美國西屋制動公司 (WAB) 2014 Q1 法說會逐字稿

Good day and welcome to the Wabtec First-Quarter 2014 Results conference call. All participants will be in listen-only mode.

(Operator Instructions)

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

(Operator Instructions).

Please note, this event is being recorded.

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

Thank you, Andrew.

Good morning, everybody. Welcome to our First-Quarter Earnings call.

Let me introduce the Wabtec people who are here with me: Al Neupaver, our Chairman and CEO; Ray Betel, our President and Chief Operating Officer; Pat Dugan, our CFO; and our Corporate Controller, John Mastalerz. We will make our prepared remarks first, and then we'll be happy to take your questions.

And we will certainly make some forward-looking statements during the call. So we ask that you please review today's press release for the appropriate disclaimers.

Al?

Thanks, Tim.

Good morning.

We had an excellent operating performance in the first quarter, with record sales of $695 million and record earnings of $0.83 per diluted share. Our operating margin continued to expand nicely and was at 17.5%. Our backlog increased during the quarter and now stands at a record $1.72 billion.

The business is performing 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 opportunities in our freight and transit rail markets.

These markets are large, they're global, and they're growing. And we are positioned well to participate in them.

Today, we affirmed our 2014 guidance. We expect four-year earnings per diluted share to be about $3.45 based on sales growth of about 15% for the year. This guidance, as it did in February, includes the acquisition of Fandstan Electric Group, which we now expect will close during the second quarter.

Our guidance also assumes the following. Continued modest growth in the global economy, The US and European transit markets remain stable with the emerging markets driving growth, US freight rail traffic grows modestly, with OEM locomotive and freight car builds also growing. So far this year, rail traffic is up almost 2%.

We assume no major changes in foreign exchange rates and that our tax rate will be about 31.5% for the year.

As always, we will be disciplined when it comes to controlling costs. We'll be focused on generating cash to invest in growth opportunities and ready to respond if market conditions change.

Ray, can you talk a little bit about our current market situation?

Thank you, Al.

One of the reasons we're optimistic about Wabtec's future is that we are involved in very compelling markets. These markets, as you know, are mainly freight and passenger transit. They're large, they're global, and they're growing.

According to the UNIFE study, worldwide addressable rail supply markets exceed $100 billion, with an annual growth rate of about 3%. Western Europe, Asia-Pacific, and NAFTA represent about 75% of that overall market.

Rolling stock is the largest segment, and outsourced services is the fastest-growing segment. And we play in both of these areas. All the markets are focused on improving safety, productivity, inefficiency. And that's where Wabtec plays an important role.

The markets are also compelling because an efficient transportation system and a robust infrastructure are essential to effective global economic growth in both developed and also emerging countries.

Finally, secular trends are also driving investment -- areas like environmental responsibility, urbanization and energy evolution.

On the freight side, in NAFTA, traffic is up almost 2% so far this year, led by a 4.3% increase in intermodal. That's despite all the weather issues that our customers had to deal with in the first few months of this year.

OEM rolling stock deliveries this year are still expected to be higher in 2014 than they were in 2013. We expect them to be around 60,000 freight cars this year and around 1,100 locomotives. This compares to 53,000 freight cars and 1,000 locomotives delivered last year.

Globally, freight traffic is also growing, although China's lower growth rate has had some ripple effect in the mining countries like Australia, Brazil and South Africa.

As you know, we are focused on increasing our global footprint and also our product offerings where we see opportunities in markets that are larger than our traditional NAFTA market. For example, the global installed base of locomotives is about 110,000 worldwide, with about 35% of that fleet being in Asia-Pacific and only 20% in the US. The global installed base of freight cars is about 5.2 million, with 30% in each of the US and Russian markets and about 20% in Asia-Pacific.

On the transit side, stability is still the theme in the transit markets, both in the US and abroad. In the US, ridership was up about 4% in the fourth quarter and 1% for the year. In the UK, ridership was up about 2.8% in the most recent quarter. And in Germany, estimates show a slight increase.

In 2013, North America transit car deliveries were about 1,000 and bus deliveries about 4,500. And we expect about the same number of deliveries this year.

Transit funding in the US is also stable; it's about $10 billion. That's where it's been the last several years.

The current two-year Transportation Bill expires this year, and we expect it to be extended because it really doesn't look like Congress will pass a longer-term bill. So the level of funding will probably remain about the same.

Just as with the freight market, we're focused on global growth in transit also and increasing our product offerings because, again, the markets outside of NAFTA, are larger than our home market. We estimate the global installed base of transit cars to be about 330,000, with about 55% in Asia-Pacific, 20% in Europe, and only about 5% in NAFTA.

And even in these larger, more established markets, investment remains strong. For example, there's cases like in Munich, where it's been announced a doubling of spending this year to modernize infrastructure and transportation systems.

Al?

Thanks a lot, Ray.

As we go forward at Wabtec, we really want to continue to focus on growth and cash generation. Our priorities for allocating free cash remain the same.

First priority is to fund internal growth programs. That includes capital expenditures. Second priority would be acquisitions. And then thirdly, return money to shareholders through a combination of dividends and stock buybacks.

We had a very small window for buying stock in the first quarter and did repurchase 27,500 shares for about $2 million. So we have about $198 million left on our approved $200 million buyback authorization. We expect to be active during the year.

We remain focused on increasing free cash flow by managing costs, driving down working capital, and controlling capital expenditures.

Our growth strategies also remain the same. Global and market expansion, after-market expansion, new products and technologies, acquisitions. Let's talk a bit about the progress that we've made on these strategies.

In the global and market expansion area, our sales outside of the US during the first quarter were $314 million. That's 4% higher than last year's quarter and about 45% of total sales versus, if you look back five years ago, that number would be about one-third.

We continue to expand our capabilities and market presence in various markets around the world. In particular, we have taken advantage of opportunities in Europe, China and South Africa.

The after-market expansion strategy.

Overall, after-market sales were $414 million in the quarter. That's a 16% growth over a year-ago quarter, and it represents 60% of our total sales.

This growth is due in part to acquisitions and internal growth initiatives. We're very focused on expanding our service offerings globally.

As for new products, we continue to have tremendous focus on this area with many internal development projects. To name just a few: electronic braking, oil-free compressors, locomotive services, and an integrated brake system for the European freight market. And, of course, positive train control.

PTC-related sales come in at about $235 million during 2013. Based on our First Quarter 2014 numbers, we're on track for PTC sales growth of about 10% to 15% this year as we continue to work with the railroads and other industry suppliers to develop an inter-operable system.

Recently we announced two contracts. One contract was with Alaskan Railroad; the other with Sound Transit in Seattle. We expect to announce others as the year goes on.

As you know, the railroads and transit authorities have said that meeting the December 15 PTC deadline is not possible, which could lead to an extension of the deadline. We have analyzed this and do not feel that it would have a meaningful impact on our business.

In the area of acquisitions, we completed three transactions last year and have already announced one this year. That's Fandstan Electric, which we expect to close in the second quarter as we work through some final regulatory issues.

Let's talk a little bit about Fandstan Electric. I mentioned this on our last call, but it makes highly engineered components.

Those are pantographs or third rail shoe gears. It has excellent IP and strong engineering and technical capabilities.

About 60% of that business is associated with transit, and 40% industrial and energy. It meets all of our strategic criteria -- new products, no product overlap whatsoever with Wabtec. It has an after-market component of about 30%.

It has an installed base in more than 100 different countries. It meets global expansion in the sense that it has sales of about 50% in the continent of Europe, 20% in the UK, 20% in Asia, and 10% in the US.

It has a strong management team that will continue with the business. The annual revenues are about $235 million, with margins slightly less than our current transit margins.

We see significant opportunities to improve the margins using our lean and sourcing activities, but this will take time and lots of hard work. In 2014, we expect to see significant sales from Fandstan, but minimal earnings accretion due to integration costs and purchase price accounting charges.

Long term, we think Fandstan will be an excellent addition to our portfolio.

With that, I'll turn it over to Pat to talk a little bit about our numbers.

Thanks, Al.

Good morning, everybody, and thanks for joining us on the call.

Just some highlights from our financial results for Q1. Our sales for the first quarter were a record $695 million, which is 13% higher than last year. Of this increase, about 3/4 was from organic growth.

Our freight segment sales increased 23%. That increase was due to acquisitions and organic growth from increases in the area of electronics and freight car components.

Transit segment sales increased 3%. For 2014, we expect to see revenues increase in both of our operating segments, with freight probably growing at a faster rate.

Our operating income for the quarter was a record $122 million, which is about 17.5% of sales. The first quarter operating margin in 2013, a year ago, was 16.8%; and we finished the full year at 17%. So we continue to have slight improvement.

Our interest expense for the quarter was $4.5 million, which is a bit higher than a year ago. And that's due to some increased borrowings related to acquisitions that we completed in 2013.

Our effective tax rate was 31.7%, and it was 30% last year. You have to remember that last year in the first quarter 2013, we had a one-time tax benefit due to changes in legislation, especially the extension of the R&D tax credit, which was a first-quarter discrete item.

We expect to see the annual rate for 2014 to be about 31.5%. We could have some variability due to the timing of any discrete tax items throughout the quarters in 2014.

In terms of working capital, our trade and unbilled receivables were $637 million, inventories were $420 million, and payables were $345 million. The unbilled receivables are related to the long-term contracts, where we need to hit certain project milestones before we're able to bill for the work.

As our businesses become more global and as we expand our sourcing programs into other low-cost countries, that will affect our working capital requirements.

Cash, we had $295 million in cash mostly outside the US; $286 million was on hand at December 31st. When we close Fandstan, we expect to fund the acquisition with both cash and debt, so those numbers will change accordingly.

Our debt at March 31st was $451 million, and that's very similar to year end. In terms of cash generated from operations, we generated $26 million for the quarter; and we expect that to continue as the year goes on.

A couple miscellaneous items -- just some things that we always point out for the call.

Our depreciation for the quarter was $8.8 million, compared to $7.6 million in last year's quarter. That's higher mostly due to the acquisitions we closed in 2013. So we have a full year's worth of depreciation from those acquisitions that weren't in the first quarter of last year.

Amortization expense was $4.7 million compared to $3.6 million in last year's quarter. Same reasoning. It's increased due to the ongoing amortization from last year's acquisitions.

Our CapEx for the quarter was $6.3 million; a year ago it was $6.4 million. Our expectations for the full year for CapEx is to be about $50 million, which includes some of the expenditures that will come from the acquisition of Fandstan.

For backlog, we reached a record multi-year backlog of $1.72 billion, which is about 1.5% higher than at year-end, December 31st. You break that down: $1.2 billion for our transit segment, and $531 million for our freight segment.

Our rolling 12-month backlog, which is a subset of the multi-year backlog, was $1.1 billion, which is about the same as it was at year end. You break that down: transit was $616 million and freight $467 million.

Those backlog numbers, I'll just point out, do not include about $250 million of contract options. We don't count those in the backlog numbers until the customer exercises the options.

So with that, I'm happy to turn the call back over to Al for his closing comments.

Thanks, Pat.

In summary, we had an excellent performance in the first quarter, with record sales and earnings and a record backlog. As we look forward to 2014, we are anticipating another record year and affirm our EPS guidance of about $3.45 on revenue growth of about 15%.

We are pleased with our strategic progress and excited about 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 would be more than happy to answer your questions.

We will now begin the question and answer session.

(Operator Instructions)

The first question comes from Scott Group of Wolfe Research. Please go ahead.

Hello, thanks. Good morning, guys.

Good morning, Scott.

Good morning.

So, first in terms of the delay in closing the Fandstan acquisition, maybe if you just have any color on what's going on there? And how does that impact the guidance? I know no change to the guidance, but Fandstan closing a little bit later -- does that imply the rest of the business may be doing better than you thought? I just want to understand that.

Okay. First question was related to Fandstan and closing of the business. As we've explained, Fandstan is a very global business with businesses in over 100 different countries and some complex business models, and we're going through some anticipated regulatory steps that we need to take in order to be able to close.

So we're confident that we'll be able to work through those and close in the second quarter at this point. Any change to that obviously we would keep everyone informed.

The second question is related to did we actually see the rest of our business perform a little better than expectations since we had anticipated we would have closed the Fandstan business in the first quarter. The anticipation was that we would not close it until late in the first quarter. However, there was impact that we had built into the guidance related to revenues.

And your assumption and your statement is partially correct. There is some strength that we saw in the first quarter that was not anticipated or built into our guidance.

I think that we had stronger sales related to freight car products. And a lot of that had to do with the severe winter that we had.

We also saw the advantage that we had from our electronic product line, and some of the growth was through the acquisitions that we had last year. And the results were a little better and those acquisitions. We typically don't see some of the growth in the acquisition right out of the shoot.

So in total, we saw a little more strength than would have been reflected in our guidance. And hopefully that will be sustained going forward.

Okay. Great. And just a second question. Most of the rails have raised CapEx guidance, particularly for locomotives for the year. And I think you guys are sticking with your guidance in terms of locomotive deliveries. Maybe, what's the disconnect there? And can you give some color -- I don't know if you talked in the past about your content opportunity on locomotives and if that changes at all when the new tier four locomotives kick in, I guess, next year?

Okay. Our guidance on the locomotives, if you would have gone back to the fourth quarter last year, as we saw, we expected actually locomotive business may have been flat to down. And I think that we reported in February and, again, this year, that we actually think it's going to be up a bit at about the 1,100 -- about 10% increase.

We continue to see strength in that area. Whether those can be delivered or not in 2014, still needs to be seen. I think we're pretty consistent with what's happened in the marketplace on locomotives.

Your second part of the question was related to the content. The content on locomotive varies greatly. I think if we were to have every product that we possibly make on a locomotive, we could be upwards of around $200,000 per locomotive. And that creates a good opportunity for us.

As far as tier four, that doesn't create any more products for us, but it does require redesign of many of our products to be tier four compliant. One of which is, as you're aware, we make heat exchangers, and that heat exchanger now has to have different thermal management conditions in order to help meet that tier four requirement by the customers.

Also some of the emission control equipment we have also needs to be designed to help meet the tier four. So it does create an opportunity, but it doesn't really broaden our offering package.

Okay. Thanks for the time, guys. I'm get back in the queue.

Okay. Thanks a lot.

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

Hi, guys. Good morning.

Good morning, Allison.

Good morning, Allison.

On your new product topic, you mentioned electronic braking. And yesterday the NTSB was holding some hearings and the concept of electronic braking was a big discussion point.

Just want to get your sense, with all of this crude by rail safety and sort of the appetite out there. I know it's probably very early stages, but do you think this could be a real opportunity as you move forward? I know there's been some challenges historically.

Yes, I think that there's a lot of challenges for the utilization of electronic controlled pneumatic braking by the freight railroads. And primarily it comes into the fact that you need a unit train, and a unit train is one that would travel from point A to point B and back and forth and not be changing the cars, because every railcar has to be equipped with ECP in order for it to be effective.

And as you know, most trains could have a tank car, a hopper and a flat car or whatever, even an auto rack all mixed in one train. And that makes for it to be very difficult.

I think that crude by rail creates a potential opportunity that they may be able to use this concept to help electronic controlled pneumatic breaking. It allows for shorter stopping distances. It allows for electronic control of each of the cars.

So there are some advantages. Obviously, you could get some of those benefits used in other technology, such as distributive power. And I think that a lot of railroads get some of the benefit from doing that.

So I think there's a lot that still has to be overcome. We continue to have good success in the international markets, primarily in the mining area where unit trains is the standard -- Australia, Brazil, South Africa.

So I think that there's other complications in the US as well, and that's related to if you lease the car, you own it, who pays for it, who gets the benefit, all those things really need to be worked through. We see it as an opportunity, not an immediate one, but long-term this technology is good technology that adds value.

It helps in the safety, efficiency and productivity of the railroads. And it will be adopted over time, is our opinion.

Great. And then, Ray, you commented on transit, obviously Federal funding. I think your view makes sense. Most likely we'll just go on a stable funding pattern for a little while until we can get Congress to move.

But how should we be thinking about that in terms of orders? Is that what transit is assuming at this point? -- and kind of we just keep going forward from here? Or could we see an acceleration once it's sort of clarified?

No, I think, Allison, we have a very strong backlog in transit. The transit projects are three to five years in nature. So I think a stable trending towards increasing, or slightly increasing, funding stream is very good for us. We have a pretty good share on the orders that we win, and we have a lot of ongoing projects.

So those projects are going to sustain our ability to grow our market. If you look at it on an international basis, we have a strong foundation in North America and our goal is to increase our market share in Europe and other places in the world. So if the funding stream remains the same, it's a good thing for us. If it increases, obviously it's better. But we're in a very good position, and the opportunities really are international in a transit market for us.

Perfect. Thanks, guys.

Thanks, Allison.

Thanks.

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

Hey, thanks. Good morning.

Good morning, Matt.

So just kind of a higher level question for you. There's been obviously more talk of potential PTC delay here. You guys reaffirmed your guidance.

I guess the question is, what gives you conviction that you're able to potentially hit this guidance with incremental potential complications or delays on the PTC side? What kind of differentiates what you're doing in the market versus others who are involved?

When you think about the delay on positive train control -- what the delay is, is the full implementation of PTC on all the designated routes and designated locomotives. That delay does not indicate, and truly we see it, that there's any delay in effort to try to get to that -- still that same deadline and a lot of work continues. And we're part of all of that work trying to develop an inter-operable system with PTC.

So any delay, I don't think they're going to stop spending money because I think that what they're trying to say is, hey, we may not -- we cannot meet the deadline, but we're still going to work towards trying to. And we're going to get it done as soon as possible. I think that's more of the message, than we're going to stop and wait and continue. I think the work will continue.

Okay. And are you able to provide some color on what total PTC sales in first quarter and how that broke out between the freight and then the transit divisions?

Yes. Our first quarter sales were about $72 million in PTC related products. About half of that was freight, about a quarter of it was international and about a quarter of it was transit. And that's pretty much -- if you look at the total spend up to this day in that area, that's about where the percentages are at.

Okay. That's helpful. And just, last question, you mentioned seeing some benefit from weather on the maintenance side. Is there any carry forward into second quarter? And then if there was any negative weather impact, maybe you could talk to that?

Yes. Obviously the weather impact, the negative part of it would have been just that the railroads probably didn't get the loads carried that they would have normally had they not had the weather impact. So there might have been more activity. But the severe weather is very tough on the equipment, which I think we saw some added sales related to that.

As we look forward, during the quarter, the deliveries I think were actually down fourth quarter of 2013 to first quarter almost 2,000 cars. We would expect with the backlog going up to 82,000, which is, I think, the second highest in recent years. I think 2006 it might have peaked out at 88,000 or something like that.

And so I would think that delivery should actually increase going forward into the second and third, fourth quarter based on that backlog. That would be a plus that we would obviously see.

Okay. Good color. I appreciate the time.

Thank you.

The next question comes from Thom Albrecht of BB&T. Please go ahead.

Hi, guys. A couple of questions here. Just in your guidance, it looks like you're calling for probably 8% -- 7% to 8% organic growth. I want to see if you're comfortable with that. Because as I went through your 10-K, your organic growth last year was less than 1%.

Yes. Right now that's about -- we would expect to get half of our growth this year from internal growth and about half from acquisitions. Your math is pretty good, Thom.

Okay. So on this weather issue, I'm trying to picture it a little bit more specifically than a couple of the other questions. I actually picture that weather probably created -- maybe not in the beginning but the second half of the quarter -- some repair opportunities in freight but maybe was more of a hindrance to transit and that that might lead to more repair work in the second quarter. Is that possible or am I just over-thinking it?

Yes, I think you're over-analyzing it a little bit, Thom. I don't think it's going to carry over into transit. I think most of the weather type things are behind us now. The only thing that you see in transit sometimes is delayed spending based on budgets or money available, but we don't know of anything that happened that way.

You know, last year during 2013, Hurricane Sandy had a major impact on the transit lines, and there was a lot of after-market that happened from that, and we saw that. But I don't anticipate any little pop in transit or freight into the second quarter related to that weather.

I think the biggest thing will be that hopefully traffic will continue to improve as we've seen in the last few weeks. And that we would also expect that OEM delivery of the freight cars going up into the second quarter.

And then the other question is, in recent years, usually the first quarter EBITD margin is the low point for the year, but you had an impressive 17.5% margin. Do you think that could be the low point for this year as well?

We're probably not going to comment on that, but I would like to congratulate Ray Betler and the entire team of really operating at peak performance, which I think we always strive for. We're working for incremental improvement.

I think there were a lot of questions on the last call related to the improved margins. And I think that we said with confidence we're going to continue to try to do that. And that's our goal, and we'll continue to do that going forward.

Thom, I want to thank you very much for setting expectations. (laughter)

Nothing like a good old whip there. (laughter) And I'll get out of -- or back in the queue in a moment.

But I think Pat said the organic growth was about 75% in the first quarter, so that means your organic growth was just under 10%. Is that a correct figure?

Yes. Organic growth was exactly 3/4 of the total.

That's right.

Okay. All right. Thank you very much.

Thank you, Thom.

Thanks, Thom.

The next question comes from Justin Long of Stephens. Please go ahead.

Thanks. Good morning. And congrats on the quarter.

Thank you.

I saw that the 1,000 unit locomotive order in South Africa you've been talking about was placed, it looks like, with four builders. So I was wondering if you could talk about the bidding process for components associated with those locomotives. What's the potential opportunity and timing around winning some of this business?

And then also, just longer term, could you remind us of the additional locomotive and freight cars that are currently being discussed as potential orders in South Africa?

Okay. In South Africa, you're correct, there was four builders were selected. They split up the electric locomotives and the diesel locomotives. Right now the locomotive builders are going through the bidding process.

I can tell you in the last month, we've made trips to South Africa. We've made trips to China. And we visited with the other people here in the North America.

That bidding process is going on right now. We hope to have some success in our bids. We won't know for a little bit of time. And whenever we do know, we will announce it.

But we're trying to get some content from all the builders. Related to the transit vehicles, I think it's 3,600, Ray?

Yes.

They have let out a contract to Austin. Again, we're aggressively talking to Austin about our participation in that project. We're not in a position where we could announce anything at this point.

But, again, we'll keep you informed. They're nice opportunities. We were pretty impressed with our South African operations. And our General Manager in that area is doing a fine job and creating a lot of requirements are going to be that you have to have localization of the manufacturing in order to participate. So our visit was timely and important.

Great. That's a helpful update. It sounds like there's a lot of activity. And I guess as a follow-up, one thing I wanted to touch on was PTC. And kind of follow-up on an earlier question and your guidance.

How much of your backlog today is PTC related? I'm just trying to get a sense for how much visibility you have to the 10% to 15% increase in PTC revenue you guided for this year. Is that already in the backlog today, or do you need to win additional contracts to hit that target?

There's about $150 million in the backlog with PTC, and it's spread out over a long period of time. Typically we do not get a large backlog on the onboard computer.

The only way we get some backlog is signing some of these transit contracts. But when we look at the freight railroads where we're doing contract work, signaling work as well as the onboard computer, those are usually come in on the purchase order on a short delivery, and we're able to support that.

Okay. Great. That's helpful color. I'll leave it at that. I appreciate the time today.

Thank you.

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

Good morning.

Good morning, Steve.

A couple of Fandstan questions. You talked about having an installed base, or they have an installed base in 100 countries. What's the dollar basis of the installed base, if you know? And does that base track the revenue mix of 60% transit, 40% industrial?

I don't have the dollar value of the installed base. And I'll tell you why.

Fandstan was a company that started in the UK. And when we did meet with their CEO, it was amazing that their strategy was very similar to ours. He named the same -- and I know a lot of companies have the same strategies -- but he named the same.

He also did a lot of the growth related to acquisitions of companies around the world. So I would imagine that the installed base is excellent. But keep in mind it's only a 30% after-market business. So we think there's an opportunity there to grow that.

Some of the products they install, though, you install them and they're there for 30, 40 years. And that's -- they make a conductor rail, a third rail product -- they actually make the rail with -- it's a cladded material with aluminum that the electricity is transmitted on.

And that product doesn't really have an after-market. So there's some products that create an opportunity for us, and there's others that probably you're just not going to get an after-market with.

I got it. That actually [segs] into the next question in terms of the useful life on transit or industrial. Is more of the after-market focused on the industrial side? And typically for the after-market that you're serving, are these the types of products where customers can push out or defer CapEx, or do they have a more predictable replacement cycle?

On Fandstan, if you look at the pantograph -- the pantograph is -- how do I explain it? It's on top of the -- if you ever look at a street car or a transit car on top of it, you see this thing that kind of scissors up and down on springs. That has a good after-market. You have carbon shoes up there that need to touch the wire that's hot.

Also on the third rail shoe gear, that wears as well. Because they sell the actual component that goes between the vehicle and the third rail. And some of the other industrial products which are large induction lines, they have C ports where they make these big reels and festoons, some of those have some after-market. Not a lot. Less than normal.

So it's actually more on the transit has the after-market, in my opinion, than the industrial. I don't know, Ray, you may have a comment on that.

Yes, I agree 100% with your assessment, Al. I think that high maintenance wear products -- I'll just explain the pantograph is by far on the top of the list in terms of opportunities.

Got it. Historically speaking, can you give us the growth rate for Fandstan?

Intrinsic, I would think it's probably in the 3% to 5% range. But if you look at it historically, they've had acquisitions over the years. It's grown rapidly.

You think the 3% to 5% is the organic, plus or minus?

That's what our assumption is, yes.

And I know it's going to be -- not contribute much on the EBITDA line this year, but as you look out and you just look at this family of products, where do you think the Fandstan transit and industrial margins can go? If you want to hazard a guess.

Yes. Normally, what I'll tell you, is they're going to improve. You can be assured that our goals and objectives will show that we're going to try to improve those margins. We really don't have a goal in mind, other than continuous improvement.

We think there's -- as I stated, we think there's a lot of opportunity, especially as we apply our lean manufacturing techniques, the Wabtec Performance System. We think there's a lot of servicing opportunities. I apologize, I think I'm getting an echo for some reason. But I would think that that probably is an opportunity, but I would rather not give you an exact number.

Okay. And since it's late in the call, I'll ask a little more and then get back in line. You've been expanding your international footprint to gain access to these global markets, which certainly has been a successful strategy. But are there still opportunities domestically from a share standpoint, whether it's on content on a railcar or a locomotive? Or are you kind of getting there and you'll more grow with the market?

Well, I think there's certain products and certain businesses that will grow with the market, but there's also opportunities to broaden our product lines, which would allow us to increase our share. We still do not offer the full range of products in transit or freight.

Is there -- just to follow-up, is there more opportunity on transit or freight to broaden the products lines?

Transit is a small market in the US, so you could get incremental improvement, but it's not going to end up that much in the bottom line. Freight is a much larger market, so I would think that the growth would be more in freight in NAFTA than in transit.

Got it. Thanks.

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

Good morning. Thanks for taking my question. I'll try to be quick. If you already hit on this, I apologize, Al. But you had mentioned a regulatory kind of hang up on Fandstan. Where is that at? Is it here or the UK?

Really it's a global regulatory issue that I think will be resolved in the second quarter.

And is that just kind of your comfort level with where it's at, or is that based on legal or regulatory requirements that they make a decision within a certain amount of time?

I think that there's probably no time limit on this decision, but we're confident that it will be resolved.

Just going back to Thom's question about margins for the rest of the year, I think my understanding on this is correct, once you start to bring in Fandstan -- Fandstan initially is going to have a margin drag, is that not correct?

Yes. It will have -- it's lower than the transit on average, right.

Right. Okay. So that just simply --

Plus we have to expense the expenses of the integration as well as the purchase price accounting. So initially it has a larger drag than it will say -- once -- what you have to do is the inventory value that is building the inventory has to flow out and you have to go through your backlog. You have to operate through that backlog.

And any profit that's in either one of those has to flow through the P&L as a negative hit. I learned that from these accountants that are sitting here laughing at me trying to explain this. (laughter)

Yes. Unfortunately you did a good job. So when we think about Q1 potentially versus the rest of the year, we need to take that into account when we think about other margins, excluding all other issues that could come up, right?

That's a valid statement. But as you know, our goal is to continue to improve margins.

I understand that.

Okay.

Thank you.

Thank you, Art.

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

Thank you. Good morning, Al.

Good morning, Liam.

Al, several quarters ago you talked about your Chicago service center and today in your prepared comments you said service is going to be a big part of your growth going forward. Do you see any need to expand that Chicago service area, and is that going to effect any kind of capital expenditure?

Yes, we expanded it in 2013, I believe. Right, Ray?

Yes.

And it was not a major expenditure. As our offering continues to take hold and we do more in that area, we will have some capital going to be required in order to expand. Because locations, everything, in that particular market area.

Now, do you plan on taking that outside of Chicago, or is that just going to -- are you just going to continue?

Yes. Right now we have a repair facility in Houston. Chicago was a greenfield site that we put in. We have one down in Houston. We have one in Salt Lake City. We have a repair in Boise and Chicago now. I think those are the locomotive repair centers we have. So we do have quite a few now.

Okay. And, Pat, you mentioned that a lot of the cash you have is residing overseas. Does that change any of your -- how you're going to address your capital needs in the future?

No. I mean, we contemplate that in our cash plan every year. Really our goal is just to use that cash and reinvest in the business and do it in a way that's the most efficient from a treasury and a tax standpoint.

Great. Thank you.

The next question comes from Samuel Eisner of Goldman Sachs. Please go ahead.

Yes. Thanks very much. Good morning, everyone.

Good morning, Sam.

Just going back to a few of your comments on the share repurchases. It sounded as though you are going to be active, I think is the word that you used, regarding share repurchases. As this represents about 2.5% to 3% of current cap, just curious about how you guys are thinking about using the outstanding, I guess, $200 million. Should we expect you to do that by the end of the year? Or should that creep into 2015 as well?

It could very easily creep into the beyond. I think if you historically look at what we've done on share repurchases, when we say active, I think that you're going to see more of the same. We'll be opportunistic. We definitely want to minimize any creep that would happen with the share account.

We just wanted to point out that the first quarter is not indicative of our normal strategy, because we only had a window that was open for a very short period of time. I think maybe a week it was open. And there was a lot of -- that's when the stock-base comp gets spent as well. So we just want to point out that the first quarter is not indicative of our strategy.

Understood. And then, Pat, on the cash generation, I think you said about $26 million in cash from options. That seems to be down about $6 million year-on-year. So just curious what's driving the lower cash generation for the Company?

Well, our first quarter is always a challenge. We have a number of uses of cash. I mean, simply paying taxes and other items that normally build up throughout the year.

So we end up having sort of our weakest cash generation in the first quarter. And that gets better as the year goes on.

Clearly the growth of the sales, the top line, has impacted our use of cash as we -- our working capital has gone up with receivables and inventories. We tend to see as the year goes on that the cash generation improves quarter over quarter. And really I don't think this is anything

So it just sounded like there's just about $6 million of working capital built. And then, on PTC -- I think last quarter there was a delay or push-out in revenue -- PTC revenue -- that was going to hit in the fourth quarter. Has that all been captured in the number that you said today, Al? Or is there still more to come on that portion that was delayed?

No, I think it's all captured in what we discussed. And I'm struggling a little bit to remember exactly which delay. I don't know of any large amount.

Orders were pushed out.

Orders were pushed out. Yes. Okay. No, I don't think there's anything hanging there. Okay?

Understood. Thanks.

Okay. Thanks, Sam.

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

Thanks you. Good morning, guys.

Good morning, Greg.

I wonder if you could comment how MRS rollout is going down in Brazil?

Right now our pilot program continues to operate. It's utilizing the PTC system. We're working through trying to solve any of the issues we have with the system.

At the same time, we're expanding into new areas. We're doing it section by section. I think it's going well. We stay very close to it.

I don't know of any major concerns that we have at this point, other than trying to complete it as soon as we can. It's a very large system that has a lot of tunnels. It has a lot of complexities with the signaling system that we're working through.

All right. And, Pat, I wondered if you had figures for total assets and equity at the end of March?

I do. Our total assets are $2.917 billion, and our shareholders equity is $1.680 billion.

All right. Thank you. And within the freight segment, I wondered if you could comment on how the industrial piece of that did, if that was a headwind, tail wind or what?

Yes, it's actually improving. What we're seeing is the industrial business is coming back. I think that the production of natural gas has gone up significantly. We see the results of that. So our industrial business is returning, not completely at this point, but is showing signs of being healthy into the future.

All right. And a couple final ones. On both the freight and transit, I wondered if you could break down the OEM versus the after-market in the quarter.

Okay. I can tell you that on freight, OEM was 45%, after-market was 55%. On transit, OEM was 35%, and after-market was 65%. Total, was 40% OEM, 60% after-market for total business.

Great. Thank you very much.

Thanks a lot.

The next question comes from Scott Blumenthal of Emerald Advisers. Please go ahead.

Good morning, gentleman.

Good morning, Scott.

Al, you mentioned in Scott 's question, the very first question, long ago, that you're going to benefit and you may be one of the few companies to benefit from the severe weather. You also mentioned that you felt that you saw a benefit here during this quarter. Did this occur closer to the end of the quarter? And maybe can you provide us with some insight as to how the cadence of the sales progressed through the quarter?

Yes. It was towards the end of the quarter. Mostly in the third month, actually in March. I think probably they are just trying to keep everything running was probably the goal in January and February. And it's not. Don't misunderstand. This is not a large increment that we saw from that, but it was worth noting.

Okay. Thank you for that. And as Allison mentioned the crude and natural gas are now obviously big topics in the domestic rail business. Maybe this is a better question for Ray. Can you maybe provide an update on the opportunities that this might represent for Wabtec? -- Maybe locomotive engine times, natural gas tenders, fueling systems, those types of things?

I think, Scott, as far as opportunity for crude by rail, I think we've mentioned before that the type of trains and the type of haulage really doesn't have a significant difference on us in terms of our opportunities. Certainly if the volumes go up, that's an opportunity.

But in terms of technology -- technology applications and product applications are pretty much the same. If there is any kind of migration or regulatory requirement to go PCT, obviously that will be a big plus. There's product developments that we're doing always to try to capture incremental opportunities in those areas.

Some of those are follow-ons from some of the incidents that have occurred in that market. But in general, I think the best opportunity we have comes through the increased volume.

And if the technology went from diesel fuel to natural gas, it really would not have a major impact on us.

Okay. Fair enough. Thank you.

Okay, Scott. Thank you.

(Operator Instructions)

This concludes our question and answer session. I would like the turn the conference back over to Albert Neupaver, Chairman and CEO for any closing remarks.

Thank you very much, and we'll talk to you soon.

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