the normal growth. A little bit of replacement, we try to do what people, other people do, which is make it last one more year. But there is always a normal replacement cycle. But it is more growth and expansion and trying to fulfill the strategy than anything else

Great. Thank you.

Thank you.

Thank you. (Operator Instructions). Okay there are no more questions at this time.

Thank you very much.

Thanks everybody. See you in a few months.

Thank you that concludes today's teleconference. You may now disconnect your phone lines. Thanks for participating, and have a nice day.