美國西屋制動公司 (WAB) 2013 Q1 法說會逐字稿

Good morning, and welcome to the Wabtec first quarter 2013 earnings conference call. All participants will be in a listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Tim Wesley, VP of IR. Please go ahead.

Thank you, Ken. Good morning, everybody. Welcome to our first quarter earnings call. Let me introduce the Wabtec people who are here with us. Al Neupaver, our President and CEO; our CFO, Alvaro Garcia-Tunon; our Chief Operating Officer, Ray Betler; and our Senior VP of Finance and Corporate Controller, Pat Dugan. We'll make our prepared remarks from Alvaro and Al, and then we will take your questions as usual. First, starting the call, we will make some forward-looking statements, so please review our press release today for the appropriate disclaimers. Al, go ahead.

Thanks, Tim. Good morning. We had another good operating performance in the first quarter. We had record sales of $616 million and record earnings of $1.44. Very important is our backlog increased to about $1.7 billion, a record high, and an increase of about 8% compared to the year-ago quarter. Overall, our business is performing well, and what appears to be a slowly-recovering global economy. It is important to note that our performance shows the effectiveness of Wabtec's diversified business model, the importance of our strategic growth initiatives, and the power of our Wabtec Performance System.

We remain excited about our long-term growth opportunities in our freight and transit rail markets, which are being driven by several mega trends -- 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 affirmed our 2013 guidance. Based on our first-quarter results and the current outlook, we continue to expect full-year earnings per diluted share to be about $5.85, with sales growth of 8% to 10% for the year. This guidance is about 13% higher than our 2012 results. We now expect transit to drive most of our growth for the year.

Our strong transit backlog, both domestic and internationally, as well as acquisitions are driving that segment's growth. We expect freight to grow, but at a slower pace because we think the economic recovery will remain slow. If we looked at the quarterly comparison in freight, it shows the impact of weaker industrial sales for gen sets and power generation products. It shows lower rail car and locomotive builds, and a mixed shift at our MPI locomotive division from freight to transit locomotive builds. Although we expect to see some improvement in our freight markets during the year, it is premature to assume that the economic recovery will be more robust.

Our guidance assumes the following. Continued slow growth in the global economy. A US and European transit markets remain stable, with the emerging countries driving our growth. Our transit revenues should grow based on our existing backlog of projects in the US and internationally. US freight traffic is stable, with OEM locomotive and car builds down 10% or more. And no major changes in foreign exchange rates, and we expect to have a slightly lower tax rate for the year. As always, we will be disciplined when it comes to controlling costs. We're going to be focused on generating cash to invest in growth opportunities and ready to respond decisively to any changes in market conditions.

Let's take a look at the transit market. We continue to see stable markets in the US and abroad. In the US, ridership was up 1.5% last year, and in Canada, it increased 2.3%. In 2013, North American transit car deliveries will be about 900, those are transit cars. And the bus deliveries will be about 4,500. Both of these figures are similar to what it was last year. This stability in the North American market continues despite budget issues and uncertainties about a long-term transportation bill. Transit funding in the US is also stable. It is at about $10 billion, and this is Federal funding. And that is about where it has been for the past several years.

Outside of the US, we're seeing stability as well in the developed markets, and we're seeing growth in the emerging markets. Even in Europe, our transit rail marks are stable and seem to be fighting off recessionary pressures because transit -- public transportation, is so ingrained into their culture. We also continue to see incremental improvement and the development of our global transit business.

Looking at the freight markets, in NAFTA freight rail traffic is mixed. In the first quarter, total traffic was up about 1.3% compared to the year-ago quarter. This consists of 5% increase in inter modal, and a 1.5% decrease in general traffic. The decrease in general traffic is due mainly to a 6.8% decrease in coal. Categories that have increased include petroleum products, aggregates and chemicals. The OEM rolling stock deliveries for 2013 are expected to be lower than in 2012.

About 1,200 new locomotives were delivered last year. We expect that number to be around 1,000 to 1,100 for 2013. Forecasters are expecting rail car deliveries to be about 50,000 to 55,000, in 2013. This compares to 59,000 in 2012. If we look at the first quarter, there was about 12,000 cars delivered. This compares to 17,000 that were delivered in the first quarter of 2012, and it was 12,000 delivered in the fourth quarter. The orders in the first quarter were very strong at 23,000, and this drove the backlog, now stands at about 72,000.

Continuing the recent trend, tank cars dominate the story. They account for about 80% of both orders and current backlog. With builders already sold out for this year, many of those tank cars will be delivered beyond 2013. Over 50% of the tank cars that are being built is for crude oil by rail applications. Globally, freight traffic is also mixed. China is still growing but not as fast. So that has had a ripple effect on some of the mining countries such as Australia, Brazil and South Africa, where we have seen some slight weaknesses.

Our priority has continued to be focused on growth and cash generation. We generate that cash to fund internal growth programs for more acquisitions and also to return money to our shareholders through a combination of dividends and stock buybacks. We are focused on increasing the free cash flow by managing cost, driving down working capital, and controlling capital expenditures. Our growth strategies also have not changed. Global and market expansion, after-market new product and technologies, and acquisitions.

Let me update you a little bit on these strategies. Global and market expansion -- our sales outside of the US for the quarter was $302 million. That's 4% higher than last year's total, and it accounts for 49% of the total sales. If we look back five years ago, that number was only 33%. Some of our new projects include components for transit cars in Taiwan and Brazil, as well as new freight locomotive components in Brazil thanks to an after-market platform that we initiated a few years ago.

In the after-market area, after-market sales were $336 million, that accounts for about 55% of the total, and that growth is 5% on a year-to-year basis. We saw some of the growth from providing PTC-related services, and from transit agencies in New York and New Jersey region, as they continue to recover from the effects of Hurricane Sandy.

New products, we continue to focus on this effort, with about one-third of our total annual sales coming from new products. We define a new product as a product that has been introduced in the last 5 years. An example of a new product that has grown nicely is our electronic-controlled pneumatic braking systems. We recently received additional orders in South Africa to retrofit more rolling stock with that equipment.

As for positive train control, that represented about $215 million of our sales in 2012. We expect it to grow by 10%, 15% this year, 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 that deadline. We certainly can't predict whether that will happen, but we have analyzed how a delay would affect us and we do not think it will have a meaningful impact on our business.

In the acquisition area, we had previously announced the acquisition of Napier Turbochargers out of the UK in January. Acquisitions actually accounted for our growth in the first quarter this year, as compared to last year's first quarter. I will turn it over to Alvaro for some additional comments.

And then we can go to Q&A as usual. Thanks, Al, and good morning, everyone. We are always happy to discuss financial results like these with sales and earnings at record highs. Start with sales. Sales for the first quarter were at $616 million, 6% higher than last year. As Al said, most of the net increase was from acquisitions as well as increased transit sales. The transit group sales increased due to revenues from a backlog of existing projects, mainly locomotives, and also from acquisitions as well, as we mentioned earlier.

The freight group sales were down mainly due to three factor, although NAFTA rail traffic was slightly higher in the '13 first quarter, as Al mentioned earlier, deliveries of new freight cars were appreciably lower by about 5,000 units. In the first quarter of '12, we were delivering new freight locomotives to a customer in Australia under a contract that ended in the first half of that year. While that locomotive manufacturing facility is still being fully utilized, that mix has shifted from freight to transit locomotives this year. And the third reason sales are off a little bit is reduced drilling activity, both oil and gas, has resulted in lower demand for our industrial heat exchangers that are used for gen sets in that market. However, we have started to see some pickup in orders in that market there, and we're optimistic for the rest of the year.

Margins, as you know, that is key for us, and we're always striving to drive our operating margins higher, which we did this quarter. SG&A increased due mainly to acquisitions. Hopefully we can reduce a little bit of that as we go forward, but it was still only 10.4% of sales, compared to 10.6% of sales in the year-ago quarter. For the quarter, for this quarter, operating income was $104 million, or 16.8% of sales, compared to 16.1% of sales last year. Margin performance was driven by several factors, including higher sales, but also obviously benefits from the Wabtec Performance System. And right on cue, you can hear some background noise, one of our customers is riding a big train, it is full, right by our windows over here. (laughter) They tooted our horn for us, so it might be a little noisy. We apologize for that.

The effective tax rate was lower in the first quarter. It was about 30% versus 34.4% last year. I believe we mentioned in the last call that we were expecting taxes to be lower in Q1. We now expect the tax rate for the remainder of the year to be at around 32%. So for each of the next three quarters, we expect that to be around 32%, which is slightly lower than what we said during the last call. This is obviously good news and due largely to our international sales and international tax planning.

The tax rate for the first quarter of '13 was actually lower than that 32%, at 30%, and this is primarily due to the extension of the R&D tax credit by Congress on January 1 of this year. The accounting rules provided that we can only recognize that benefit this year, even though a big chunk of it related to activity from the prior year. We recognize approximately $1.47 million, $1.5 million of benefit from this in the first quarter, which translates roughly to about $0.03 per share. So you won't see that continuing. But again, for the tax rate level, it will fluctuate somewhat, it will be about 32% going forward.

Cash from operation, we had a good quarter. We generated about $32 million in cash from operations. The first quarter is always a little bit tough for us because the funding of year-end items such as federal and state tax, incentive comp payments, benefit payments, and interest on our bonds. So we expect that this result will improve during the year, but again a good start to the year. Working capital increased in part due to higher sales. Just to give you a couple of balances at March 31 -- receivables were $433 million, inventories were about $429 million, and payables were $267 million.

Our GAAP working capital is again a little bit higher than we would like. It was about 15.7% of sales for the quarter, versus about 13.6% at year end. So it has deteriorated somewhat, and that obviously gives us something to shoot for and get that back on track. One of the issues that we wrestle with and I think you're familiar with this, is that our business has become more global, and as we expand our sourcing requirements into low-cost countries, that affects our working capital. We tend to have to order more, and we tend to have to pay for it when it leaves the port rather when it arrives, so we have a lot of inventory in transit. But even so, we think we can do better, and we expect continued improvement in that area as we go forward.

Cash and debt, again, just to give you a few numbers. At March 31, we had $225 million in cash, mostly outside the US. This compares to $216 million at December 31. At March 31, we had total debt of $418 million. This is up $100 million from $318 million at December 31. This was due primarily to the acquisition of Napier in the UK in January. A few other miscellaneous items. Depreciation was $7.6 million, compared to $7.1 million in last year's quarter. Again, that is a nominal increase but mostly due to acquisitions. Amortization was $3.6 million, versus $3.1 million last year. And again, that difference was due to acquisitions. And CapEx for the quarter was $6.4 million, versus $10.2 million last year.

Our budget for 2013 is about $48 million in CapEx. We tend to under spend that a little bit, and I think the results for the first quarter reflect that. In terms of backlog, I think Al mentioned that we were at a record high. The total for the -- as of the end of the quarter, was $1.7 billion versus $1.66 billion at December 31. So a slight increase. But both transit and freight increased, so it is nice to see an increase in both segments. Transit increased from $1.17 million to $1.19 million. And freight increased from $492 million to $515 million.

I think we said this before, but just as a reminder, backlog tends to be much more significant in transit than freight. The rolling 12-month backlog, which is the backlog we expect to execute in the next 12 months, was relatively steady, $1.1 billion in both periods. In transit, it went down slightly, about [$700,000] to [$661,000], and in freight, it was relatively steady from about [$414,000] to [$403,000] at the end of Q1. And those figures, we mentioned this just to give you an idea what we have out there in options, but we don't book options until they -- we execute the agreement and they become firm, but we have about $215 million of options related to this backlog. And with that I will turn it back over to Al for final comments.

Thanks, Alvaro. Considering all of the factors, we are off to a good start to the year -- record sales in earnings, excellent margin performance, and a backlog at record levels. We are anticipating another record year in 2013, with EPS guidance of about $5.85, and revenue growth of 8% to 10%.

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, and a very dedicated work force. So we're poised to take advantage of our growth opportunities and ready to respond to any changes to the market conditions. With that, we will be happy to answer your questions.

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Allison Poliniak with Wells Fargo.

Hi, good morning, guys.

Good morning, Allison.

Just going to the margins, I understand, you'll give us the segment margins when we get the Q, but you certainly saw a nice expansion there year-over-year. Was that expansion more weighted toward freight, transit or was it sort of balanced at this point?

We actually, we improved our margins in transit during the quarter. You get the benefit of some of the volume related to that, but as you know, and we talked about it at the last conference call, was our focus on that improvement, and I think that focus resulted in some good results which you will see. We also have performed well in the freight area, as well.

Okay. And then just on transit, with positive train control, we certainly heard a lot from the freight side, but transit -- I don't know if we don't hear as much about it, but do you have any color on what's going on with PTC there? It seems to have been a bit quieter on the freight side.

We've only been able to announce the projects we're working on. There's 21 different transit authorities throughout the country that will need to have some form of PTC in order to operate and share their rail space with the freight people. We have announced work with Metro Link in Denver so far. We are working with most of those transit authorities.

A lot of them are struggling to find funding for their program, but they're moving forward with them. I'm hoping that we can announce in the near future some of these contracts that we've signed. The thing I have to tell you though that there is big projects. It depends on the scope of our work, and some of the projects if you bid it in a turn-key basis can be large, and we can have small content as well. It is just providing the onboard PTC equipment. So, we're excited about the opportunity. Right now, I think transit of the $350 million of PTC work makes up about $50 million of that 350 so far.

Perfect, thank you.

Thank you.

Our next question comes from Art Hatfield with Raymond James.

Good morning, everyone. Al, if I can ask you a question about your comments about growth for the year. You had mentioned that you expect most of the growth to come from the transit side, but yet you do expect freight to grow. Looking at first quarter year-over-year, you were down about 23%. Understandably so given where the freight markets are, and you got a tough comp in Q2. I'm assuming you're expecting much greater growth in the back half of the year. If so, can you kind of get into some specifics about areas where you think you're going to see that growth, and what is going to happen to be able to get you to get to flat to slightly up in that business?

I think that we feel that the growth will come in a number of areas for freight. One is, as the economy recovers, we expect our industrial product that is part of the freight group to improve as the year goes on. We have seen some of that, and I think if you take a look at some of the industrial, diversified industrial companies, I think most people were talking about that type of recovery as it goes forward.

I think the second area is that we expect to see more strength in our international markets as the year goes on as well, and some of the opportunities we're working on. The third thing we saw, and I'm sure this will be a question. Our sales in PTC for the first quarter was about $50 million.

What we saw was that there was a lot of large purchases toward the last part of last year, and so there was a little bit of a hold-back, I think, in the first quarter. As we said before, we expect that 215 or 220, whatever it was last year, to grow by 10 or 15%. So we think we will see that improvement, and I think if we see the economy improve in general, I think the freight markets, from a car loading standpoint and other impact it would have on us would be positive, as well.

You know, that is interesting you say that. We have been hearing -- at least I have been hearing from other companies, there seems to be a lot of pent-up demand, a lot of customer inquiries, and clearly, that hope for optimism. But have you started to see, at least in late Q1 or early Q2, people starting to ink deals where you're kind of getting stuff in the backlog that you're confident -- that builds your confidence for back half of the year?

Well, you know, we stated on the backlog being up at 1.7 and Alvaro broke that down, but if you look at it on a percentage basis, about 38% of that backlog for the next 12 months is in freight and 62 of it is in transit. So, that is probably about normal. The place where we have seen an uptick is really in the Industrial part of our Business, and we're hoping that is sustained. We don't know. So we have seen slight indications of it, but nowhere near enough to give us confidence to get overly aggressive with our projections.

Okay. And your industrial business, does that always -- that is in backlog, is that in the freight side?

That is in the freight side, yes.

Just one other question on margins. The last couple of years you guys have done a phenomenal job on margin, and I know your strategy of continuous improvement. You will say you always want to improve margins, but you'd probably agree that the level that you've been able to improve margin the last couple of years, that kind of growth year in and year out is not sustainable. But when we think about kind of a more slow-growth environment, more stable, organic growth, without a lot of acquisitions, can you talk about the areas within your operating margins that you feel like you can get growth improvement year-in and year-out, just from the things that you can do internally?

Yes, and I'm glad that you -- you just articulated our strategy related to margin, so we must be communicating well. That's good. But if you take a look at the first quarter, I think it is a good indication, and we talk a lot about how we approach it and it is continuous improvement, but when -- it is the times when you see some of the revenue backing off that we really heightened our activities in those areas and focus on that. When you don't have volume that tends to cover some of your problems and wounds, you really have to focus on the fundamentals of improving margins.

I think that our Wabtec performance system and I think Ray Betler, our Chief Operating Officer, and his team really do a good job on focusing on those things, savings from sourcing, savings from our lean applications in manufacturing, increased pricing, moving products from high-cost platform to low-cost platforms. We have a very rigid budgeting process that asks each of our divisions to come in with improvements year-on-year, and I think that yes, it is going to get incrementally more difficult to improve our margins, but I think that one thing that we're going to focus on is how we continue to do that.

Can you --

No matter what the market conditions are.

Would you be comfortable, if you could, articulating publicly kind of what those goals are and sourcing, and do you have like a goal of 20 basis points a year, through sourcing, or 30 through --?

I can explain to you that when they -- every division comes in with their plan, it is a number that is much larger than we expect to end up at the bottom line. As a matter of fact, they need to have actions that would improve by about 2%, but we know we're not going to get 2% following through the bottom line. We've got inflation, we've got wage increases, we've got issues that are going to exist.

And if you look at any point in time, yes, you could predict a number, but over time, it is going to get incrementally harder. So, I would hate to say that we're going to increase by 0.5, or 50 basis points each year, because next year it is going to be more difficult to do that. So, we really focus on trying to identify action items that will result in margin improvement and making sure that some of that flows to the bottom line. If you look at our contribution margin in the quarter, it is very high in incremental sales, and the reason it is high is because those results were driven to the bottom line.

Excellent. Hey Al, thank you very much for your time.

Okay, thank you.

Our next question comes from Tom Albrecht with BBT.

Good morning, Tom.

Good morning, everybody. Sorry I've got a bad cold here. I just want to go with Art's question a little bit. When I look at 2013, right now you've got about a 50/50 mix of transit and freight. Just on a revenue side, would you expect that mix to stay about that, or is transit going to end up larger because it sure seems like freight is going to be down in the second quarter before it would begin to stabilize?

One thing, and you bring up a good point, Tom, that I didn't mention, and when you look at that market improvement, in light of the fact that we had a large shift of business going to transit, which is traditionally a lower-margin business, I think it really is a good reflection on how hard our team worked to improve margins during the quarter. Right now, we still feel that the freight business will be larger than the transit business for the year. Although the numbers right now are 50/50, we would expect our year result to be freight being a larger portion of our business. And I don't know if I really want to go on beyond that and give you numbers, but I can tell you that our plan shows that being larger than transit for the year.

Okay. Well, that's at least helpful. So, then a follow-on would be, there is a big margin profile difference between freight and transit. Freight's been over 20% in recent quarters and upper teens before that, versus 9% to 12% margin for transit. Would you be able to drive the consolidated EBIT margin if -- let's say it's a 55-freight, 45-transit margin, given the huge discrepancy in transit margins being lower?

Yes, I think just how we performed in the first quarter is a good indication of the future. And if freight is higher, then the comparison gets easier.

Okay. And then the last question, I know you cited some of the factors behind freight's drop, but -- and maybe this is just something we didn't want to mention, but did weather have some sort of an impact on freight's revenues beyond locomotive and rail car deliveries and the industrial power, et cetera?

I really don't think so. I think the reduction in coal maybe -- I don't think so. I don't think weather was a major factor, Tom. But one thing that does happen during the winter, you get a lot more maintenance related to breakdowns if it is a very severe winter. I'm not sure if it was that severe compared to others, but it is -- that's amplified when you consider the weight of the coal cars in the winter. So, there may be an effect there, but I don't think we were able to measure anything from the market data that we looked at.

Okay. All right. Thank you very much.

Thank you, Tom.

The next question comes from Scott Group with Wolfe Trahan.

Hey, thanks. Good morning, guys.

Good morning, Scott.

Good morning, Scott.

So just a couple of things. So the lower PTC guidance, I think you were saying last quarter, 15% to 20%, and now 10% to 15% growth, is that all just from the first quarter --

I'm sorry, Scott, we still think it is 15% to 20%. I just forgot the number I gave you.

Oh, okay. Okay. That's helpful.

We haven't backed off of that. I apologize. I sometimes forget things. I'm getting old.

All right. I hear you. We don't hear a lot about the Industrial business, and that seems to be where you're being more confident in things getting better. Can you just give us, maybe a little bit of update on the strategy on the industrial side, and how we should think about the mix of that domestically versus internationally, and maybe a sense on the margin profile there?

The industrial side of our business is about 15% of the total. The markets that we focus in primarily -- we have a number of markets -- remember our strategy is to take existing technology, existing products, and try to take those into new markets, to help diversify our portfolio. We definitely don't want to be a major force and get out of the rail business. We love the rail business. It is a compelling business. It is a long-term growth story. The mega trends -- all the things we talk about.

But if we could take our technology and we could take our products and sell in other markets without distracting our management. We don't want to go into something we don't understand. So the things we do understand is thermal management, we understand friction, and a few other areas, and those are the areas we concentrate on. Of that marketplace for thermal management, the two areas that we have been able to grow in is, one, is gen sets. Gen set market is driven a lot by the drilling and the fracking work that is going on, and that has slowed down considerably. I think if you look at Caterpillar results and their discussion, you would sense that. That market is a global market. Half of our market is outside of the US in thermal management.

We also focus on power generation, primarily after-market in the US and on OEM new construction in some of the emerging markets. And the winter time is a slow period for power generation after-market work. That should pick up, and hopefully the demand for electricity will continue to grow, which we know it will over time, but there is lapses sometimes in that growth. So that is probably a pretty good summary of that business area and what we see, and what we're looking for.

That's great, and maybe just if you have any color on the margin profile there, relative to overall freight or the overall business.

It is about the overall freight number when you put everything together. A couple of the businesses are better and a couple are worse.

Okay, that's helpful. Just something on ECP brakes, you talked about some contraction in South Africa. Do you view that as an isolated opportunity here with one customer, or do you think that, just given the commodity demand that ECP could become a pretty material driver for you guys going forward? Maybe if you have any sense, any color on kind of how much ECP revenue we're talking about right now would be helpful.

On an international basis, it is a driver. We have continued to have acceptance of that product in Australia. South Africa was actually the first application of that product, even before Australia, and what they're doing, they're getting the results, they're getting efficiencies, they're getting productivity improvements from it.

And what they've done is they decided to add to their fleet -- more ECP-equipped cars. And that's what is happening in Australia. We were just visiting South America, and we're starting to see pilots being run there. They see the same advantages.

The large opportunity obviously would be an acceptance in the US market, which I think are years off, because they're -- you know, their priorities of capital are in other areas right now, including the PTC, and their infrastructure build. And the US, there is a different model. When you talk about the easy application in Australia or South Africa, Brazil, you're talking about unit trains, trains that go from the port to the mine and back and forth, and they don't have the problem of having a train that is partially equipped. A partially equipped ECP train is useless. You won't get the advantage.

The other problem is who pays for it and who gets the advantage. In those mining countries, the mining companies own the rail cars and the train. They pay for it and they get the advantage. So, I think the complexity of that marketplace in the US prevents it from becoming a more accepted in the US. But I think over time, you have a product that would advance the technology, would advance the efficiency, productivity, and safety in the railroads, and I think it will get adapted. It will just take a long time.

Okay. That's helpful. And just last thing, one for Alvaro. Kind of on the leverage side, debt to EBITDA now, clearly below 1 times, where do you feel comfortable taking that? Would you get back to 2, 2 1/2 times? And are you itching to start doing something on the leverage side, either a big acquisition or a buyback?

No I will take the last one first there, Scott. I'm not really -- obviously we're in a very, very favorable interest rate environment. One that at a certain point in time you probably won't see, and I think our primary focus right now is how we refinance the bonds going forward for the benefit of the people on the call. To put everybody on the same page, we do have about $150 million worth of debt that we have in public bonds that will mature in and around July, and we're taking a look at different alternatives and we haven't really made a decision yet on what we are going to do.

But our primary focus is on that refinancing, and how we take advantage of -- take maximum advantage of the current low interest rate. But we're not really itching to do anything. We, in terms of acquisitions, in terms of how we spend, we are still very, very selective. We still have very tight standards for spending, and just because we have the flexibility, just because we have the gun powder, doesn't mean that we feel the pressure to use it.

In terms of leverage, our cash flow, obviously we focus very heavily on cash flow, and we still have that LPL mentality back from the 1990s. And so we feel comfortable with more debt, and if we had to get up to a level to 2, even 2 1/2, which is starting to stretch where we feel comfortable with, we feel comfortable with that. So in summary, we have the gun powder and we have the ability to leverage up, and to do more, but we are going to be very selective about it. We're just not going to, like you say, just satisfy an itch and go out and do something just to do something.

That's great. Appreciate it, guys.

Thank you.

Our next question comes from Mike Baudendistel with Stifel.

Thank you. I wanted to ask about the rail car data in the first quarter, noticed there was a big pickup in tank car deliveries from the fourth quarter to the first quarter, maybe because of production capacity increasing. I was wondering if that increases the [safe] from 6,000 to 6,500 or even 7,000 later in the year. Is that something that is included in your guidance, or would that be incremental to that?

I think it is included in the guidance. One of the issues that you have, even with the order intake of 23,000, I think it was for the first quarter -- 23,900. They could only produce, I think, full capacity, 6,000 or 7,000, as you just stated, tank car capacity. So these orders really get -- they're being placed for far out. I know that everyone is trying to add capacity to meet the demand on the tank cars, so is there a possibility that that capacity increase -- and I know that most of the tank car builders are trying to do that right now, that could be an upside but that is not figured into our guidance.

The nice thing is that backlog does provide really a large amount of stability going forward. Typically your visibility with the freight is not that great. But now with this backlog, when they're at capacity, that gives you some more visibility going forward, and it lends a higher degree of stability to that market I think than you would normally expect. So, overall it is positive.

Great. That's helpful. And then I know this is my last questions on margins, but I also wanted to ask on the mixed impact, within the segments that maybe we wouldn't see the -- if there's any change in mix, within freight or within transit, that is having an impact there to the positive, and is it safe to say that the areas of your business that are growing faster are at least as high margin if not higher than the older areas?

I don't think there is anything that is out of the ordinary in what we've seen in the mix within each segment. Obviously, the segment change has an impact, but we've been more than able to overcome.

Great. Those are my questions. Thank you.

Thanks a lot.

Our next question comes from Kristine Kubacki with Avondale.

Good morning.

Good morning.

My question is on the PTC in Brazil. I was just wondering if you could give us an update on that project, and kind of what the opportunity remains for 2013, and then even as we look into 2014?

Okay. We were just there, so that was one of the reasons for our visit to Brazil, and the project is going well. Late this month, early May, we will commence a pilot. We have individual trains right now running. This will be a series of trains that will be in the pilot. If that pilot is successful, and we would expect that this project will continue and be complete in early 2014. As far as -- there is additional work that could be done with this particular railroad. There's a couple more lines that I think could be equipped.

I think a lot of that depends on whether they would equip it -- the timing of doing that work. I'm confident that they get the benefits that we think they're going to get, and I think they're seeing some of it already. I think that what you would see, they would eventually do it. But that is going to depend on the demand that will need to continue to be driven by iron ore and coal demand from some of the emerging countries like China. That value, if they did all the work that they need to do, would be equivalent to another maybe $80 million of additional work. We're also hoping that other people will see the benefits once we have this up and running in 2014, and we will be able to talk to other railroads about the system.

Okay. That's helpful. And just my follow-up question, you mentioned about iron ore, and you know, we've seen input costs across the board go down. I was just wondering, is that any tail wind during the quarter, and would you expect it to be -- is there anything you can hold on to, or are you being asked in more of a -- what I call a squishy economic environment right now -- is the pricing power -- the ability to hold on to pricing, or do you have to pass through any input costs that reductions?

We typically don't see the pressure from the market in those cases.

And you alluded to it, Kristine. We do, which helps us when material costs are going up, we typically do have surcharges. When they're going down, we don't get that much -- we don't get too much of a benefit, obviously, because the surcharges go both ways. So I don't expect -- it would be nice, but I don't expect to get a whole lot of head wind from the raw material cost going down.

Very good. Thank you very much.

The next question is from Liam Burke with Janney.

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

Good morning, Liam.

Al, in terms of the acquisition pipeline, is it getting stronger? And also, how does pricing look on that front?

We're pretty active right now. The pipeline is starting to move a lot better. It started out a little slow at the beginning of the year because there were a lot of transactions forced by the uncertainty related to tax laws, but we've seen a lot of activity right now. Pricing has strengthened because there is a lot more people with cash looking for ways to grow. So it has become more competitive.

Great. Thank you, Al. And Alvaro, you mentioned your cash flow remains strong and you anticipate it getting stronger through the balance of the year, but most of your cash now resides over seas, understanding there is a tax implication to repatriate it. Does that constrain any of your financial planning in terms of buybacks or returning cash to shareholders or acquisitions?

Not really, and it doesn't in two respects, Liam, because long term, we are holding that cash there, basically, to utilize it. We think in the countries where we're currently accumulating cash, there are opportunities present there. And so hopefully over time, obviously you can't predict acquisition, you have to be opportunistic and take them as they come. But hopefully over time, we will be able to use that -- utilize that cash locally to make acquisitions, to make CapExes, et cetera, et cetera.

So, it is not just being trapped there. We actually expect to be able to use it. In terms of does that limit our financial flexibility, not really. I mean I haven't done the calculation the last couple of days, but typically without the cash, we're about one times EBITDA. Debt to cash flow, maybe a little bit above, maybe one, one-and-a-quarter, and that still provides us with a significant amount of flexibility. So we don't feel constrained by having that cash abroad at all. And again, hopefully over time we will be able to use it very well.

Great. Thank you very much.

The next question is from Jason Rogers with Great Lakes Review.

Hi, guys.

Good morning.

Just a question on PTC, if you've seen any other competitor enter the space.

There's a lot of activity by others to try to be involved in the PTC potential. There is a lot of areas related to it. I think that a number of companies have tried to work on an onboard solution. There's other companies that are working on the back office products. They are typically good companies. So we stay abreast of any progress, but not a lot of change from when we last talked. But there are other people involved and there's plenty out there, plenty of opportunity, and there's plenty of work to be done to get this interoperable by the year 2015 or beyond, if it is extended.

And are you seeing any additional activity lately in the Tier 4 locomotive?

One thing that I understand is that you would have expected, with the Tier 4 requirement, that there would have been a large push to buy locomotives, but I think that with the two factors that are impacting the railroads, one is coal and the other is grain, that they don't need as many locomotives. So I think they're waiting and seeing what happens with the economy.

Now whether there will be a big push before that exploration or not, we don't know. We're personally involved in upgrading some locomotives for Toronto transit, Go transit, I think they changed their name to Metro, and we're actually doing some Tier 4. I think we will deliver the first Tier 4 locomotive in the country to Toronto here this year. So, it is a little bit of a mixed bag. I think it probably is something that wasn't predicted.

All right and just finally, a few items here. If you have a shareholder's equity balance for the quarter, as well as any share repurchases for the quarter.

Sure. Share repurchase, I will take the second one, because that's relatively easy. The way our quiet periods work, we're virtually in a quiet period for most of the quarter because we didn't release fourth quarter until late February, and then we started a quiet period shortly thereafter.

So we were in a quiet period for most of the quarter, so we did not buy back any shares. In terms of shareholders equity, and again, this is subject to final adjustments and re-classes, et cetera, et cetera, but our total shareholders equity is about 1.326 million, and -- I'm sorry, 1.331. I forgot minority interest in there. I heard a couple of moans when I said that; I figured I was reading the wrong line. It is 1.331 as of March 31.

Okay, just finally did currency have any impact on sales in the quarter.

3.7 quarter-to-quarter negative.

Thank you very much.

The next question is from Scott Blumenthal with Emerald Advisors.

Good morning, Al, Alvaro, Ray, Pat, Tim; did I get everybody?

Actually we have a guest here, Karl-Heinz Colmer, our group executive for our friction products. He is visiting from Germany, so he is in the room. So say hello to Karl-Heinz.

Guten Morgan, Carl.

There you go. Guten Morgan.

This morning, the CEO of Norfolk Southern was on TV talking about his CapEx plans, and how he plans to spend about $2 billion this year, plus an additional $200 million on PTC. Now, when Kristine was asking questions a few minutes ago about PTC, you talked about piloting Brazil, and I know that we have been piloting PTC since it was ETMS, I believe in 2007, so can you comment at all about what is going on with Norfolk Southern this year and if this is the first time that you're actually going to start to collect some revenues from this ongoing pilot that you've had with them?

Norfolk Southern, like the other Class 1 railroads right now, are working very closely with us on getting an inter-operable system. As you stated, Scott, we do have an operating system, ETMS, that has been running and will continue to run on the BNSF, and BNSF is moving in -- I think in a good direction, so they expect to ask for a product safety plan being approved by the FRA probably before the other groups. But they would also need to be integrated into the interoperable system.

All of the Class 1s that we're working with right now, where they're at is they're doing a lot of what you would call testing of the system, lab testing, to make sure that the software is working real well. We're finalizing some of the software changes, hopefully all those will be in place by summer. If it is, and the specification is known, I think you will see that the railroads will then go into a pilot test, actually start running trains utilizing the system, and then continuing their efforts.

You know, when you look at their spend, their spend is in a lot of different areas. And thus far, if you look at the total spend, I think the railroads, if you add it all together, and this -- I think this is public, they spent probably $2.5 billion dollars so far in PTC, $ 2.5 billion to $2.7 billion, and they expect to spend upwards of about $8 billion, so that would show about 30% progress on what they plan to spend. But if you look at the amount of work that has been done so far on the locomotive, the onboard, and that's the only part that we actually report on, they probably have about 6,000 or 7,000 of the 18,200 to 20,000 locomotives have some portion of being equipped with the onboard computer. Some are just provisional kits.

The equivalent in number would be 4,000 to 4,500 locomotives which is about 25% of the way done. And if you look at the number of wayside switches that need to be adapted, again there, they have probably touched maybe 8,000 or 9,000 out of 40,000, so it is 20%, 25% along. So I think that the $200 million is, if you look at the various roads I think most of them have identified spending somewhere in that area, as well. Hopefully that answers your question, Scott.

Yes, that answered much of it. I might have to pick some of that up offline. Alvaro, could you maybe, to switch gears here, could you maybe give us an idea as to how much the five acquisitions from the last year added to results? I know that you mentioned that much of the growth was acquisition, if not all of it, and maybe how that might have fallen into the two segments?

Yes, quarter-to-quarter, last year to this year, Q1 to Q1, acquisitions added about $40 million of total revenue.

Okay. And most of that was skewed toward transit I imagine, right?

Yes, most of that was -- 95% was.

And since we -- you threw out the $40 million number, Al mentioned that the PTC sales during the quarter were about $50 million. Am I correct in guessing that they were about $40 million -- in the same quarter last year?

I don't have -- maybe Chad has the first quarter last year.

They're flat.

They're flat quarter to quarter.

Okay. And just one more clarification, if I may, Alvaro. You mentioned that the tax rate will be about 32% going forward. Is that from here on out, or did you mention that it would 32% -- you expect it to be 32% for the year?

I expect it to be 32% for the, say, second quarter, third quarter, fourth quarter which will give you a slightly lower rate -- overall rate, for the year. Again, that's a rough estimate. These things can fluctuate, but right now that's our best guess.

Duly noted. Thank you.

Thank you, Scott.

Our next question comes from Matt Brooklier with Longbow Research.

Good morning. Back to PTC, just trying to get a sense for the timing of booking revenue in '13. If I look back at '12, PTC revenue was kind of back-end weighted. Should we assume kind of a similar pattern of overall PTC revenue in '13, or could it be a little bit different?

Based on what we're saying, it is going to improve, grow year-on-year. I think it is going to have to be back-end loaded since the first quarter is only $50 million, so I think that is what we should see.

Okay. And the $50 million, which is a little bit below the average midpoint of your quarterly guide -- if we distribute PTC revenue evenly in '13 across the quarters, I think earlier commentary was that modest step-down was driven by more activity at the end of the year. Did I hear that correctly?

That's correct.

Okay. Does it matter what types of rail cars are being delivered going forward, i.e. a much larger percentage of rail cars, tanks this year, was there a similar situation last year? Do you get incremental dollars and revenue per the components and parts that you're providing to the OEMs, or is that not the case?

Not the case. We're basically agnostic to the type of car.

Okay. And when I look at, and I think you did touch on this, 3 components of the revenue decline, at freight, being down 23% year-over-year, in the first quarter, it was a tougher rail car delivery comp, and then there was also some locomotive and industrial product head wind. How should we think about the -- I guess the contributors to that decline? I mean if I look at your fourth quarter -- the industry fourth quarter rail car delivery comparison, it was down and kind of similar to what it was in first quarter. So should we assume that the declines in locomotives and the industrial products were a bigger contributor to that overall decline in revenue, or was there some timing issue in terms of rail car others and deliveries in the quarter?

Most of our comments were related to 2012, to the first quarter, to the first quarter of 2013, because that's the comparison that we need to make. If you look at the fourth quarter to first quarter, freight was down about 12%, I think is the number, and more of that was really due to decreased demand on locomotive content --

Okay.

Not necessarily rail car content, because we still delivered 12,000, as you said, in the fourth quarter, to the first quarter. We also saw some slowdown in the higher generation and gen set areas, from fourth to first, and we also saw some slight decrease in freight demand on an international basis, which we think is only temporary.

Okay, and maybe just a final question. Provide a little bit of color on the European rail market. Has there been any change in terms of the demand dynamics there, or are we -- is it kind of a similar operating environment versus fourth quarter?

As you know, I mean they are under some really strong recessionary pressures. But the transit market has maintained good stability throughout this, and the freight markets are down, but we have made some good progress in introducing some of our new products into that market. So for us, it has actually been a little bit of a gain.

Okay. Very good. Thank you for the time.

Thank you.

Our next question comes from Steve Barger with KeyBanc Capital Markets.

Got me under the wire; I appreciate it. (laughter) Just a couple of quick ones. The receivables increase on the balance sheet, was that due to timing or are there any customers that are delaying payment or just kind of any color there?

It is mostly, some of it is due to acquisitions, obviously, when you're just looking at raw receivable balances, some of it is due to the acquisition of Napier in the interim, and the rest of it is pretty much timing, Steve. We're fortunate in the sense that a large proportion of our customers are pretty credit worthy. So, like everybody else, we may have a receivable issue now and then, but for the most part, they are pretty solid.

And similar question on the inventory increase. Were you building ahead on transit? Did it slow a little faster than you thought in freight? Or is it maybe just a function of the broader global footprint?

There is a little bit of building up on transit because, again, the lead times in transit tend to be longer than the lead times on freight. And typically in transit, you get this at the end of the month, we're trying to get inventory out of there and they're trying to send inspectors in because they will inspect it actually before it leaves, and sometimes there is a little bit of they missed the end of the month because they can't get the investors in -- I'm sorry, the inspectors in -- before the end of the month.

So it is a little bit of transit, a little bit of acquisitions, a little bit of sourcing from low-cost sources abroad, which again, you take title to that as soon as it leaves their port, so while it's in transport, it is in our inventory balance. And then you have to order larger quantities. And in general, it is a little bit of increased activity. It is all four. Having said that, and you heard Karl-Heinz is in the room, Karl-Heinz is one of those that we constantly talk to him about working capital, and receivables and inventory. So, I'm glad you brought up the point (laughter) because hopefully he will take the message home and he will relay it to the troops how concerned investors are about it. So thank you very much.

Great. Glad I could help. And the last question. If we look at sales by product-type categories that you report in the filings, does the industrial products fall into specialty products?

They either fall into transit or freight. So far, they have fallen primarily into freight.

He is asking about the specific quantities in the 10-K.

The brake products, re-manufacturing, specialty products and electronics, those categories there.

Sorry. Pat's flipping the pages. In general, it probably is. (multiple speakers) Yes, exactly.

In specialty?

Yes, you can actually go see where all of these fall in by the 10-K and the second inscription in the front.

Okay, great. That's -- I just have it listed in my model, but I don't have the description, so that's all I have. Thanks.

Okay. Thanks.

(Operator Instructions) There appear to be no further questions at this time so I would like to turn the conference back over to management for any closing remarks.

Thank you very much, and we look forward to talking to you in July. Is that right? Yes. Okay. Talk to you then. Bye-bye.

Thanks, everybody.

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