美國西屋制動公司 (WAB) 2012 Q3 法說會逐字稿

Good day, and welcome to the Wabtec third-quarter 2012 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

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, Andrew. Good morning, everybody, and thanks for joining us on our earnings call for the third quarter. Let me introduce the people from Wabtec who are here with me -- President and CEO Al Neupaver; Alvaro Garcia-Tunon, our CFO; Chief Operating Officer Ray Betler; and our Senior Vice President, Finance and Corporate Controller, Pat Dugan.

Al and Alvaro will make their prepared remarks as usual, and then we will 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, everyone.

As you saw from our announcement earlier today, Wabtec had another strong quarter, with sales of $588 million and earnings per diluted share of $1.30. The Company is operating well, and this continued good performance, along with our outlook for the fourth quarter, led us to boost our guidance. As we will discuss, our performance was driven by strong growth in both our operating groups -- both Freight and Transit. So overall our business is performing well, thanks to our diversified business model, our strategic growth initiatives, and the power of our Wabtec Performance System.

We are also optimistic about the long-term growth opportunities in our Freight and Transit rail markets, which is being driven by megatrends around the world -- ongoing demand for natural resources, increasing global trade, increasing urbanization, and the continuing need for infrastructure investment.

Based on our results to date, the current outlook for the fourth quarter, we now expect full-year earnings per diluted share to be $5.13 to $5.18, with sales growth now expected to be about 22% for the year. If EPS guidance is about 40% higher than the adjusted EPS last year. As you all can calculate, this bodes well for a strong fourth quarter. Our guidance assumes the following -- slow continued growth in the global economy. I

n the US, we are seeing a general wait-and-see attitude toward major projects, probably waiting for the election to provide clarity on where we are headed in a number of key policy areas. It assumes that the US transit market will remain stable. Our Transit revenues are growing into the fourth quarter, based on our existing backlog of projects in the US and internationally. We assume US freight rail traffic will be stable, with car build slightly down; and lastly, we assume no major changes in foreign exchange rates. As always, we will be disciplined when it comes to controlling cost, focused on generating cash to invest in growth opportunities, and ready to respond decisively to any changes in market conditions.

Let's look at the freight rail market. In North America, rail traffic remains mixed this year. Through mid-October, car loadings were down 1.6%. Now, if we exclude coal, car loadings are actually up 2.6%. Intermodal traffic is up 4.7%. Of the 20 traffic categories that are followed, 11 are up so far this year, with particular strength in autos, petroleum products, and lumber. We see no change in our OEM delivery estimates for the year.

We expect more than 1,200 new locomotives to be built this year. That compares to 1,100 in 2011. Forecasters are expecting around 60,000 or so new freight cars to be delivered in 2012; that compares to 48,000 in 2011. About 12,000 cars were delivered in the third quarter. Orders were stronger than expected at about 15,000. Thus the backlog rose 5% to over 61,000.

Globally, freight traffic is also somewhat mixed. Brazil's MRS had a 10% increase in car loads in the most recent quarter. In Russia, we see that traffic is up 4% in the month of September. In Australia, Genesee & Wyoming's traffic was down about 8% in the third quarter. South Africa, meanwhile, has a major multi-year investment in rolling stock that they have announced. And China has also announced a stimulus program that includes additional infrastructure investments, including investments in the rail sector.

Looking at the Transit market, we continue to see stable markets in the US and abroad. In the US, ridership was up 2% in the second 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. This stability in the North American market continues despite budget issues and political uncertainties.

After three years of short-term extensions and uncertainty, we finally have a new multi-year transportation bill. It is called Map 21. This two-year bill maintains funding for transit programs at about $10 billion a year. That's about where it has been for the past several years. The lifting of some of the uncertainty with this Map 21 signing may help jump start some transit agency programs. If we look outside the US, transit is more of the culture and the economy, and we're seeing stability in the key markets. In Germany, for example, Deutsche Bahn had a 4% increase in ridership in the first half of the year. So even in these difficult economic times in Europe, transit authorities are moving ahead with existing programs. As I mentioned, we are seeing growth in the second half in Transit due to our backlog of existing projects, and especially in our Locomotive division.

We will continue, as we have in the past, to focus on growth and cash generation. Our priorities for allocating free cash remain the same. Our first priority is to fund internal growth programs. These programs have accounted for 72% of our sales increase this year. The second priority -- acquisitions. We've made four acquisitions already this year. And lastly, return money to our shareholders through a combination of dividends and stock buybacks. We bought back $6 million worth of stock during the quarter. Our growth initiatives also have not changed -- global market expansion, after-market, new products and technology, and acquisitions.

Let's talk a little bit about the progress we've made in each of those growth strategies. Global and market expansion -- sales outside of the US were $285 million. That's 24% higher than the third quarter of 2011. Through nine months, international sales accounts for 50% of our total, versus only 33% five years ago. Growth in the quarter was driven by sales of new freight locomotives in Australia, our train control project in Brazil, and acquisitions of Bearward and Mors Smitt. During the quarter, we announced several new international projects, including freight brake equipment for GATX Rail in Europe, and ECP product for Rio Tinto in Australia.

We look at the after-market expansion -- after-market sales were $297 million, or 51% of our total revenues. This grew by 5% compared to the prior-year quarter. We have benefited from train-control projects in the US and Brazil and service and overhaul work in the UK. New products -- sales of new products represented about 30% of our total sales for the quarter. These new products range from next-generation locomotives that meet Tier 4 emissions standards to an oil-free compressor to after-market services in Brazil. Positive train control, PTC, of course also fits into this category. Positive train control continues to be a growth driver, with sales expected to exceed $200 million this year. That compares to $125 million in 2011. We do expect growth again next year.

Acquisitions -- we completed as I said, four acquisitions so far this year, including Winco and Tec Tran in the third quarter, and the LH Group acquisition that was completed at the beginning of the fourth quarter. Acquisitions have helped to drive top-line growth. Acquisitions have accounted for about 28% of our growth year-to-date. And they also offer ongoing opportunities for margin improvement, as we fully integrate them and apply the principles of the Wabtec Performance System.

A little bit on these acquisitions that we've recently made -- Tec Tran is the only US-owned manufacturer of hydraulic braking equipment and related components. This is important, because it helps car builders meet Buy America. Their sales were about $10 million. Tec Tran is a strong addition to our product line with the technology that we didn't have, used primarily on light rail vehicles and streetcars, which is the fastest-growing segment of the passenger transit infrastructure market. Winco -- that is in South America, Brazil, sales of about $15 million -- they are a marketing and sales company with capabilities that include value-added engineering and assembly, service, technical support, and logistics. Winco has an extensive network of customer relationships in the freight and transit market throughout Brazil. It also complements our existing presence in Brazil and expands our global footprint.

The LH group, with sales of about $65 million, is a UK-based provider of maintenance and overhaul services for transit. It complements our existing presence in the UK by enabling us to offer complete overhaul services for passenger transit vehicles and components. That includes engines and transmissions. About 10% of their sales are in non-rail markets.

With that, I will turn it over to Alvaro to talk a little bit about our financial results.

Great. Thanks, Al, and good morning, everyone.

Once again, I am pleased to be able to report our financial results. Sales for the third quarter were $588 million, the second-highest total ever, and 18% higher than last year. Now, this increase, about 60% was from organic growth. Freight group sales were up about 12%, with about half coming from organic growth, and the rest from the acquisition of Bearward. As we expected -- and I think we've discussed this previously -- Transit group sales were up strongly, about 27% higher than the year-ago quarter. About two-thirds of this was due to organic growth. We continue to expect this group to have higher revenues in the second half of '12 compared to the first half. Increased sales were also driven by new commuter locomotive projects, components for new transit cars, and the Mors Smitt acquisition we'd already announced.

Income from operations was also strong this quarter at $97 million. Operating margin was 16.5% versus 15.1% in the third quarter of 2011. We are confident, as usual, that there is room for more improvement over time. We can't give a specific number, but we think there is still opportunities there. Margin performance was driven by several factor -- higher sales volumes, a favorable product mix, and benefits from the Wabtec Performance System. For example, SG&A was 10.2% of our sales in this quarter, compared to 11.6% last year. This is just one example that demonstrates our operating leverage and ability to manage costs.

Interest and other interest expense was pretty stable, about the same. Other income or loss can fluctuate, due a little bit to FX; and we had a small loss due mostly to paper FX translation losses.

The effective tax rate for the quarter was 31.8%, which was lower than the year-ago quarter, as we were able to close out several items at the state and federal levels. Both at the state, we were able to close out a couple of issues, and at the federal level as well. This was compared to the year-to-date tax rate of 33.3%, so if you take a look at our numbers year-to-date, the tax rate is 33.3%, and you compare the 31.8%, this yielded a benefit of about $0.03 a share. We expect the rates to fluctuate over time, but we expect it to be, in the fourth quarter, plus or minus 33.5%. And you can see that in general, this is consistent with prior history. For example, the year-to-date tax rate compared to last year is virtually the same.

Cash from operations were about $83 million in the quarter and $114 million for the nine months. For the quarter, this was a good performance, and we hope to continue that momentum in Q4. Working capital improved slightly, despite our higher sales, and we're starting to see some incremental results from our internal improvement initiatives. For example, at September 30, receivables were $430 million, inventories were $392 million, and payables were $236 million. Adjusted for acquisitions and foreign exchange, we generated cash of about $16 million by reducing receivables, $2 million by reducing inventories a little bit, and payables used up $16 million of cash. Our working capital, our GAAP working capital, what we call GAAP working capital, which is current assets less cash minus current liabilities, was 15.6% of sales for the quarter.

One of the unfortunate effects, it is probably the only down side of our business becoming more global in recent years, and as we continue to expand our sourcing programs into other low cost countries outside of North America -- it causes somewhat of an increase in working capital. Receivables tend to be longer. The days outstanding tend to be longer abroad. And obviously, if you source goods abroad, you have more inventory. But even so, we think we can do better, and we're continuing our initiatives to improve our working capital balances.

In terms of cash, at September 30 we had $282 million in cash, compared to $234 million at the end of the last quarter. Some of that cash will have been used for the acquisition of LH, post the end of the quarter. The debt at September 30 was $433 million, versus $443 million at Q2. A few other miscellaneous items -- during the quarter, we bought back 77,500 shares for about $6 million, and we still have $95 million remaining on our original $150 million buyback authorization. Depreciation for the quarter was $7.4 million, compared to $8.8 million in last year's quarter. Amortization was $3.9 million, compared to $4.1 million last year; and CapEx for the quarter was $8.2 million, compared to $9.4 million last year. Year to date, CapEx-wise, we've spent about $25 million, and we'll probably end up in the low 30s -- $32 million to $34 million, somewhere in that range, versus the $38 million last year. That number is a little bit lower than what we provided last quarter.

In terms of backlog -- the backlog is still at a near record high at more than $1.5 billion. The total multi-year backlog is, like I said, about $1.5 billion. The Transit portion of that is $953 million. The Freight portion of that is $558 million. The rolling 12-month backlog -- what we expect to execute during the next 12 months -- in total, is $1.1 billion. In Transit, that amount is $654 million, which is a record high for Transit, and the seventh straight quarter it has actually increased. For Freight, it was still strong at $447 million. And these figures, of course, don't include about $250 million or so of contract options that are not counted in the backlog until the customer exercises, but we are optimistic about that.

I think that pretty much concludes the financial summary, and I will turn it back over to Al.

Thanks, Alvaro.

Once again we had a good quarter with strong sales, earnings, cash flow, as well as good margin performance. Our 2012 EPS guidance is now $5.13 to $5.18 on revenue growth of about 22%. Longer term, we could not be more pleased with our strategic progress and growth opportunities we see. We continue to benefit from our diverse business model and Wabtec Performance System, which provides the tools we need to generate cash and reduce costs. And most importantly, we have built a strong and dedicated Management team that has taken advantage of our growth opportunities.

With that, we would be happy to answer your questions.

We will now begin the question-and-answer session.

(Operator Instructions)

The first question comes from Tom Albrecht of BB&T. Please go ahead.

Another good quarter here. I think a lot of us -- it is such a murky demand world right now, and I wanted to explore just a couple of things here. There has always been some unusual patterns with freight revenues, and they were off about $50 million from the June quarter. How much was -- how much of that was because rail car deliveries were 4,000 or 5,000 units lower than in the June quarter? And how much of that was just maybe slowdown elsewhere that you may have seen?

And we're looking at second to third, is that correct, Tom?

Yes, the second quarter was $407 million, and you just did what, $354 million.

Yes, what we saw, if we take a look at all of our freight car product groups, of that drop, probably, if you say it was around $50 million, probably $20 million of that was associated with rail car builds. Rail car builds were running about -- the deliveries were 12,000 this quarter, and about the same as the quarter 2011, but obviously, the quarter before we were at deliveries of 17,000 almost 18,000. But we also had less sales in some of our industrial product areas, the gen-sets, heat exchangers that go into oil and gas exploration, the fracking part of the business, that accounted for a portion of it. We also had less sales from our locomotive group into the freight area. We had finished a lot of our freight locomotive sales in the second quarter.

So in total, it probably only accounted for, what, maybe 30%, 40% of that freight drop, and the other part was more finishing a project, which happens, and the industrial heat exchanger area. We also had a little less in freight hardware related to PTC, especially in our MRS project. There was a little less sales in the quarter in PTC freight products as well. So I think those are the four main areas that we saw.

Okay. That's helpful. And then a follow-on, I know the goal is $200 million of PTC revenues this year. Is that pretty even at about $50 million a quarter, or has there been a ramp-up through the year? And maybe you could talk a little bit about what year-over-year growth rate we can think about for transit in the fourth quarter.

Two different questions, I think. The first one was related to PTC. And what we saw in PTC, we were running at $50 million for the first quarter, a little higher in the second quarter. And as I just mentioned, we saw a little decrease, probably about a 10% decrease, and it was all related to the MRS program where that is on a contract basis, so it really depends on how far along are you in the contract, whether you could recognize revenues. We expect that to continue to increase. And as we've stated before, we said that we will be over $200 million for 2012, and we expect it to grow in 2013. We haven't really given a percentage number at this point. That would be something we do when we give out next year's guidance.

Sure. And then lastly, I will jump off the cue, just on transit, your thoughts there? It has been a single-digit grower. All of a sudden, it was 27, and I know it really wasn't all of a sudden. You have you been doing a lot there. But can we now think that for the next three to four quarters, that this may be a 20% plus grower?

I think that we said early along in the year that we would see the transit sales go up in the third and again in the fourth quarter. We think that, that's exactly what we've seen, and we think that it will get to a point and stabilize for a while. We have a lot of confidence early along because of our backlog of projects that we had. So we knew that we were going to get some revenue growth into the third and fourth. And I think that after we have seen that, I think we will be looking at more stable markets in the transit area. And I think that's the beauty of our diverse business model. If you look at a quarter like the third quarter, we really almost totally offset the freight with our transit business, and that's why we have the model that we have for our business.

The next question comes from Art Hatfield of Raymond James. Please go ahead.

I want to follow up on Tom's question about Q3. Sequentially what -- and if I missed this in your commentary I apologize, but sequentially Q2 to Q3, what was the big driver for that, what was it, roughly $30 million increase in revenue in the quarter?

The $30 million, from second to third?

Yes.

The growth in transit was driven -- half of that was acquisitions. The other half was backlog of projects, some of it locomotive, some of it large transit projects. So if you look at the quarter, we really only had an impact of acquisitions about $15 million.

Okay, and then just I was looking at something else, Alvaro, when you went over the backlog numbers. And if I -- just to confirm a couple of these numbers, the total 12-month backlog for the Company, is it roughly $1.1 billion?

That's right.

And then multi-year is $1.5 billion?

That's correct.

Okay. I'm good. That's all I got for right now. Thank you.

The next question comes from Scott Group of Wolfe Trahan. Please go ahead.

Just to follow up on the last couple of questions about the big acceleration in transit revenue, so it has been a couple of years since we -- transit grow faster than freight. How should we think about the mix impact of that on gross margins and operating margins? It doesn't look like there was much impact in the third quarter, but if we think that this is something that continues over the next year, how do we think about that mix impact?

I think that the mix impact of transit, obviously, has a negative impact on the overall EBIT. However, as we've stated before, our continued effort is to strive to improve that margin, especially during the times where we're growing. So I think it probably bodes well for our ability to increase margins even when the freight business comes down a little bit, like it did during this quarter.

Right. That makes sense. Al, you mentioned a couple of times that the strength in transit felt like it was on the locomotive side. Within transit, is that a good thing, or a bad thing if locomotives are what is driving the strength?

It can be a good thing or a bad thing, but it depends on the locomotive and the project, but generally we do well in our locomotive business.

That's helpful. Maybe just thinking about the Wabtec performance, what is the goal every year of we're trying to get this much in savings out of the Company? Is there a target that you set every year, or what percent of inflation do you plan to or try to offset each year?

What we try to do, and we have about 45 different operating divisions that each prepare a budget, and each of those budgets, we expect the division to come in with action items related to margin improvement, with a target, understand a target of around 2%. And it is a combination of sourcing. It is a combination of sourcing, pricing, and the Wabtec performance system. Now, of that three different areas, we know that we're going to have inflation. We're going to have labor inflation. We're going to have material inflation. We are going to have other inefficiencies in our productivity endeavors. And we would like to see about a 0.05% improvement in each division after you account for the negatives that offset that 2%.

So what we are looking for is the continuous improvement of about 0.05% in margins in our budget. That always doesn't happen. Sometimes you have -- you don't get the savings you want, and sometimes you have one-time issues and inefficiencies and more new issues that will impact it. The other thing that helps is if you've got volume growth like we have in this particular year, there's nothing that hides problems better than volume.

Right. Makes sense.

So that's why we have pretty aggressive goals for each of the divisions. It is a very painstaking effort for everyone to come out with specific items that add up to those numbers. Some are able to do it and some come short and some overshoot it.

That's very helpful. Thank you, Al. And then last thing for now, I know you mentioned that you think that PTC is up again in 2013. I know it is really early, but do you think it will be up again in 2014?

It is early to make that statement, and it really depends a lot on the class ones. Keep in mind that we talk a lot about the potential. And the one potential that we've quantified for everyone is related to the onboard computer. And the onboard computer right now, there is about 18,000 to 20,000 locomotives that will need to be equipped with our product. Of that 18,000 to 20,000, only 4,000 have been equipped. Now, some of them have been conditionally equipped, so you have part of the equipment, but we upgrade it. So it is equivalent to about only 4,000 out of the 20,000 that we will need equipped. We have a projection, so it really depends a lot on whether they start adding the equipment during '13 or '14. But you can see -- I think the total opportunity doesn't change, whether they take more in '13 or less in '13, more '14; it is a tough call right now.

Just to follow up on that, doing some quick math, if we've done call it 20% of the locomotives, and you've booked -- I know not all of the $300 million over the past two years is just for the locos.

The freight portion that we booked, we talk about $25 million and then we went to $125 million and then $200 million; it was about $375 million. Of that $375 million, $200 million of it is related to freight.

Is it a bad thing to just take $200 million and multiply that by 5 to finish the other --

There's other things in there. So you just can't take and multiply it. I think what you can do is say that the units, an onboard computer normally costs $30,000 to $40,000, and you can multiply that by say the 16 that's left, and you can get an idea of the potential

The next question comes from Allison Poliniak of Wells Fargo. Please go ahead.

On the MRS project, I remember if I recall correctly, it is a pretty sizable project. I think it goes through 2013. Is there any way to help us gauge, is 30% of the project done so far with the balance to be in 2013 or any way to help us clarify that a little bit?

Yes, and I'm glad you asked the question, Allison, because last time, my crew here convinced me to give a number that may have not been totally accurate.

His crew is mainly Alvaro, and trust me, I heard about it later.

It is a $160 million project. We probably, by the end of this year, will be about halfway through it. We should complete it in 2013, and there is options for another $80 million. And I don't know if we will see those in '13 or whether that will go out to '14. We just don't know. It depends on the performance of the system.

Got you. And then on -- I guess just in general on the --

Last time, we talked more of a larger number.

Last time, I think somebody asked about the option, and I think I gave them a larger number than that $80 million, but we checked it out and it is about $80 million.

About $80 million, okay. And then on ECP in Australia, that has been a nice growth opportunity for you guys. Is there a way to quantify that project or product I guess alone in Australia? Or are 30% of the potential cars that could have ECP getting outfitted? Or where should we think about that number?

You actually, you hit it almost exactly on the nose. It is about 30% of the vehicles that could use ECP now have ECP. And they usually do it by -- it is almost a project basis. So you really have to -- we will get another increment when the next project is taken on. So it is about 30% of the fleet right now.

The next question comes from Steve Barger of KeyBanc Capital Markets. Please go ahead.

If you strip out tank car activity in the quarter, as you noted, there was a pretty big drop in delivery sequentially. And the non-tank backlog is at the lowest it has been since mid 2010. So just given those weaker dynamics for freight cars, are you starting to see more pricing pressure from the OEMs or more competitive pressure in the market?

I'm not aware of any. We've always had it. It is always there. We're striving to give them the best total delivered cost. We're not seeing it. I think that, that is a dynamic that you would see if it does soften. I think the softening in a way -- the fact that the deliveries are at 12 this quarter, I think means that I think that the car builders are trying to use their heads as well as the ultimate end customer, and trying to prevent, I think, a steady state going forward. If you look at 12,000, if that was maintained, that would be a pretty healthy car build going forward.

Right.

If I can add just one comment to that, I guess from a financial perspective, from a CFO control perspective, because I think everybody focuses on tank cars, and I understand why. That is a large percentage of the orders. That is a large percentage of the deliveries. But I think what -- and this is more anecdotal and this is more logic than specific evidence, but I have to believe that the railroads go through the same process that we do here internally at Wabtec, which is that you have a CapEx budget for certain components. And you have certain amounts for track. You have certain amounts for this. You have certain amount for stations. And you have a certain amount for cars. And to the extent that the tank cars are what you need the most, then you go ahead and order the tank cars, and you order fewer of the others.

But I think, this is just to me, more logical than anything else, that as the tank cars get more of an equilibrium, there have been some other cars that they preferred in the capital budget, because they didn't have enough money for everything. And that will revert back to a more normal ordering pattern. We've seen that in the past. And I have to believe that, that is part of the ordering pattern in the future. But they only have a certain amount allocated to cars, and it is going to tank cars right now because that is the highest demand. But once that -- again, once that reaches equilibrium, that should reach a more normal demand rate. So we will see.

It is a good point. And just to take that one step further, do you have an opinion on what car types might be seeing some pent-up demand right now?

Well, I think, it was nice to see intermodal. I guess it is non-intermodal, though. The flat car is seeing -- there is some steel in there, covered hoppers, box cars. It's pretty diverse, It is good to see that diversity. And I think that what Alvaro is saying, it could very well happen. And I've read some consultants feel the same way that you're going to get to the point where you have to order some of these other cars.

And I think that is a good point about intermodal. If you take a look at the stats, and I'm just looking at the ARCI report right now, year-to-date, intermodal, which is -- the traffic has been up 5% to 6% year-to-date, the deliveries have been half of that of tank cars, of non-- they break out the intermodal between five unit articulated cars and others. And so it has been -- intermodal has been pretty strong, and the traffic has been pretty strong. So I think if were you to pick on one, that would probably be number two in demand; I think intermodal would jump right at you.

Sure. So looking at the quarter itself, since you did have a moderation in the freight car build rate, ex-tank, have you seen customers start to slow order activity to get their own inventories levels down, or how are you thinking about channel inventories? And I just ask that since your own inventory wasn't up a lot, but it was up $4 million sequentially in 3Q against a lighter build.

And one thing I don't think we've mentioned too much during the phone call, Steve, but it is certainly a pattern, is that normally the third quarter is slower, particularly in freight. Transit tends to go at its own pace. These contracts are very long, and it takes a while to execute them. So transit tends to go at its own pace. But normally year in, year out, the freight segment experiences lower sales in the third quarter because of seasonality. You have plant shutdowns for vacation. They have plant shutdowns for repairs. And you normally see a little bit of a dip in Q3. What we see in Q4, we will see when we experience Q4, but I think that seasonality is part of the decrease in the demand.

The other thing is, is if you take a look at the portion of our business that is really related to freight cars, I think this quarter gives you, I think again, and I said it earlier, about the strength of our business model, the diversity that we have. When you see a drop from 18,000 to 12,000 cars being delivered, and our net impact is $20 million, and it is totally offset by some of the other areas, this gives you the idea, the strength of that diverse business model that we continually talk about. We are conscious of it. And it is a great product area for us, and we like being in it. But we also realize that, that cyclicality is going to be there. Sometimes it becomes a discretionary purchase, a capital purchase, by the railroads.

And just one more question, and I will jump back in line. I think I may have asked this last quarter, too, and the increase in tank car production sequentially was 8%, but to about 4,500 cars. And obviously, you know that there is a tremendous backlog concentration of tank cars. Any thoughts on where quarterly production of tank cars can go, just as you look through your -- the various customers that build them?

I have read, the other thing I've done, I've read about expansion and a couple of the car builders, and which would mean to me that there is a need for extra capacity to meet the demand. I don't know anything more than that, other than I read it in a commentary area, and it might have been a report that you wrote.

Because again, we tend to be revenue neutral with regard to the type of cars. We don't put any more content, on average let's say, on a tank car than we would on a coal car. So a tank car versus say a coal car is not that critical to our financial results.

No, I understand. I was just trying to see if you had any information on if it is 4,500 now, can the industry build 6,000 or quarter, or 7,000, any idea on what that capacity could go toward?

No, we don't have that information. I'm sorry.

The next question comes from Liam Burke of Janney Capital Markets. Please go ahead.

Alvaro, you mentioned that the CapEx for the year you'd anticipated being in the low 30s, versus last year, which is in the high 30s. Is there anything significant different -- is there any significant difference in those numbers?

Not really. Last year, it was $38 million. I think in the last conference call, if memory serves me right, we said it would be somewhere near that number of $38 million to $40 million or something like that. And now it looks like it is going to be a little bit lighter. And to be honest, we're not like -- we don't have to spend our CapEx budget or have it come back next year. We try and spend what is necessary and what the units convince us is necessary. So that is just -- there is nothing really significant to it. It is just the way they're rolling in. And again, the way we do CapEx, we do what is needed, and if you don't spend it one year, you still get it carried over to the next year. It is not a question of when you do it, so I wouldn't read too much into that.

Okay, so it would probably be on a year-to-year basis. It may step up next year, but by and large, this is a nice reflection on your returns here.

Thank you.

And on the transit side in Europe, it looks like the spending is still holding up nicely. You've got a nice backlog of contracts. With the other two major competitors, Al, are you seeing any price competition?

There is, and it does get competitive now that there is a third player, and I think that what we've tried to do is be a very responsible supplier. We're trying to sell our product on technology and the service and the Wabtec name, and not on price. But I think to protect their marketplace, they obviously are willing to do what it takes to try to protect it. So there is some pressure there without a doubt. But again, since we have a small volume of business there and a small market share, and there is just so much opportunity, we try to be selective in what we go after, and don't try to go after everything. And I think our program is -- I'm feeling good about our incremental success rate, year-on-year. And this week, we will be reviewing the European budget and taking a look at next year and seeing what success we have planned for that.

The next question comes from Matt Brooklier of Longbow Research. Please go ahead.

Hi, Al, question for you, RSI has a 60,000-unit freight rail car number. You talked to the number on the call. At this point in time, and we're roughly two-thirds of the way through October, what is your conviction level that we do hit that 60,000 delivery number? And what is the potential flex either up or down, given your experience through different cycles?

I think if you take a look at what has been delivered so far this year, you had, what, 16, 17, and 1,247, so I think the 60,000 looks good. I think if the build rate stays right there at the 12,000, 13,000, and I guess that's everyone's best guess right now. With the possible -- if we start seeing orders continue to grow and the economy come back, I think that build rate and deliveries will go up next year, but I think most people, most consultants right now are suggesting low 50s to mid-50s is the number they're using. So that's about the only insight that we have on it right now.

Okay, and we're going to through, obviously, a very strong tank car cycle and seeing good benefit in terms of deliveries. But as you look out to 2013, and Alvaro, I think you talked to it previously, where is the potential for catch-up? What equipment types, cars specifically, potentially need a higher rate of replacement in '13?

I would think that if you look at the deliveries over the last year or so, it has been really centered around covered hoppers and tank cars. And we know that coal is right now, the demand for coal is down, for power generation is -- even the export is a little bit down. And so you have -- I don't think there will be demand for the coal cars, but I think that intermodal, the way it is growing, at some point, you are going to see ordering for that type of car. You look at those cars specialized for building materials, I think that -- although right now, in the fracking area, the covered hoppers, I think that's being impacted by not just the shale and the fracking, but also grain right now with the drought, there was an impact, and that could come back drastically. So I think the ones that you haven't seen much deliveries on are the ones that could be the drivers into 2013 and '14.

Okay, and back to PTC, you mentioned that some of the timing in MRS revenue was the primary driver of us seeing sequential PTC revenue decline from 2Q to 3Q. Is that -- I just want to clarify that it was MRS and not on the transit or the US freight side.

That's correct, yes.

Okay.

Actually, it was the decrease in MRS was offset by growth in the US portion.

Okay. So you did see better PTC within the freight -- the US side of the product?

Right.

Okay, and maybe just talk a little bit to transit. US transit opportunity for PTC announced a couple of contracts. Where are we? And I know there's a number of cities or urban networks that need to adapt this technology. You have only announced a couple at this point in time. How should we be thinking about that moving forward?

There's 21 agencies that will need to work with PTC. Right now, we have signed contracts with Metrolink, which is the LA area. We have one with Denver. And we also have signed a contract -- I don't know if we have announced any of this, but we have been working with Amtrak in the northeast. We've got dialogue going on with a number of other agencies in North County, San Diego, Alaska, Railroad, Caltrain. I would think that our conversations right now are going on with most of the transit authorities of some sort.

Now, getting a contract signed with a transit authority is something that doesn't happen overnight, so we could be working a while. We could actually be delivering some product and not have a full contract signed on some of these. And the thing that we've told people about it is, it is hard to quantify. And we use the example that Metrolink has 100 locomotives, and I think we announced $27 million or something like that, contract. North County, in the San Diego area, only has 10 locomotives. So you can see there is relative size to the programs, and it really depends on the scope that we're doing. We would could go to a full scope where we do the prime contract, or we could be a sub just supplying the onboard computers. And we will announce these as they get signed and try to give you an idea that you can better quantify what the opportunity is.

Okay, but again, two thus far announced, and we have roughly 19 to go. Not to say you're going to potentially be involved in those projects, but still a long runway at this point?

That's correct.

Okay. And just one quick little one. Other income below the -- or other expense below the line was roughly $1.4 million. What is in that line?

That's mostly where we're -- most of the cutting, that's where you put your miscellaneous odds and ends, but the largest majority of that number, quarter in and quarter out, are paper FX losses. Those are translation gain and losses on the inner-Company balances, and a few other items. We try to minimize them just to keep the variability out of it. But invariably, you have a little bit of creep in there. So that is normally the large, large portion of that amount.

The next question comes from Kristine Kubacki of Avondale Partners. Please go ahead.

I admit, I'm just trying to get a little bit better read here on the market and the economy. And you mentioned about after-market trends, but I wanted to dive into the after market for like freight US. Are you -- and I know traditionally that is followed gross ton miles growth or decline. Are you seeing any changes there, the cadence due to maybe some of the choppy freight trends among some modes? Is there any disconnect that you are seeing on the gross ton miles, maybe suggesting that maybe the railroads are pushing off maintenance a little bit at this point?

No, we're not seeing that at all, Kristine. As a matter of fact, if you look at the ton miles, which really track the car loadings almost to a T here, it is down 1.7%, and car loadings are down 1.6%. So I was talking to a railroad CEO in the last month, and he said to me, he said Al, if someone told me that coal would be off as far as it is and that we would be in a situation that we're in, and we're still moving as much freight as we did, even with coal off, I wouldn't believe him. And it just shows that the railroads, the traffic is just not that bad considering how bad the impact of coal dropping that we've seen. And I think you add to that the fact that you have the drought and grain is off, so I think it really shows the strength of the class-one railroads and how important it is to the economy. So I just -- in the after market, it does follow, it follows the volume, and I think that we are just not feeling that negativism from the after-market business at this point.

Okay. Very good. And then I can't believe it has gotten me, but on PTC, can you give us a sense on -- there is always sable rattling going on about delays and that, can you give us an up-to-date on where the class ones are and how you're thinking about the 2015 deadline? And then, can you also think of -- give us a little color on how you're think about the competitive marketplace there? Do you see an entrant coming in before 2015? Just some color around that.

I think right now, we used the term during the prepared remark, wait and see. I think that the railroads are in a wait and see about what happens in the election, as to if there is a strategy to continue to lobby for a delay or whatnot. I think the FRA and the railroads have concluded that full implementation will be very difficult by 2015, and -- but they -- I think they are all convinced that implementation is going to happen, whether it be delayed six months, a year, and whether they will get provisional approval so they can operate and roll it out in a more reasonable fashion. I think that is the ultimate goal that people have.

So I think there is still going to be talk around it. But at the end of the day, we're going to have a positive train control system that inter-operates on the railroads. And any delay that exists from a technology standpoint will not be related to Wabtec. We've had this -- this system has been operating five-plus years on the BNSF. Metrolink is talking about taking their system live the middle of next year. Our MRS program, we will start the pilot later this year. So the technology is there. Are the railroads able to inter-operate is a question that I think still exists, and a lot of work needs to be done. And we're going to support the railroads.

As far as competition, I'm sure there is always people that -- we did it, so someone else can do it. We're conscious of that, and we try to be very responsible to our customers and meet deadlines and support the technology. I think that the fact that this interoperability between the railroads gets so complex that it would be very hard for the railroads to try to bring on other systems. And a matter of fact, it would be very costly. But that doesn't mean they can't do it.

The next question is a follow-up from Tom Albrecht of BB&T. Please go ahead.

Hi Alvaro, just a quick question. Given the acquisitions and that, do you have an approximate SG&A and amortization level for the fourth quarter?

Yes, I would say for the fourth quarter, I think the run rate on SG&A, I think the run rate for this quarter was pretty consistent with the second. And I think going forward for the fourth quarter, you can -- it will be roughly somewhere in that range, obviously.

It is about 60.

Yes, it is about 60.

Okay.

We have added LH early in this quarter. So you will see a little addition from that. But what happens with the acquisitions, and we've talked about this before, the first couple of quarters, when they're out of the gate, the net bottom line financial effect is negligible. Because you basically have -- you have to write up their assets to the inventory and the backlog to the estimated realizable value. So until you fulfill the backlog and until you turn over the inventory once, you're basically operating at basically break-even on those items. So the financial -- the net bottom line effect will be negligible, but it will have some effect on the run rate of SG&A.

In terms of what we call purchase price accounting, it is that amortization, that one-time accounting of the inventory and the backlog. In this quarter, it wasn't too much compared to the prior quarters. In this quarter it was about $1.7 million. In the prior quarter, it had been about $0.3 million, so it increased -- the amortization for those recent acquisitions increased by a $1.4 million, a $1.5 million. It was pretty similar to last year; last year it was $1.3 million. So it was similar to last year, higher than second quarter this year by about $1.4 million. And we project that to drop a little bit in the fourth quarter to about $0.5 million or $1 million or so, somewhere in that neighborhood. So it fluctuates a little bit, but it is not too material an amount.

(Operator Instructions)

Seeing that there are no other questions, I would like to turn the call back over to Al Neupaver for any closing remarks.

Okay, we will talk to you next year. Thank you very much.

Thanks, everybody.

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