美國西屋制動公司 (WAB) 2014 Q3 法說會逐字稿

Good morning and welcome to the Wabtec third-quarter earnings release conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Tim Wesley, Vice President of Investor Relations. Please go ahead.

Thanks, Bill. Good morning, everybody. Welcome to Wabtec's third-quarter earnings conference call this morning. Let me introduce the other Wabtec people who are here with me, Al Neupaver, our Executive Chairman; Ray Betler, our President and CEO; our CFO, Pat Dugan; and John Mastalerz, our Corporate Controller.

We'll of course make our prepared remarks and then we'll be happy to take your questions. We will make forward-looking statements during the call, so please review today's press release for the appropriate disclaimers. Al?

Thanks, Tim. Good morning, everyone.

We had an excellent operating performance in the third quarter, with record sales of almost $800 million and record earnings of $0.93 per diluted share. Cash flow from operations was also strong, as we generated $93 million, exceeding net income. Our backlog now stands at a record $2.18 billion. The overall business is performing well, thanks to our diversified business model, our strategic growth initiatives, and the power of our Wabtec performance system. We're optimistic and excited about the long-term opportunities in our freight and transit rail markets. These markets are large, global and growing, and we are well positioned to participate in them.

Today, we increased our 2014 guidance. We now expect full-year earnings per diluted share to be between $3.58 and $3.62. That is based on a sales growth of about 18% for the year. We have some assumptions in our guidance. Continued modest growth in the global economy. The assumption that the US and European transit markets will remain stable, with the emerging markets driving growth. The US freight rail traffic continues to grow, with OEM locomotive and car builds also growing. So far this year, rail traffic, freight rail traffic is up about 4%.

We're assuming no major changes in foreign exchange rates, and a tax rate of about 31% to 31.5% for this year. Our guidance includes the three acquisitions we completed so far this year. As always, we will be disciplined when it comes to controlling cost. We'll be focused on generating cash to invest in growth opportunities and always ready to respond if market conditions change.

Now I'd like to turn the call over to our President and Chief Executive Officer, Ray Betler.

Thanks, Al.

One of the reasons we're optimistic about Wabtec's future is that we're involved in very compelling markets. Those markets, mainly freight rail and passenger transit, are large, global and growing. According to a UNIFE study, the worldwide addressable rail market exceeds $100 billion, with an annual growth of about 3%. One common theme around the world is that customers are focusing on improving safety, productivity and efficiency; and Wabtec plays an important role in all those efforts. The markets are also compelling, because an efficient transit system and transportation network and robust infrastructure are essential to global economic growth in both developed and emerging countries. Also driving global investment are secular trends and urbanization, energy evolution, and increased environmental awareness.

In NAFTA, on the freight rail side, freight traffic is up 4.2% so far this year. It's led by an increase of 5.7% in intermodal. OEM rolling stock deliveries this year are strong. We expect more than 1,200 locomotives to be delivered, compared to 1,000 last year. The freight car market continues to be strong, with third quarter deliveries of about 18,000, orders of 43,000, which puts the backlog at about 124,000, another record high. Full-year delivery should hit in excess of 67,000.

Globally, freight traffic is somewhat mixed. In Brazil, MRS had a record first half, with traffic up 8%. India saw growth of about 5%, while traffic decreased about 1% in Russia. Germany was up about 1.5%. UK was down about 2%. As you know, we are focused on increasing our global footprint and our product offerings where we see opportunities in markets that are larger than our traditional NAFTA model. The global installed base of locomotives exceeds 100,000. The global installed base of freight cars is more than 5 million, with about 75% of those vehicles being outside of NAFTA.

On the Transit side, stability is still the theme, both in the US and abroad. In the US and Canada, ridership was up slightly in second quarter. In the UK, ridership was up 3.7%. And in the most recent quarter in Germany, it was also slightly up. This year, we're expecting North America transit car deliveries to be about 1,000 and bus deliveries about 4,500. Both numbers are about the same as 2013.

Transit funding in the US is also stable, at about $10 billion, and that's where it's been for the past several years. The current two- year transportation bill expired recently, but was extended a few months, as expected. Congress doesn't seem to be focused or interested on a long-term funding bill right now. Just as with Freight, we're focused on global growth and increasing our product offerings, because the markets for Transit are larger than NAFTA globally. We estimate that the global installed base of transit cars is around 300,000, with about 95% of those vehicles outside of NAFTA.

Now let's focus on growth and cash generation. Our priorities for allocating free cash remain the same, to fund internal growth, including CapEx, to focus on acquisitions, to return money to shareholders through a combination of dividends and stock buybacks. In the third quarter, we repurchased 124,600 shares for about $10 million. So we have about $175 million left on our $200 million buyback authorization. We remain focused on increasing free cash flow by managing costs, driving down working capital, and controlling our capital expenditures.

Our corporate growth strategies remain the same, global and market expansion, aftermarket expansion, new product development in technologies, and acquisitions. So let's talk about our progress in these areas. On the global and market expansion side in the third quarter, sales outside the US were $416 million, a little more than half of our total sales and about one-third of our sales five years ago. We continue to expand our capabilities and our market presence in various markets around the world. During the quarter, we won a signaling project with a new customer in Brazil. We continue to have opportunities in places like Europe, China, India and South Africa. The common denominator in these markets is an ongoing need for transportation infrastructure investment and maintenance.

On the aftermarket expansion side overall, our aftermarket sales were $497 million in the third quarter. That's about 60% of our total sales and up from $358 million a year ago. This growth is due to acquisitions and also internal growth initiatives.

Regarding new products, we continue to have tremendous focus in this area, and it is driving much of our internal development projects for new technologies. Positive Train Control has certainly been one of several growth drivers and our sales came in at about $235 million in 2013, based on our year-to-date numbers. We remain on track for PTC sales of about 25% this year, as we continue work with railroads and other industries to develop an interoperable solution.

On the acquisition side, our pipeline continues to be very active and we're pleased with opportunities we're reviewing. During the third quarter, we closed on two acquisitions, Dia-Frag and C2CE, so I'd like to brief you a minute on those. Dia-Frag is based in Brazil. It has revenues of about $45 million. It expands our friction product offerings in a niche market, motorcycle brake pads and other highly differentiated products, with a strong intellectual property content in technology. Dia-Frag also offers margins that are better than our corporate average, and the company has a large installed base which provides recurring aftermarket revenue. Dia-Frag also offers us the potential to manufacture other products within their facilities for the Brazilian and South American market.

C2CE, it's a company based in Australia. It offers revenues of about $35 million. It provides turn-key train control signaling and communication solutions for us in that part of the world, which include design, project management and installation. Those are very complementary capabilities with our Xorail business in Jacksonville. C2CE serves as a regional market provider. It allows us to address the Australian and Southeast Asia market. Those markets are large and growing, and C2CE has a good installed base with strong customers, like Rio Tinto and Queensland Rail. C2CE also has an excellent management team and technical staff with significant breadth and depth of experience in train control solutions.

So we're very confident in these companies, along with Fandstan, and we know that they'll be an excellent addition to our overall portfolio. Now I'd like to turn it over to Pat Dugan for more details on the numbers.

Good morning, everybody.

Our sales for the second quarter were a record $797 million, which is 26% higher than the year-ago quarter. Of this increase, about half was from organic growth and half from acquisitions. That remains consistent with our long-term expectation. In the Freight segment, our sales increased 33%, or about $112 million. Only $29 million of that increase was from acquisitions. Therefore, the majority of the growth was organic from locomotive and freight car components, electronics, and radiator heat exchanger businesses.

The Transit segment sales increased 18%, or about $53 million. $57 million increase was from acquisitions, so we're essentially flat organically amongst all the other businesses. And the reason for that is that we had completed certain locomotive projects in prior quarters which had contributed revenues. Adjusting for these projects, the organic revenue in the segment would have been up about $35 million, or about 14%.

Operating income for the quarter was a record $136 million, or 17.1% of sales. As expected, that operating margin is slightly lower than prior quarters, mainly due to acquisition of Fandstan earlier in the year. During our second quarter call, you might remember that we said that Fandstan would contribute significant revenues in the second half of the year, but minimal earnings, mostly due to expenses from purchase price accounting and from integration. In addition, its historical margins are currently lower than our Transit margins. Now that we've had Fandstan in the fold for a few months, we're confident that we can increase margins over time; and we continue to expect corporate operating margin to improve over the long-term, as well.

Interest expense for the quarter was $4.6 million, or about $800,000 higher than the year-ago quarter. And that's because of increased borrowings for our acquisition program. Our tax rate for the quarter was 31.3% versus 29.2% in the year-ago quarter. In the prior year, we had a benefit from a tax law change in the UK. We expect our annual rate to be about 31% to 31.5% in 2014, but the quarters will vary due to timings of any discrete tax items.

Working capital. At September 30, 2014, we had a trade and unbilled receivables were around $715 million. Inventories were $489 million and accounts payable were $389 million. At June 30 of this year, trade and unbilled receivables were $717 million, inventories were $482 million, and payables were $397 million. As we have discussed in prior quarters, our unbilled receivables are related to our portfolio of long-term contracts. By hitting certain project milestones, we're able to bill for that work, so it would shift from unbilled receivables to trade receivables and be collected. During the quarter, we reduced that number from $252 million to $240 million, and we expect to make further progress by year-end.

In the quarter, the Company generated $93 million of cash from operations, which we feel is a strong result. So far this year, we have produced $231 million of cash from operations, which is a 9-month measure. And when you compare that to the prior year for the full-year result, we generated about the same amount in 2012 and 2013. Cash on hand at September 30 was $213 million, mostly held outside of the US. We had $226 million on hand at June 30. And our debt balances at September 30 were $522 million, which increased from $501 million at June 30, due to part to the acquisitions of Dia-Frag and C2CE.

A couple miscellaneous items we always point out. Our depreciation expense for the quarter was $10.3 million, compared to $8.2 million in last year's quarter. Our amortization expense was $6.7 million, compared to $3.9 million in last year's quarter. That's up because of PPA and amortization from the acquisitions. CapEx was $13 million versus $9 million in the last year's quarter. So far year-to-date, our capital expenditures were $31 million. And that's compared to a budget of roughly $50 million.

Backlog information. At the end of the third quarter, we had a record multi-year backlog of $2.18 billion. We split that in our segments. Transit backlog was $1.3 billion and Freight,$886 million. Of the increase from the second quarter, about half came from acquisitions and half came from contracts for locomotive overhauls, freight car components, and signaling projects. Our rolling 12-month backlog, which is a subset of the multi-year backlog, was $1.4 billion. And you would split that, again, $641 million for Transit and $736 million for Freight. I'll point out that the total backlog figures that we just quoted do not include about $220 million of contract options. We don't count them in backlog until the customer actually exercises the options.

With that reported, I'll turn it over back to Al.

Thanks, Pat.

Once again, we had a strong performance in the third quarter, with record sales and earnings, strong cash flow, and a record backlog. We expect to close out 2014 with another record year, and we have increased our EPS guidance to $3.58 to $3.62, on revenue growth of about 18%. We're happy 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 cost. We have an experienced and extremely dedicated Management team that is taking advantage of our growth opportunities and ready to respond to any changes in market conditions.

With that, we'll be more than happy to answer your questions.

(Operator Instructions)

Allison Poliniak, Wells Fargo.

On the global growth strategy, you continue to execute well there. Can you maybe discuss areas or regions that you think you're gaining the greatest traction, maybe better than expected, and then maybe conversely, areas that you feel you're still a bit challenged in?

I think overall, I think you're correct. We are making great progress when you look at our international expansion, with 33% of our business outside of the US just a few years ago and today, we're over 50% of our business.

If you look at Freight and Transit individually, our Freight sales, 43% were outside of the US, where in Transit, it was up around 65%. So one of the areas that I think we continue to make progress in is Transit, as we've explained to you all over time that we're a small player in a large market in both the European and the Asian area. So we continue to focus on those areas, and I think our acquisitions that we've targeted have helped that transition, as well.

When you look from a location globally, where are we getting a better footing? I think it's -- I would almost say almost everywhere, Allison. I don't know of an area that we're not making progress in.

We've actually have entered some orders -- Transit orders in Russia. That was a target market for us. We're getting a larger position in Europe. We have opportunities that we think that we're going to be able to take advantage of in South Africa.

If you look at the Freight markets in Brazil and Australia, we continue to make progress and gain market share and continue to offer new products in those areas. Even with the shut down of -- not the shut down -- but the slow down in China, we still see a lot of activity in the infrastructure area.

I think one of the things that Ray mentioned that is extremely important is that we did get another -- not a large, but a small signaling project from a new customer in Brazil. I think that's a great sign that our efforts at MRS are being noticed, and I think that hopefully will give us the momentum to continue its growth in that area, as well as Australia, after our acquisition with C2CE. So I think internationally, we expect to continue to grow and we're making progress around the world.

That's great. And then, Pat, I just want to clarify, I think you said Transit organic adjusting for the locomotive was up 14%. Was that the right number?

That's right, yes. If you go a year-ago quarter, we had a couple projects that are now completed. So if you were to compare the sales, we end up with about a $35 million improvement, and that's about 14%.

And what's driving that? It sounds like you have flat funding. Is it your execution outside the US that's driving that organic higher?

The orders, Allison, are large in the locomotive, new locomotive area, and they're lumpy. There's not continuous orders in the transit commuter market. So we had a couple large orders, one in New York City that we finished out, one in NMTA that we're about to finish out. So we're going to deliver all those locomotives this year. So it's really the unique size of the orders in this area.

But I think what your question was is where is the strength coming from Transit globally, and the answer is globally. We're having some success in new markets that we have been working on for years.

That's great. Thank you.

Thank you.

Justin Long, Stephens.

Thanks and congrats on the quarter.

Thanks, Justin.

Thank you.

I wanted to ask first about the organic growth profile of the business. Just given the tightness in the North American freight rail market, PTC, what you're seeing globally, do you believe the organic growth rate that you're seeing in the business today is sustainable, as you look out over the next several quarters?

We've said in the past, and I think that this will continue to hold true, we think that organically, we can grow our businesses mid-single digit rate. And if we want to sustain the top line growth that we've experienced over the last 5 to 10 years, we're going to have to supplement that with acquisitions, as well.

Realize that when we look at these acquisitions, we're trying to make sure that we have acquisitions that are strategic. By strategic means that we could grow them or we can improve their profitability. I think that when we put together our strategic plan, which we just presented to the Board just last month, we feel that we could very well hit that target of at least mid-single digits internal growth into the planning period.

Okay. Great. And as a second question, it's obviously been a very good year for PTC and the related revenue growth. But I wanted to get an update on your early expectations for 2015. Do you think that PTC-related revenue can continue to increase next year, just based on your current contracts and the discussions you're having with customers?

Without really talking about 2015, because we're right in the middle of our planning process for our budget. Ray and his team are putting that together. Maybe Ray, if you want to give an update. There was a nice report that we saw that was put out by the Association of American Railroads that kind of gives a summary on where they're at. And I think that will give you an indication on what you might see into the future.

So Justin, for FY15 we feel pretty good about FY15. And the reason is if you look at the report that Al has referenced -- and Tim can send it to you -- it basically says that about 50% of the spend has been executed to date. So that's $4 billion out of $8 billion, that about 50% of locomotives have been equipped, either fully or partially, about 33% of the wayside equipment.

So there's still a significant amount of revenue opportunity for the base business. And again, as we have elaborated several times, they'll be following opportunities associated with the aftermarket and enhancements.

So there's still a lot of work to do. The railroads are working very hard to install and develop the qualification process and submit their safety cases. They're all in different states of accomplishment there. And we feel pretty good about FY15.

Okay. Great. Thanks. And I'll sneak one last one in, kind of along those lines.

One of the items that was brought up at the Investor Day was the potential to integrate new productivity related products into the PTC on-board technology in an effort to leverage that system. Could you provide some more color on what some of those products might look like and maybe a realistic time frame for starting to make progress on that opportunity?

I think that the progress has already been made on a lot of that. I think you'll see that railroads are already using -- not necessarily auto pilot, but throttle control and a similar mechanism is cruise control -- so that they can maximize their fuel efficiencies.

There's also products that are related to planning on where some of these trains are moved, when they're moved, and how they're moved. I think efficiencies related to sensor technology that would monitor the health of a particular locomotive. There are probably a myriad of enhancements that are being looked at and worked on, some of which are already being implemented.

Are these going to deliver $8 billion of savings? No. But now that the railroads, the class 1s and other railroads are going to have a computer on board, it's critical that we're talking about how do we better utilize that computer to help with productivity, efficiency and safety of the railroad? And that's exactly what we're doing.

Ray and the team are out there talking to the various railroads exactly about that and trying to pick the easier ones first. And we'll continue to work on this as we go forward.

Okay. Great. I appreciate the time, and congrats again.

Thank you.

Scott Group, Wolfe Research.

Just want to follow up on the PTC question. How much of the revenue this year includes some aftermarket opportunity, and is there -- when do you think the aftermarket starts coming?

And any way to put some context around how big that could be is the first part on PTC. And then, any update on how far along you are on the Transit side with PTC?

Okay, the first question is related to has the aftermarket really kicked in. And as you define aftermarket, the answer to that is not extensively. I think that we have some service agreements that fall in that category. But we're really focused right now on, especially in the US, in getting the pilots running, the field testing done. And once all this equipment has been commissioned, I think that's when you start turning over to more of the aftermarket. We're closer to that with our MRS project down in Brazil, where we should be able to get some aftermarket business in 2015.

Your second question was related to where do we stand on the Transit. Up to this point, we've announced five or six transit authorities that we have contracts with. That's out of a potential of 21.

Those contracts we announced, you could go back and add them up, it's probably $150 million to $170 million. So that will give you an indication of where that is. It's hard to predict the size of the projects, because in some cases, we may be the program manager, may be a turn-key. In other cases, we may just be supplying the on-board computer. So I think that gives you a fair indication about where we're at in the Transit PTC.

I think also in the Transit arena, the aftermarket and service portion probably is a good opportunity, as well. Because most of those organizations do not have a large signaling department or people that are capable of maintaining that system going forward.

Okay. That's helpful. We hear from the freight rails that locomotives are really, really tight. What's your -- how do you think about the locomotive market entering next year? Do you have a better relationship with one versus the other OEM on that side? Does that matter if one of the OEMs is leaving the market? How's Wabtec positioned with this tight locomotive market?

We work very hard to have a good relationship with all potential customers. And I think the market right now, because of the requirement of tier 4 requirements, on which one of the producers is now offering a product and my understanding is that they have a good backlog that goes out a couple years related to that.

But you must keep in mind that the locomotive market is not just for the US. There's a lot of locomotives being sold worldwide. And I think both the major US producers are taking advantage of that international market spend.

Although we're not sure, we haven't really looked at 2015 to the point where we could talk about it, but we think that the demand for locomotives are going to continue, as long as the economy continues to push and there's demands. I think that there might be a tightness of availability, but I don't see a big drop coming in FY15 because of the regulation change, as long as the economy keeps the demand up.

Okay. Great. And just last question, maybe for Pat or Al or Ray, whoever. On the margin side, so the margins were down, year-over-year operating margins, and you get the Fandstan mix impact. Should we think -- do the next three quarters have a similar cosmetic margin pressure, or are there enough other things going on in business or improvements coming in Fandstan where we can start to see margin expansion again in a quarter or two?

What happened in the third quarter, when you look at all the acquisitions together, we had less than a 10% contribution margin from those increase in sales, where the rest of the business was really operating where it should be. Some of that is purchase price accounting that is one-time.

Those one-time charges usually flow out between six to nine months. A little tail, but not much of an impact. So I would think there would be some impact going into the first quarter of FY15. But also, though, after about three to six months, we expect some of our synergies start kicking in, as well, to hopefully offset that.

Okay. Makes sense. Thank you, guys.

Art Hatfield, Raymond James.

If I could follow up on that a little bit. Is that based on how I'm modeling fourth quarter, due to the guidance that you gave for the rest of the year, I'm kind of coming up with SG&A number for the year that is growing a little bit above 20%. And I understand that can move around based on what actually happens with Q4. I can't even recollect, but it appears that's the first time that's going to outpace revenue growth in a very long time.

And I understand that PPA is probably having an impact there. I know you don't want to get too much into detail on FY15, but should we think about that SG&A flattening from here, now that you've got these acquisitions installed, or is there opportunity to reduce that number as we go forward?

We're always going to be doing acquisitions. So that isn't going to slow down. But I think Pat has taken a good look at the SG&A engineering and amortization. And maybe, Pat, you could address that.

Right. So if you look at the SG&A, we're roughly for the quarter, $88 million. We have some acquisition costs and some other that, when you take a full quarter, might increase that a little bit. But some other one-time expenses that are more related to PPA and professional fees. And so I think our run rate is going to end up being in the range of $85 million to $86 million per quarter for SG&A.

And that's exclusive of any further acquisitions, I would assume?

That's right. And so when you look at engineering, I think our engineering's going to be relatively flat for the quarter. And then our amortization expense is a little high. We have a one-time acquisition amortization in there, and that's going to then be offset by ongoing amortization of intangibles and other costs. So I think the best number for your model would be somewhere around $5.8 million, $6 million.

Okay. That's great detail. I appreciate that. Also, just as I think -- and I've been trying to figure this out and I don't know if my numbers are right, because I'm not going to share them -- but when I think about the acquisitions that you've made this year -- and let's just assume that there is no growth to the companies after you acquire them for that first 12 months -- how much acquisition revenue do you already have embedded for FY15?

You know, the only thing I would recommend you do is go back to the announcements related to each of the acquisitions and relatively when they were acquired. I think you could get a pretty good feel for that.

Okay. So you're basically telling me my numbers are probably right.

I did not say that. I don't know your numbers.

That's why I asked you, Al. (Laughter) Did you guys say how much of a decremental impact Fandstan had on margins in the quarter?

The only thing I mentioned is that the contribution margin related to all the acquisitions was up 10%.

Okay. Fair enough. That's all I got today. Thanks.

Liam Burke, Wunderlich Securities.

Al, you talked about lots of opportunity on the transit side. You have a fair amount of runway, being the third player -- roughly, the third player in the market. Are you seeing any competitive pushback here?

You know, obviously our competitors are very aware of our presence in the marketplace. We've got excellent competitors, and we've seen some -- we've been in some tough battles along the way. And keep in mind that one of the things that we really like about the rail market is the barriers to entry. And just as we're able to protect our base pretty good, they do a good job of protecting their base, as well. So as we do make progress, the one thing that you can be assured is that you've got to earn your ability to keep it. But if you do a good job, there's barriers for others to enter. So we do see some tough competition there.

Okay. And with the tight locomotive market you announced -- or you mentioned -- a servicing contract on the locomotives adding to backlog. Do you need to beef up that area of the business or invest any additional funds there?

Okay. Yes, we received some orders that the railroads have some choices on whether or not they buy locomotives or they could actually take and repower or upgrade their existing locomotives, as long as they improve. They don't have to reach tier 4, but they do have to improve on the emissions. And some of the railroads are doing that and we're taking advantage of that.

In order to take advantage of that, we do not need to spend any capital at all. We have the capability at our locomotive plant out in Boise, Idaho, as well as we've put in -- I think we've established three, if not four -- how many, Ray?

Three currently on the books.

Three current locomotive overhaul service centers around the country.

Great. Thank you, Al.

Scott Blumenthal, Emerald Advisors.

Al, the business showed very, very small organic growth. I think we all have a good idea as to the pulse of domestic rail activity, and the freight railcar business is strong with record backlogs. Can you maybe discuss some of the other business end markets that were particularly strong and contributed to the organic growth?

I'll pass that on to Ray here.

In general, across the board, we have new product development that we're introducing, Scott, throughout the worldwide market. We have a lot of examples of that on the transit side, new brake systems, new calipers, new disks, new electronics that's generated -- resulted in incremental revenue and future orders.

On the locomotive side, Al just talked about tier 4. Heat exchangers, we have developed for that application on the locomotive, new locomotives for NAFTA. Locomotives internationally, we have new products that we're selling as complete brake systems. There's incremental growth organically through some of the acquisitions. Fandstan in particular has new technologies that they're introducing and that's contributed to organic growth.

So both on the Freight and the Transit side. And a part of it is the diversified international markets that we have focused on, and that focus has been both in product development and in certification. There's a tremendous effort and cost that's required to participate in these international markets, and we again, slowly, surely, incrementally are focused on getting our product certified so that we can sell into these international markets.

Al mentioned Russia. Russia is a good example. We were on platform for locomotives in Kazakhstan. We took those products and we focused what changes needed to be made in Russia, made those changes; and over the last two years, have gotten certification for a whole plethora of products in Russia. So those are some examples that I can give you.

Okay. That's helpful. And Ray, you did bring up heat exchangers and the heat exchanger business. Obviously, there are multiple applications for those things and you'd been benefiting recently from some of the strength in the oil and gas business. And I was wondering if recent downturn in oil prices concerns you and if you've heard anything, either directly or anecdotally from some of the customers that would maybe give you a little bit of concern there?

I would say in general, we are worry warts. We are concerned about everything. So there's a lot of speculation about what's going to happen on a micro and a macro basis in terms of the change in oil prices. But we haven't seen an impact, at this point. And I think, in general, the heat exchanger business, both on the power generation side, as well as on the locomotive side, has been really good for us this year and we anticipate growth next year.

Okay. Terrific. And one last one, if I may. Al mentioned the signaling project with a new customer in Brazil. I'm assuming that the new customer is separate from the MRS project, which was a PTC project. And I was also wondering if that represented the bulk of the -- or a large portion of the backlog growth sequentially.

As I said, it's not a large order. It's just an important order, because it gives us more credibility in the marketplace.

Okay. Terrific. Thank you.

Greg Halter, Great Lakes Review.

Relative to Scott's question, that signal project that, I presume, is a PTC project, correct?

Yes.

All right. And just one other housekeeping. Pat, do you have the equity number at the end of the quarter?

Yes. It's [$1,789,000,609].

All right.

Point 5. (Laughter)

I know you guys are big in WPS, so that's good to hear. Actually, that answers what I had. Thanks.

Samuel Eisner, Goldman Sachs.

Just to start off here, it looks like gross margin was up about 120 BPs year-on-year and was definitely ahead of our expectations here. So it's continuing to inch up. I'm just curious, what specifically is driving that? Is that mix? Is that WPS? Just want to understand, again, just on the gross margin line, what's driving it.

Okay. I think some of it is mix. That's a term we're not allowed to use internally, because that's usually an excuse, not a plus. But I think the other thing is, is we continue to drive our margins through our Wabtec performance system.

I think Ray and the team are doing a tremendous job staying focused on increasing the productivity efficiency, getting advantages from sourcing. He started a new initiative on cost quality. I think that's what's driving it.

There's only so much leverage that you have on your SG&A and operating cost. So that's the reason you're seeing it. And hopefully, we'll be able to continue that.

Great. And then transitioning to the backlog here, I think if our numbers are right, orders increased sequentially in Freight over $300 million. Transit is up over $100 million, almost nearly $200 million. So can you maybe break down what the real drivers are of that significant quarter-on-quarter order strength?

We've got to nip this. We were not totally complete analyzing the Fandstan backlog at the end of the second quarter. When we fine tuned that backlog, that contributed to part of the difference between second and third quarter.

If you take that into account, that backlog, about 50% to 55% of the backlog gain is from acquisitions. The balance was internal orders, from which we talked about freight car components, the locomotive overhaul. And I think that we feel that the internal growth rate is about 13%. Tim, you did some work --

Even if you adjust, I think it was about $100 million that the second quarter backlog was light. And even if you adjust for that, the third quarter backlog was still up like 13% over the second quarter. So still a pretty strong increase.

All right. That's helpful. I guess I can follow up offline regarding the actual numbers here. And then lastly, thinking about the railcar cycle, you mentioned that 67,000 expectation for 2014. Initial view into 2015, up, down, sideways, Al, how are you thinking about that?

Well, I think that, again, we're in our planning process right now for next year. I know in my nine years in the industry, I've never seen a backlog at 124,000. That's the only thing I can tell you. But there is capacity constraint, especially on certain types of cars, that we're aware of, especially tank cars, which makes up 50% of the backlog.

All right. Great. Thanks.

Matt Brooklier, Longbow Research.

So wanted to follow up on PTC, if I could. Do you have total PTC revenue contribution for third quarter and how that broke up between Freight and Transit?

I think the sales were around $75 million, and it's still hanging in there. About half is Freight, about 25% is Transit, and 25% International. It's still around those percentages.

Okay. And I think Ray earlier on the call talked to the upper end of PTC growth -- revenue growth, the range that you had provided at the end of second quarter. I'm just trying to get a feel for -- A, confirm that, and, B, get a feel for why potentially you have more conviction in that bigger number.

Yes. It was -- maybe I didn't articulate it properly, Matt, but it was up 25% growth this year.

Over last.

Okay.

Is that the question you're asking?

I think the former range -- I'm probably getting a little bit too nit picky here -- but the former range was 20% to 25% growth for this year and you talked to that 25% number. So I was just curious if --

The reason for the range that is a lot of the orders right now -- and I think we might have explained this in the past -- are tied to field testing. And the field testing continues. If it's moved up and there's no issues, you tend to see more orders than you would if they come in with an issue or it gets slowed down for any reason. So that was the reason for our conservatism in projecting last quarter.

And the other issue that Al mentioned, Matt, is transit authorities continue to struggle with this funding issue. So we can't predict when they're going to receive their funding and release orders. So we're involved with all the transit authorities at various stages of business development. But a lot of their spending decisions are dependent on funding.

Okay. And then this new signaling contract in Brazil, it sounds like it is PTC work. Are you able to provide a little bit more color on that contract, who potentially you're doing the work for, how much this could grow? Or maybe you're not able to give that color at this point.

We're not able to give the color any further than basically what we say. And it is PTC-related work, and it's a new customer, and it's a small amount. But the important thing is we're getting looks from other people. And that's one of the things we've talked about in the past. And we just wanted to give you an indication of it. But we're not capable of saying anything else at this point.

Okay. Understood. Thanks for the time.

Thank you.

(Operator Instructions)

This concludes our question-and-answer session. I would like to turn the conference back over to Tim Wesley for any closing remarks.

Okay. Thanks, everybody. We will talk to you at the end of February, when we have our fourth quarter reports. Have a great day.

Thank you.

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