美國西屋制動公司 (WAB) 2012 Q4 法說會逐字稿

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

(Operator Instructions)

Please note, this event is being recorded.

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

Thank you, Denise.

Good morning, everybody, and thanks for joining us on our earnings call for the fourth quarter and full year. Let me introduce the Wabtec people who are here with me, Al Neupaver, our President and CEO; our Chief Financial Officer, Alvaro Garcia-Tunon; Ray Betler, our Chief Operating Officer; and Pat Dugan, our Senior Vice President, Finance, and Corporate Controller. As usual, we'll make our prepared remarks with Al and Alvaro, and then we'll be happy to take your questions.

We will, of course, make some forward-looking statements during the call, so we encourage you to review today's press release for the appropriate disclaimers.

Al?

Thanks, Tim.

Good morning. We had a strong operating performance in the fourth quarter, with record sales of $610 million and record earnings of $1.34. As a result of this strong finish to the year, we ended the year 2012 with record sales, and earnings, and a record backlog of more than $1.6 billion. Wabtec finished 2012 as the only company in the United States, on any exchange, whose year-end stock price has increased for 12-consecutive years. We accomplished this during a period that included two recessions, one of which, I think you'd all agree, was probably the worst that we will ever experience. Clearly, our business is performing very well, thanks to our diversified business model, our strategic growth initiatives, and the power of our Wabtec Performance System. We are optimistic and excited about the long-term growth opportunities in our freight and transit rail markets, which are being driven by megatrends around the world. These trends include ongoing demand for natural resources, increasing global trade, increasing urbanization, continuing need for infrastructure investment, and the demand for more environmentally friendly technology.

Today, we also issued our 2013 guidance. Based on our current backlog and our outlook, we expect full-year earnings per diluted share to be about $5.85. Along with this will come sales growth of 8% to 10% for the year. This EPS guidance is about 13% higher than 2012.

Our guidance assumes the following. Slow growth in the global economy, the US and European transit markets will remain stable, with the emerging countries' transit markets driving growth. Our transit revenues should grow, based on our existing backlog of projects, in the US and internationally. The third assumption is that US freight rail traffic will be stable, with OEM locomotive and car builds slightly down. So far this year, traffic is slightly down from one year ago. Fourth assumption -- no major changes in foreign exchange rates, and we expect to have a slightly lower tax rate. We have also included our most recent acquisition, Napier, in our guidance. 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 first look at the freight rail market. In the US, rail traffic is mixed and was mixed in 2012. For the year, carloadings were down 3.1% and revenue ton-miles were down 2.4%. However, excluding coal, carloadings were actually up 3%. Intermodal traffic was up 3.2%. Of the 20 traffic categories, 10 were up, with particular strengthen autos, petroleum products, and lumber. So far in 2013, total rail traffic is down slightly, 0.7%, although it was up 2.2% in the most recent week.

In 2012, it was a good year for OEM deliveries, with 2013 expected to be slightly lower. About 1,200 new locomotives were delivered the last year. We expect that to be around 1,000 to 1,100 this year. Forecasters are expecting anywhere from 50,000 to, maybe, 55,000 new freight cars to be delivered in 2013, this compares to 59,000 in 2012. About 11,800 cars were delivered in the fourth quarter. Orders were about 11,000, so the backlog remained, about steady, at around 60,000 cars. This compares to deliveries of 12,300 in the third quarter and 16,700 in the fourth quarter of 2011. Globally, freight traffic is also mixed.

Looking at transit. We continue to see stable markets in the US and abroad. In the US, ridership was up 2.6% through the third quarter of 2012. In 2012, transit car backlog increased about 10%. We expect deliveries of about 900 units for 2013. Bus deliveries will be about 4,500 in 2013, and that's about the same number that we had in 2012. This stability in the North American market continues despite budget issues and uncertainties about a long-term transportation bill.

As you all remember, after a period of about three years of short-term extensions and uncertainty, Congress did pass a new transportation bill, that's a two-year bill, called MAP-21. This two-year bill maintains funding for transit programs at about $10 billion, about where it's been for the past several years. This bill was passed in the fall of 2012. Outside of the US, transit is more a part of the culture and the economy, and we are seeing stability the developed markets and growing in emerging markets. In Germany, for example, the Deutsche Bahn had 4% increase in ridership in the first half of the year. In France, SNCF saw a 6% increase. So even in these difficult economic times in Europe, transit agencies are serving their customers and moving ahead with existing products and projects.

We continue to focus on growth and cash generation. Our priorities for allocating free cash remain the same -- fund internal growth programs first. This accounted for 67% of our sales increase in 2012. We invested $36 million in capital expansion, with most of that focused on growth opportunities. Secondly, we'll focus our cash generation use on acquisitions. We spent about [$150 million] on four acquisitions in 2012.

We will also return money to shareholders through a combination of dividends and stock buybacks. In 2012, we bought back 607,000 shares of stock for about $47 million. In the fourth quarter, we bought 231,000 shares for about $19 million. We also increased our quarterly dividend from $0.03 per share to $0.05 per share, earlier in 2012. We are focused on increasing free cash flow by managing cost, driving down working capital, and controlling capital expenditures.

Our growth strategies, also, haven't changed. Let's talk about some progress in these strategies. First, global and market expansion. Our sales outside of the US were a record $1.2 billion in 2012, that's 30% higher than last year's total, now 50% of total sales versus one-third five years ago. We showed good growth in Australia, South America, and China. We also had growth in non-rail, which is, now, about 15% of our total sales.

In after-market expansion, we saw sales of $1.3 billion, another record, that accounted for about 54% of our total. This is growth of 16% compared to the prior year. This growth is due to both, acquisitions and internal growth initiatives, such as expansion of our locomotive services in the US and continued expansion of our service center in Brazil. The third strategy -- new products. We continue to have tremendous focus on this effort, with about one-third of our total annual sales coming from new products. We define new products as those introduced in the last five years.

We have many internal development projects, such as -- electronic braking; an oil-free compressor; locomotive services; and an integrated brake system for the European freight market; and of course, positive train control, which gets most of the headlines. PTC represented about $215 million of our sales in 2012. We expect more growth in 2013, as we continue to work with the railroads and other industry suppliers to deliver an inter-operable system by the 2015 deadline. As you know, there has been discussions about extending the deadline. We certainly can't predict whether that will happen or not, but we have analyzed how the delay would affect Wabtec, and we do not think it will have a meaningful impact on our business.

The last growth strategy is acquisitions. As I stated, we completed four transactions last year and have already closed one this year. Combined, the 2012 acquisitions, and the ones we closed at different points in 2011, contributed incremental revenues of about $128 million in 2012. About 50% of that growth was in transit and 50% in freight. That total represented 33% of our growth in 2012.

Let's talk about our most recent acquisition, Napier Turbochargers, for a minute. Napier has about $55 million in revenues. They manufacture turbochargers and components for high horsepower engine. It's a growing business in good markets. Power generation represent about 70% of their revenue; and sales, within the marine area, contribute about 30% of their sales.

They have good IP and strong technical capabilities. Their install base of more than 18,000 turbochargers in use around the world provides a strong recurring after-market revenue. They have a strong customer base -- Caterpillar, Hyundai, Wartsila, and other OEM engine manufactures. This acquisition meets all of our strategic goals. New products, after market is 60% of their total, and global expansion -- they have sales of about 50% in Europe, 35% in the US, and 15% in Asia and growing.

The other acquisitions that we had in 2012 was Tech Tran, the only US-owned manufacturer of hydraulic braking equipment and the lady components for light-rail transit cars; Winco, a marketing and sales company in Brazil with capabilities including value-added engineering and assembly, service, technical support, and logistics; and the LH Group in the UK, it's a provider of maintenance and engine overhaul services for transit; and lastly, Mors Smitt, a European-based manufacturer of electron components for rail and industrial markets.

I will now ask Alvaro to discuss our financials.

Great, thanks Al; and good morning, everyone. I am pleased to be able to discuss the financial results for the quarter, which we believe were pretty good. Sales for the fourth quarter were a record $610 million, which was 14% higher than last year. Of this increase, about 50% was from organic growth, and the remainder from acquisitions, and the acquisitions were discussed by Al. Transit group sales increased 45%, due to revenue from our backlog of existing projects and from acquisitions as well. Freight group sales were relatively stable and in line with the prior year's quarter. Overall, rail traffic was slightly lower in the fourth quarter of '12, as were deliveries of new locomotives and freight car. And earlier in the year, which affects the comparison, we completed deliveries of new locomotives, which had started last year.

Turning to margins and cost information, as we've discussed in the past, we are always striving to drive our operating margins higher. In dollar terms, SG&A expense increased, due mainly to acquisitions, but it was 10.6% of sales, compared to 11.4% of sales in the year-ago quarter. For the quarter, for this year's quarter, operating income was $101 million, or 16.5% of sales, compared to 13.6% of sales in the year-ago quarter. The improved margin performance was driven by several factors; mainly, higher sales volume, a favorable product mix, and benefits from the Wabtec Performance System. Again, for comparison purposes, we should also note that we recorded charges of $5.5 million in the fourth quarter of '11. If you add back these items to our operating income again, in the fourth quarter of '11, the operating margin back then would have been 14.6%, so I think the appropriate comparison is 14.6% to 16.5%, but still a very significant improvement. For the full year of '12, our operating margin was 16.4%.

In terms of other expenses, interest expense for the quarter was $3.9 million, a bit higher compared to the year-ago quarter due to the lower returns on cash investments and cash borrowed for acquisitions. Other income -- sometimes that's other expense; sometimes that's other income, depending on FX rates, and it's typically the charge or that the income is just paper FX translation gains or losses. The effective tax rate showed a slight improvement. Last year it was 33.8%; this year it's 33.3%. We expect the rate to be slightly lower in '13, and we've included that assumption in our guidance for the year.

Turning to cash, which is always critical for Wabtec. Cash from operations was $123 million in the quarter and $237 million for the year. That's a good performance, and we hope to continue that momentum in 2013. Working capital during the quarter improved slightly, despite our higher sales. At year end, receivables were $390 million, inventories were $407 million, and payables were $249 million.

Our GAAP working capital, which when we calculate, we exclude cash, was about 14% of sales for the quarter. It was about 16% of sales at the end of the third quarter, which shows, obviously, our improvement, but our effort -- our continuing efforts to reduce working capital. As our business becomes more global, and as we expand our sourcing programs into other low-cost country, this will affect our working capital requirements. Even so, we think there are opportunities to reduce working capital, going forward, and that's one of our critical goals. Cash at year end was $216 million, mostly outside the US, it was $282 million at September 30. We used some of the cash -- no, I'm sorry, Napier didn't occur until January. It was just a normal decrease in cash. Debt at year end was $317 million, compared to $433 million at September 30.

A few miscellaneous items. One is share buybacks. We bought back 231,000 shares, during the quarter, for about $19 million. We still have ample room remaining on our $150 million buyback authorization from the Board of about $75 million. A few of the other plenary items -- depreciation was $7.7 million, compared to $6.7 million in last year's quarter; amort was $5 million in the quarter, versus $4.4 million last year; and CapEx was $11.3 million versus $15.7 million. For the year, CapEx was $36 million, versus $38 million last year, so relatively stable. For 2013, our budget is about $45 million in CapEx. We tend to under spend our budget, somewhat; but right now, the budget is about $45 million for next year.

In terms in backlog, at the end of the year, we had a record-high backlog, and it was 7% higher than one year ago. The total multi-year backlog -- so, this is the backlog in total, is $1.6 billion, versus $1.5 billion at September 30. The rolling 12-month backlog -- this is what we expect to execute in the next 12 months, was $1.1 billion, which is the same as it was in September 30. Those figures don't include about $250 million of contract options that are not counted in the backlog until the customer exercises them; but hopefully, we'll be able to get a good chunk of that.

With that, I think that concludes the financial review, and I'll turn it back over to Al.

Okay, thanks, Alvaro.

Once again, we had a good performance in the fourth quarter and for the full year. Taking one final look back at 2012 -- revenues increased 22% to a record $2.4 billion; income from operations increased 45% to a record $392 million; EPS increased 48% to a record $5.19; and our backlog ended the year at a record $1.6 billion. Looking ahead to 2013, we are anticipating another record year, with EPS guidance of about $5.85, on a revenue growth of 8% to 10%, with stable-market conditions. This guidance is our best estimate at this time.

We couldn't be more pleased with our strategic progress and the long-term growth opportunities we see. As countries around the world continue to invest in freight rail and passenger transit infrastructure, 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 costs. We have an experienced management team that is poised to take advantage of our growth opportunities and ready to respond to any changes in market conditions.

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

Thank you, sir.

(Operator Instructions)

Scott Group, Wolfe Trahan.

Alvaro, can you give us the break down of the backlog for freight and transit like you've done in the past?

Sure. The total backlog for transit, it's $1.2 billion, versus $970 million at September 30. For freight, it's about $492 million, versus $558 million at September 30, so it's down slightly. But again, I think the backlog is more significant for transit than for freight. The rolling 12-month backlog -- again, what we hope to execute in the next 12 months, for transit, it's $703 million, versus $654 million. The $703 million is a record, I believe. And for freight, it's $414 million, versus $447 million.

Okay, that's very helpful.

So with that, as the transit backlog's been growing and the freight's been leveling off a little bit, we saw the first quarter of, I guess, negative freight revenue in fourth quarter. Within the guidance for 2013 revenue growth, can you give us a sense on how you're thinking about freight versus transit? Is freight kind of flattish in the expectations, and transit is up a lot, how do you think about that?

We think that we should see growth in both transit and freight, and almost 50/50. We expect both markets to support that.

Okay, that's helpful. A couple other things -- on the acquisition front, can you give us a sense on how you're feeling about potential for additional opportunities? If I look back the past couple years, you spend, typically, $100 million-plus on deals, and we've already done that this year. Is there room to do a few more deals and accelerate the pace of acquisitions relative to what you've done the past few?

Yes, the pipeline is adequate right now. We continue to always try to develop new potentials. I think those potentials -- we're going to be as opportunistic, but we're also going to be very disciplined and structured with our acquisition program. We have enough potential there to say that, hopefully, that we could continue what we've done in the past. I think the other thing that's worth noting is that we're in a unique situation, being a company that is -- we've proven now that we're an acquirer. We've proven we could find them. We've proven that we could close them. We've proven that we could integrate them.

But, we also have the beauty of a great balance sheet that allows us to be opportunistic if that larger acquisitions come available, and we're able to do that. We've said time and time again that we feel that we could take on debt of 2 to 2.5 times our EBITDA, which would give you a very large acquisition. So, I would answer your question by saying that we continue to be excited. We think it's an important part of our growth strategies going forward.

Okay, that's really helpful. Just a follow up on the acquisition side. Alvaro, can you refresh us on how you treat these acquisitions, from a purchase price accounting, and so we've seen eight or nine deals over the past two years, does the amortization of some intangibles -- does that start coming down at this point, where the accretion from these deals can look even bigger in '13 than what we saw in '11 and '12?

Yes. To answer your last question, they will improve, somewhat. In terms of the accounting -- I'll see if I can do this in two minutes. Basically, when you do an acquisition, you write up all the assets -- obviously, you recognize the liabilities, but you write up all the assets at the fair market value. And, to the extent that the price paid exceeds what you paid for the hard assets, they go in intangibles. What really affects it, and I think it is what you're referring to in your question, is what we call purchase price accounting, or PPA for short, which makes you write up, as an intangible asset, the entire amount of unrealized profit in inventory and backlog at the time of acquisition, and you amortize that as you sell off that inventory and as you fulfill your backlog.

So basically, until you have an inventory turn, you almost recognize very little profit in the acquisition. And until you work off the backlog -- now that backlog is slightly different, you'll recognize diminished profits. The amounts that we had for this type of PPA, say in the fourth quarter, was just about $2 million, so I think you'll see some increased benefit from this PPA eventually going away, but it will be relatively small. And to be honest, hopefully, we'll make additional acquisitions, and their PPA will offset that, so it's kind of a recurring cycle.

Okay, that's actually really helpful. Appreciate that. I'll pass it out someone else. Thanks, guys.

Allison Poliniak, Wells Fargo.

Al, could you give us a break down of the PTC, in terms of what came from US freight and transit, and then I guess, global is the other piece of that?

Okay, if you look at the sales that we've discussed, now, we have, I think it was 2010 with $25 million; $125 million in '11; and now, in '12, it was around $215 million, so that would give you about $365 million in sales. Of that, around $200 million of that would be freight, about $100 million is in international, and about $50 million in transit. We would expect that proportion, going forward, as well.

Okay, great. Then, I guess, just going back to the top-line growth that you guys are looking for -- on the freight side, obviously, it sounds like, at this point anyway, that we're looking for a headwind from the OEM deliveries. Should we be assuming that PTCs are going to somewhat offset that, or in international? Where is the other growth coming from on the freight side?

Yes, I think that what we'll see is we have offsetting growth from PTC. There will be internal growth from that. Right now, it's hard to predict the exact amount, but we do expect it to grow because spending is going to grow with the railroads, and we're finishing up our project, hopefully, we'll be done with the project in Brazil this year, so we expect that to grow. I think that the other growth we have some freight acquisitions that will also add to it, incrementally; and we think, internationally, we'll be able to grow in the freight markets. We do have the concern about railcar build, as well as traffic, as well as locomotive builds, but we do have a large international market that will more than offset that.

Okay, perfect, thank you.

Art Hatfield, Raymond James.

Alvaro, real quick question on -- as we think about interest expense going forward, with Napier, now, in the fold, and some of the things that went on in the fourth quarter, can you help us out, from a modeling standpoint, what a normalized interest expense number should be?

Yes, I think so. Going forward, obviously, the bonds that we have outstanding, I think pretty much everybody is aware of that, they will mature in July. They're at 6.875%. Right now, I think in the short term, what we'll probably do is refinance those with bank debt. But in the longer term, the public-market yields are very attractive right now, and it could be that we go back out to the public market. Right now, we haven't made up our mind, but there will be some savings with the refinancing of those bonds --

If you went either way --

Yes, either way. For right now, like I said, you have to make up your own mind how to model that. Bank rates are very low. Right now, all in, we are paying about 1.5% on our bank financing, and if we went out for a refinancing, we've been told that the bond rates, right now, are about 4.5%. But again, I'm not sure where that's going to end up right now. We have plenty of capacity under the bank revolver to refinance those bonds, and that's what we intend to do short term. And after that, the debt balance should be relatively stable.

We have a large amount of cash, obviously, we used about $25 million to $30 million to buy Napier, but some of the other cash is in foreign jurisdictions like Mexico, Australia, Canada, that we can't use it for an acquisition in the UK. We did manage to use about $30 million of it for Napier, but the rest will be offset through cash flow. So, I think, I would assume, for modeling purposes, that you have a stable principal balance, and then you're just going to have to make some assumptions on the interest.

The major impact will be in the back half of the year, when you decide how you're going to refinance those bonds?

Yes, I think so.

Getting back to your guidance for the year, the Napier acquisition, have you -- within your guidance, are your purchase-price adjustments included in that guidance?

Yes, they are.

Okay. Then, when I think about the revenue growth for the year and the range that you gave out, I would say that, probably, just initially today, maybe about 25% of your growth is already accomplished through the Napier acquisition, ballpark. To get to that midpoint of that range, are you pretty comfortable thinking the balance of the growth comes organically, or do you have other acquisitions teed up that you expect --?

We have no other acquisitions in our guidance, okay?

Okay.

We do not plan on them. They are all opportunistic. They are all upside.

Then finally, on Napier, I know I should know this, but it just hit me. I can't remember -- is that going to be in transit or freight?

Primarily in transit; however, if any of the products end up in the freight markets, then it would be included in freight. We have a number of divisions that go into transit and freight, not just one or the other, but it will be reporting through the transit organization.

And then, finally on -- as you acquired Napier, and you look at the opportunities that are out there with their existing customers and maybe some of the existing markets, are you finding any opportunities in new potential markets where those turbocharger products could find another area of customers that you can serve?

Without a doubt, and that's the main strategic thrust is to look at market expansion. If you remember, we talk about global and market expansion. Market expansion is a way to take our existing technologies and products and introduce them into new markets. And, as we look at these adjacencies -- the non-rail markets, we're looking on how they can contribute to the rail markets, but we're also looking for new markets that will help in our overall strategic initiative, which is to really focus on trying to dampen the cyclicality. The brutal fact that we've accepted and tried to maintain, and we've successfully done, is we know that we're going to have deep cycles in the rail industry, especially the US freight market.

Have you been able to identify opportunities yet, or is that something you guys are still looking at?

We, obviously, have an integration plan that includes exploring those. Whenever we look at an acquisition, we're looking for what synergies we have, and those end up in the sale-synergy category, and sale synergies are not always easy to accomplish. As a matter of fact, those are the ones that usually have the greatest pie-in-the-sky type of thing, and you really have to work over a period of time to help develop those.

I think the other thing that I should mention is the importance that Napier is a great service organization, and it will allow, not only new markets, but it will allow us to expand our product offering from a service standpoint as well.

Thank you, that's very helpful. Last one, and I'll get off. Al, how would you characterize your acquisition pipeline today, versus maybe one year ago, 24 months ago?

I think that there was a little bit of a rush toward the end of last year, where a lot of the private owners and private equity were worried about -- unsure about the uncertainty related to the taxes. But, if I compare the pipeline, I'd say it was adequate, right now, and last year was about the same. I think it's about the same. There's, obviously, a lot of competition out there for the acquisitions, as there has always been, and private equity is definitely back in the mix, full steam.

Great. Thank you for your time.

Matt Brooklier, Longbow Research.

I just wanted to circle back to PTC. I think, for the first three quarters of 2012, we're at roughly a $50 million run rate, and it sounds like that number was more like $65 million in fourth quarter, if my math is correct. I'm just curious to see, if that is the case, what pushed up or accelerated the PTC revenue in fourth quarter?

Your math was pretty good, and --

Okay.

We always [give] estimates. The actual number was closer to $60 million, and there was a little bit of a peak on some of our larger backlog projects.

Okay. Was that within the US freight market, or was that--?

Some it was international and some of it was transit market. It was more so in those than the freight expenditures as we had seen.

Okay. I think we -- you had preliminarily offered a '13 PTC revenue target of above $200 million. If we are already at $215 million, should we assume that '13 is above that number --?

Yes, '13 will be above that number, and I guess for a target range -- it's very difficult to give an exact number because we're not sure how the capital spend will go, and how many on-board computers will be ordered and delivered and installed during 2013, but a rough number, we expect to see 15% maybe 20% growth. And, we'll update you quarterly as we go on.

Okay. The 15% to 20% growth, I think, it's a little bit north of what the rails had announced, as they went through their budgets and made those public. Just curious to hear if we're getting more spend this year from the rails on the locomotive side, versus track and signaling? Or, could you maybe talk a little bit about what's been spent, where that money has been spent, and future spend going forward?

Yes, a lot of -- the on-board computer only makes up a portion of our PTC sales. I want to make sure you understand that, and we've got the turnkey project in Brazil; and as I mentioned earlier, we'll be finishing that project up in 2013. So, we definitely will see some growth in there. We are also progressing on a number of transit programs -- one at Metrolink out in LA, and there's a couple other transit authorities, so we'll see growth in those areas.

As far as the amount from the railroads, our best estimate says that on an equivalent installed base, there's about 18,000 to 20,000 total locomotives that will have to be equipped for PTC eventually. A lot of the railroads are doing -- putting in provisional kits, which trying to do some of the wiring and some of the hard work, time-consuming work, now. Then, we'll later -- once the specification has been better defined, which it has not up to this point, they will go further. So, we try to estimate on an equivalent installed base. And we think, maybe of the total, about 4,000 to 4,500 equivalent installations have occurred, so that's out of 18% to 20%, and it gives you a view of what has to happen over the next couple of years, from an installation standpoint.

Okay, that's very helpful, thank you.

Thom Albrecht, BB&T.

Nice quarter. Couple of housekeeping items, and then I've got a little bigger picture. Alvaro, I know in your guidance, you said to expect a slightly lower tax rate. Can you give us a little more specific than slightly lower for this year?

If you make me, I guess I will. It is slightly lower. Our tax rate for the year was about 33.3%, I think, to be exact, and I would expect a similar number for next year, somewhere between -- I would say the overall tax rate for next year will be about 33% to 33.5%, somewhere in there. Maybe, probably, a little bit closer to the 33%, but you're cutting it pretty fine there, so I'd say 33% or 33.5%, shading probably towards the 33% again. And first quarter, we do expect a couple of tax items to come in, basically, as a result of some of the tax bills that they recently passed. They extended the R&D credit, but we can't recognize that until Q1, and a couple of other items. And, you'll probably see about a 50-basis-point to 100-basis-point reduction in the average tax rate that we'll do in the first quarter, so it is very slight.

Okay, that's helpful. And then, SG&A was quite a bit higher than what we were looking for, and now with Napier, do you have -- at least the next quarter --?

I'll give you an analysis of SG&A. It's mostly -- the increases have mostly been driven by acquisitions. For example, last year's quarter, SG&A, I think, was about $61.1 million, and acquisitions added $7 million, so absent other items, you would've expected SG&A to be at $68 million. However, because of a couple other factors -- and there's always a few factors in there, as well as cost savings initiative, it ended up at $64.7 million. So basically, the increase in SG&A is almost 100% due to acquisitions.

In terms of a run rate, at this quarter, it was $64.7 million. There weren't really any unusual items in this quarter, so I would expect it, going forward, to be about that $64.5 million and $65 million. Napier is going add about $1 million -- Napier took place in '13, so that's not in Q4. Napier is going to add about $1 million a quarter.

Okay, that's helpful. On the whole revenue growth, I know Al, you said that you would expect both divisions to post revenue growth in 2013, but -- there's a reason we analysts are anal. When I look at where we are, we're talking with really super high growth rates the last two quarters in transit, for a lot of reasons -- could it be the second half of 2013 before freight reestablishes positive revenue growth again?

I think -- we're no different than other industrial companies, and I think that it's all based on the fact that most people will think that the recovery is going to be slow, and hopefully, it will accelerate as the year goes on. We do not provide quarterly guidance, but I would say that we're no different than other industrials, and I've read enough guidance reports, myself, from other people out there to know that, right now, the economy is moving along at a pretty stable rate, and hopefully, it would accelerate as the year goes on, is what most people feel. We had a lot of assumptions that I stated in our guidance, and I think that -- like I said, we don't provide quarterly guidance for you.

Okay. Alvaro, what did you pay for Napier? I know it had $55 million of annual revenue --?

I'll handle that. Generally, it's almost 2 times the revenue. We were asked not to provide that information, so that's the reason it wasn't there, but it's about 2 times revenue.

Okay. I think that's it. Thank you very much.

Greg Halter, Great Lakes Review.

Yes, good morning, excellent results. Back on Napier again, will the management team be remaining there? And also, can you give some guidance, relative to their margins being above or below your own?

Okay. Yes, the management team is on board. Give you an example of the General Manager of that division, two days after we acquired the company, attended a leadership conference, where we get all the Vice Presidents, General Managers together, and was a great participant in that event. Key to when we do acquire companies is that we're really looking for strong management and management that will stick with the company; and I think in this case, it's really been a home run so far, as far as the management team. We make them part of the integration team. And yes, it's a critical part of the success that you have with integrating new acquisitions.

And, hopefully they're listening to this call (laughter).

The second part of your question again?

Margins -- whether or not they're above or below your own.

Now I know why I didn't remember it (laughter). It's -- as stated, they're better than our average. We have not provided specific margin data. [David] told me I'm not allowed (laughter).

Not just this time? Alvaro, do you have a preliminary figure for your equity at the end of the year?

Sure, hold on a second, let me figure it out real quick. Total shareholders equity, at the end of the year, should be about $1.282 billion.

All right. And, what was the impact of foreign exchange on sales and operating profit?

For the year, it was down $19 million; and for the quarter, it was down $3 million -- and the fourth was up $3 million.

You got it right -- it was minimal, but those numbers are exactly right.

And, any flow through to operating profit?

It was very minimal, again, less than $0.01 a share, either way, in both quarters.

Okay. For the year, can you provide a breakdown of -- which I think you do in the K, and maybe you don't have it yet, but on the freight OEM versus after market, and then transit OEM and after market, in terms of percentage?

Yes, for the year, freight was 53% OE, and after market, obviously, 47%. And for the year, transit was 34% OE and 66% after market. Overall, for the Company as a whole, 46% OE and 54% after market -- very much in line with our targets.

All right, that's excellent. I think you were in the process of doing a field test on the PTC, and just wondering how that has gone?

Yes, I don't -- the field tests that are going on -- MRS has a field test going on, right now, and that's the railroad down in Brazil. There are some field testing going on at Metrolink, and the BNSF has done some field testing on some of the product. I think the other railroads are still in the laboratory test phase and expect to move into field testing later this year.

Okay, thank you.

Steve Barger, KeyBanc Capital Markets.

Obviously, your non-US sales are becoming a more important part of the Company. Can you just frame up the growth rate for that 50% of the business that's coming from outside the US?

Sure. In general, compared to last year, international sales in '11 were about $666 million. At the end of '12, it increased significantly, it was almost $1.2 billion.

Wow, okay. Can you break out how much of that was acquisition versus organic?

That I'd have to calculate.

You'd have to probably follow-up with Tim --

Okay.

Overall, the percentage, and I don't know if -- if you look at the growth in international and domestic, it was about the same, really, maybe a little more internationally. Earlier, we said that internal growth accounted for 67% and acquisitions was 33%. I think, internationally, it probably would be more acquisition and a little less on the -- but the exact number, we don't have. I would guess it would be probably 50/50 internationally, but I'm not -- Tim could follow up with you, okay?

The CAGR over the last five or six years has been about 15% for non-US sales growth.

Perfect. I know it's a diverse group of businesses, but can you help us frame up the margin profile for that 50% of sales that comes from outside the US?

Generally, the margins are a little better in the international markets, primarily because, we're a small player in larger markets. And, we try to be very particular about what opportunities we go after; so in general, we do better.

As you look -- you guys have obviously done a great job in terms of driving margin expansion from internal initiatives. If those margins are already better than, say the aggregate or the corporate average, is there still the same kind of opportunity to drive incremental margin expansion in those non-US businesses?

Yes, we're firm believers that there's always opportunity to expand margins.

The only thing I would say is that as your margins improve, the incremental improvement gets more difficult, but there's always room for improvement. Really, that's our mantra when it comes to continuous improvement in the Wabtec Performance System, that we are going to incrementally continue to improve over time. Yes, there may be one quarter or two quarters where we have some type of impact that we can't manage; but over time, our goal is to continue to expand those margins, whether domestic or internationally.

Obviously, you drove a lot of margin expansion from -- in 2011 from 2010; you did it again in 2012. Your guidance implies more of a flattish or a smaller increase in operating margin. Is that just a function of mix, and is there any -- do you expect that you can get back to those magnitude increases going forward, just as you think about the portfolio of businesses and what you expect you can do internally?

I think one of the things that we have to be honest about is that volume is the great -- it helps cover problems and issues, so volume is a large contributor to margin improvement a lot of time, and we had some extremely good growth in both '10 to '11 and '11 to '12. With that, we still have a very focused targeted improvement on margin, division by division, group by group, and company-wide, focusing on improvement through the Wabtec Performance System, improvement on pricing, improvement on sourcing, improvement on moving to lower-cost manufacturing platforms. So yes, we expect to continuously improve.

Great. Last question, you talked a lot about acquisitions on the call. It's an important part of the strategy. Given the pipeline that you can see, do you think it's possible to match the pace and magnitude of deal activity that you did in 2012?

It's impossible to predict acquisitions. That's why we don't allow people to put them in their plan or count on them. You just have to be opportunistic. There could be years where we don't have acquisitions. I think our track record shows that we at least have a trend going, and that trend has supported us in the past, and hopefully, would support us in the future, but it's impossible to predict them. We aren't going to do acquisitions just to do acquisitions. Our focus is on internal growth first and then acquisitions after that.

Very good. Thanks very much.

Scott Group, Wolfe Trahan.

Just two things -- Al, you talked about, I think, about 25% of the locomotives that you think need PTC have the on-board recorder, now --?

Equivalent locomotives -- there's been a lot more touch, but it's provisioning kick, so we are trying to get an estimate on the total -- but yes, go ahead, Scott.

Do you think it's fair to take the US freight part of the PTC sales that you've already done and think about multiplying that by 4, or does that seem too aggressive?

I think that it's probably -- there's still some uncertainty. There's uncertainty related to the mandate completion date of 2015. I think there's uncertainty related to the actual specification. I think there's still things that have to flow. I think that's an indicator, but I would definitely not start multiplying those numbers and saying that's exactly what's going to happen, okay?

Okay, that's helpful. Then, last thing, the -- people have talked about, in the past, transit margins being worse than freight margins. How do you think about incremental margins, though, on freight versus transit? Are those closer?

I think that the incremental margins -- they're probably about the same. I don't think there's a lot of difference. The problem with transit is that a lot of these large contracts could have an impact on your margin. I think we were very open with everyone -- as we were completing some of the large projects, and you get down to the end of a, say a locomotive build, and you're going to make more money on the last five locomotives than you did the first five. And, you're going to make more money on a system later on, as you're supplying a braking system, than you do starting out. I think it's just one of those things. There's projects that are good margins and others are not so good, so it's really hard to say. But I would say, in general, incrementally, we do okay.

And, that comment about, at the end of a big contract, you tend to do better -- I'm guessing you're referring to some of the big New York City subway programs and things like that. It feels like those are maybe a little bit less a part of the overall transit piece and growth right now, than maybe, historically --?

Yes, they've gone from very large projects to smaller orders, so that is changing.

Okay, so maybe--

I'll add one small proviso -- part of it can depend on the accounting, too. Some of these large contracts, you use percentage of completion, and in general, you estimate your profit at the beginning, and you'd try and recognize it ratably. What happens is, when you get to the end of a contract, you can have a much better idea of what your cost picture is because you are no longer relying on estimates, you have a large actual cost base to choose from, so you can refine your estimates. And, that will result, sometimes, in larger profits than you originally estimated just because you have better data. But, the percentage of completion does tend to smooth it out a little bit -- but on some of the other contracts, you just recognize the profit, based on as you deliver, and there is a learning curve and there you do recognize it a little bit more towards the back end, as well. It depends --

That's why we love accountants.

Yes, we can complicate the simplest things. That's what we get paid good money for.

Sounds good. All right, appreciate it, guys. Thanks a lot.

Rhem Wood, BB&T Capital Markets.

I think most of mine have been answered. I just had one left. Al, or maybe Alvaro, can you help us a little bit with the net interest line? I know you mentioned it had to do with foreign exchange, but it's moving around a fair bit. Can you just help us --?

You mean the other line, other income --?

Do you mean other income and expense, rather than?

Right, sorry, yes, that's the one.

Basically, that relates to FX, for the most part, on inter company balances. We sell goods to units abroad, and they sell goods to units over here, and we advance funds, so they pay off funds, and basically, you have a number of inter company balances. And in general, you just have to recognize the changes in FX on that.

That can bounce around. It can be -- our goal is to minimize it, is to keep it as small as possible. Some quarters it will be a gain -- a small gain like it is this quarter. Some quarters it will be a small loss, like it was last quarter. But, our goal is really to minimize it rather than predict what's going to happen. So typically, it has an effect of about $0.01 a share, one way or the other, which is not too material.

Okay, thanks. Does it depend on maybe the quarter of whether you gain or loss, or is that any impact?

Yes, it depends on the FX, where the rates are going.

Okay, thanks.

Greg Halter, Great Lakes Review.

Have you seen any -- and I know it's early, but any changes in the competitive landscape, given the Ivensys-Siemens deal a few months ago?

Not at this point. I think that -- it, obviously, hasn't closed yet, so there's not much that they could really do. I know that -- I'm sure that they're working on integrating it, but no, we haven't seen anything.

Relative to the freight side, with the car build, I wanted to confirm that your content is generally the same, no matter if it's a tank car or coal car or a --?

Yes, exactly, Greg.

Okay. I think I saw something about Amtrak replacing the Acela. Whenever we see those types of news stories, I presume you have a role in that, as a -- maybe not as a primary, but as a sub along the way?

Yes, I think the only program that they actually, I think, is actually going on, right now, is that they're upgrading some of their cars. As far as the locomotive, they haven't even decided what they want. They're saying maybe they want locomotives that go 150-mile-an-hour, 125-mile-an-hour high-speed whatever, and that has not even been put out to bid. So, we're unsure, exactly; but yes, we'll participate. If there are locomotives being built, we'll participate in some way.

One last one for you. Your business in China -- how did that do in 2012, and what do you see going forward?

Yes, I think in 2012, we showed growth that was high-single digits, and we expect it to continue to grow into 2013 and beyond.

Thank you.

At this time, we have no more questions. I would like to turn the conference back over to Mr. Neupaver for his closing remarks.

Thanks to everyone. Thanks for the questions, and we'll talk to you at the end of the first quarter, look forward to it. Bye-bye.

Thanks, everybody.

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