美國西屋制動公司 (WAB) 2015 Q1 法說會逐字稿

Good morning and welcome to the Wabtec first-quarter 2015 earnings release 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 Tim Wesley. Please go ahead, sir.

Thank you, Chad and good morning, everybody. Welcome to our 2015 first-quarter earnings call. Let me introduce the other Wabtec people on the call. We have 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 be happy to take your questions. During the call, we will make our forward-looking statements, so please review today's press release for the appropriate disclaimers. Now let's get started.

Thanks, Tim. Good morning, everyone. We had an excellent operating performance in the first quarter with sales of $819 million and record earnings of $0.99 per diluted share. Our operating margin continued to expand nicely and was at 18.1%. 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 are global and they are growing and we are positioned well to participate in them.

Today, we also increased our 2015 guidance. We now expect full-year earnings per diluted share to be about $4.10. This is based on sales growth of about 10% for the year. Our guidance has the following assumptions -- modest growth in the global economy taking into account current conditions in all of our key markets; top-line growth coming mostly from our freight group with about half of that growth coming from organic initiatives; Most of the growth in our transit group will be offset by headwinds from foreign exchange rates. We expect continued operating margin expansion. Our assumption is there will be no changes in foreign exchange from the current levels they are at today. A tax rate of about 31.5% for the year. As always, we will be disciplined when it comes to controlling costs, focused on generating cash to invest in growth opportunities and always ready to respond if market conditions change. Ray, can you talk a little bit about our current markets and growth strategies?

Thanks, Al. Good morning, everyone. It is a pleasure to talk to you about our results and why we are optimistic about Wabtec's future. I will start by talking about our freight rail markets. In NAFTA, freight rail traffic is up 1.5% so far this year. It is led by a 2.2% increase in intermodal. Coal traffic is off about 3.6%, but all other major categories are increasing. Any growth is positive for our industry. But the growth rates are slower than they were in 2014, so we will continue to monitor those for further changes this year.

On the OEM side, rolling stock deliveries in 2015 should be above the long-term average. We expect about 1300 locomotives to be delivered this year compared to 1450 in 2014. The freight car market itself remains strong with a backlog of more than 140,000 cars at year-end. Our plan assumes deliveries of about 75,000 this year and an increase of about 12%.

Globally, freight traffic is mixed depending on the geographical location. In India, we are seeing some increases while commodity markets such as Australia and Brazil currently are challenged. We remain focused on increasing our global footprint and our product offerings beyond our traditional map to market. Remember that about 75% of the installed base of locomotives and freight cars are outside of NAFTA.

Now if we move to the transit market. In our transit market, stability is still the theme, both here in the US and abroad. In the US and Canada, ridership was up about 1% in fourth quarter and for the year. In the UK, ridership was actually up 6.7% in the most recent quarter and in Germany, it was up almost 1% to a record level. This year, we are expecting North America transit car deliveries to be higher than last year while bus deliveries should be about the same as last year.

Our pending orders in transit are up significantly, many of which are international. Transit funding in the US is also stable at about $11 billion. That is slightly higher than the $10.8 billion last year and as many of you know, the Obama administration has proposed a six-year transportation bill with a very significant increase in transit funding. However, we don't expect the bill to pass in its present form.

Just as with the freight market, we are focused on global growth and increasing our product offerings because the markets are larger than NAFTA. We estimate the global installed base of transit cars to be about 330,000 with 95% of the fleet outside of NAFTA.

Energy prices. As we have discussed on recent calls, we have participate in certain markets that are affected by oil and gas prices and also drilling activity.

Drill acquisitions and organic growth. About 5% of our sales in 2014 were associated with the energy sector. With the price of oil uncertain and maybe more volatile this year, drilling activity has slowed, so we are seeing some headwinds in our markets and our guidance takes that into account and we will continue to monitor those market conditions.

Long term, we continue to be optimistic about these markets and our opportunities in them. We continue to focus on growth and also cash generation. Our priorities for allocating free cash remain the same. First is to fund international growth programs, including capital expense. Second is to fund acquisitions. Third is to return money to the shareholders through both dividends and stock buyback. We didn't purchase any additional shares in Q1 due to a very small trading window. We have about $175 million left in our $200 million buyback authorization. We do remain focused on increasing free cash flow by managing costs, by driving down working capital and controlling capital expenditures.

Our corporate strategic objectives, which are focused on growth, remain the same -- global and market expansion, aftermarket expansion, new product development and acquisitions. So let's talk about our progress in these four areas. Global and market expansion. In the quarter, sales outside of the US were $401 million, about half of our total sales versus one-third five years ago. Some markets are currently challenged due to low commodity prices, but we continue to win orders outside of NAFTA. For instance, draft gears for freight in India, brake systems and relays for metro cars in China. In Saudi Arabia, various freight car components, shoe gear in Singapore through Fandstan and locomotive compressors and radiators in Africa.

Aftermarket expansion. Overall, aftermarket sales were $517 million, about 63% of our total sales. This growth is due to acquisitions and also internal growth initiatives. Recent orders include Fandstan in order to overhaul current collection equipment with the London underground and we continue to explore various opportunities throughout the PTC market.

In the new product development area, we have focused significantly on internal development projects. PTC is probably the one that is most familiar. PTC-related sales came in a little bit over $90 million in this quarter with about $10 million of that from Railroad Controls, an acquisition we completed in early February. Our PTC sales this year could be about 15% to 20% depending on the pace of orders from railroads and transit agencies.

Electronic control breaking is another new product in the headlines recently. The FRA is expected to announce new rules for tank cars next month and ECP has been mentioned as a potential requirement. We certainly have the sufficient capacity and capability to respond in the event that ECP would be mandated and we are prepared to do so. We are seeing good initial results from our field tests in the oil-free compressor area.

On the acquisition side, our pipeline continues to be active and we are pleased with the opportunities we have been presented. During the first quarter, we acquired Railroad Controls, the integration of which is going extremely well and we are already seeing some significant new project opportunities through RCO. The Fandstan integration also continues to progress well. We have many new revenue opportunities as a result of our combination with Fandstan and we are working on programs to improve their cost structure. And with that, I will turn it over to Pat for some comments on our quarterly results.

Thanks, Ray and good morning to everybody. Sales for the first quarter were $819 million, which is 18% higher than last year's quarter. This includes a negative impact from foreign exchange rates of roughly $39 million, or about 5%. Of our reported increase for the quarter, 25% was organic growth.

Looking at the segment sales, our freight sales increased 33%, mainly organic growth from increases in our electronics and our freight car components and also from acquisitions. Our transit segment sales decreased 1% due to a number of elements -- the changes in FX rates, the completion of certain locomotive contracts included in the transit segment a year ago. If you excluded the impact of FX, the transit sales would've actually been up 8% mostly due to acquisitions. For 2015, we expect to see revenues increase in our freight segment while the transit segment is expected to be about flat again due to the dampening effect of FX offset by acquisition revenue.

For the quarter, our operating income was a record $148 million, or 18% of sales. Again, FX had a negative impact on the operating income of about $5 million, and that reduced our margin percentage by about 60 basis points. In 2014, our first-quarter operating margin was 17.5% and we finished the year at 17.3%, so we have continued to find ways to improve despite these FX headwinds.

Interest expense for the quarter was about $4.3 million and that is the same as the year-ago quarter. I just want to take a minute and talk a little bit about how FX impacts our results and we have three areas that we review. The first is our transactions and projects in foreign currencies. The second is the translation of non-cash foreign currency accounts and that impact is recorded in our other expense and income line of the income statement and third, just a simple consolidation or translation of the results in foreign currencies into US dollars.

For this quarter, included in the other expense and income line of the income statement, is an expense of about $2.9 million for the quarter and that is non-cash foreign currency translation losses on balance sheet accounts. As for transactions and project exposure to foreign currency exchange, we have natural hedges in place and to the extent that we might have an exposure, we mitigate it with forward hedges.

And lastly, I just want to point out, that the consolidation of our local results in foreign currency, we have considered that effect in our FX guidance and using today's FX rates, our sales guidance for the rest of the year is negatively impacted by about $125 million and a corresponding effect on the earnings. And this is all mainly due to the euro and the pound currency change.

Our effective tax rate for the quarter was 31.9% versus a 31.7% in the year-ago quarter. We expect the annual rate to be about 31.5%. And I will just remind everyone that this is an annual forecast and the quarters will have some variability due to timing of any discrete items.

Moving to our balance sheet, our working capital and -- we had a good result. The trade and unbilled receivables were $666 million. Our inventories were $516 million and payables were $381 million. The unbilled receivables component are related to long-term contracts where we need to hit certain project milestones before we are able to bill for the work. During the quarter, we continued to reduce the unbilled receivables from $188 million at the end of 2014 to $170 million and we expect to continue to improve and make progress this year.

I also want to point out that offsetting this unbilled balance is a customer deposit balance, which stood at $107 million at the end of the quarter. Our cash at March was $249 million, mostly held outside the United States. At the end of the year of 2014, we had $426 million. Our debt at the end of March was $421 million compared to $521 million at year-end. Our cash flow, we generated $44 million for the quarter compared to $26 million for the year-ago quarter and we expect that to continue as the year goes on.

Just a couple of miscellaneous items just to help with your questions. Our depreciation for the quarter was $10.3 million compared to $8.9 million in the year-ago quarter. Amortization was $5.3 million compared to $4.7 million and our CapEx for the quarter was $8.5 million versus $6.3 million a year ago. For the year, we expect to have capital expenditures of roughly $60 million.

Some backlog information. At March 31, our multi-year backlog was $2.2 billion. Transit accounted for $1.3 billion and freight about $900 million. Some of the decrease in the year-end was due to changes in FX rates, which reduced the backlog by about $35 million. Our rolling 12-month backlog, which is a subset of the multi-year backlog, was about $1.4 billion; transit was about $610 million; and freight about $823 million. The total backlog figures don't include about $375 million of contract options that are not counted in the backlog until the customer exercises them. So with that, I'll turn it over to Al.

Okay, we are prepared to answer any questions you have, but to summarize before hand, once again, we had a good performance in the quarter. As we look at the rest of the year, we have ongoing challenges like everyone else. That includes the global economic uncertainty and FX headwinds. But as we stated, based on our first-quarter performance and our outlook for the rest of the year, we have increased our guidance to $4.10 on revenue growth of about 10%. We are extremely pleased with our strategic progress and the long-term growth opportunities that we see. As we have stated before, we continue to benefit from our strong team of employees and management, our diverse business model and the Wabtec Performance System, which provides the tools we need to generate cash and reduce cost. With that, again, we will be happy to answer your questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Allison Poliniak, Wells Fargo.

Just touching on the outlook, obviously, EPS raise -- you kept the revenue guidance the same even though freight was much stronger. Should I just take into account sort of the FX headwinds getting greater for you? Is there something on the organic side there?

What we might do is -- maybe Pat could explain how FX affects our revenue and our results, but if you look at the rest of the year, it is about $125 million headwind, as Pat said. And in the quarter, we had headwinds of what? $39 million. So as you can see, the amount going forward is still pretty large. Why don't you explain how you get averages that affects the current quarter and forward as we are using the spot rate?

Right, well, just simply, in the historical results, we are using an average of the rates and so as you have seen these FX exchange rates decline throughout the quarter, we would obviously reflect that in our top-line sales and our results. When we estimate going forward, we are assuming that essentially today is the best guide of where we will be for the remainder of the year. And so if you just simply take the revenue forecasts and plan for the rest of the year using today's exchange rate, you are going to end up with a dampening effect on the top line and then obviously a reduced EBIT for the year.

Okay, great. And then just on positive train control, it seems like you are increasing your outlook for growth in that area, but just any impact with the obvious potential extension here on the deadline? Are people changing their buying habits there?

No, I think, Allison, obviously, the deadline wasn't going to be met, so honestly it is pretty much business as usual. I think the railroads are all trying as hard as they can to implement PTC and you know there are some that are further ahead than others. Commuter agencies are still very much in a catch-up mode. Some haven't even started because they don't have funding. Others are underway and we have a little bit of a pickup here with RCO now. RCO will also generate PTC revenues and that's why we think we will be up somewhere around 15%, 20% this year.

Great. Thanks so much.

Justin Long, Stephens.

Good morning, guys and congrats on the quarter. I wanted to follow up first on a question on PTC as well. At some point, PTC will be fully installed in North America, but do you think that other PTC-related opportunities can help you avoid a cliff scenario in this revenue at some point down the line? I know you've talked about aftermarket. You've talked about international opportunities, but maybe if you could give some more color on the developments you've made with new products where you could leverage that PTC installed base, that would be helpful.

Let me take that. If you look at PTC and you try to estimate how much is done now today, and there is a report out that -- I think it is put out by the ARR and it talks about where they are at and what they feel that they've done, they have spent about $5 million out of potentially -- $5 billion out of $9 billion of cost and they only have equipped about 60% of the required locomotives with either a full PTC capability or partial. And from a revenue standpoint, that probably means they are less than 50% along the way. Only half of the required wayside units have been deployed and about a third of the antennas and a third of the radios.

For the freight railroads, there's a long way to go and up to this point, we have reported revenues between $900 million and $1 billion, half of which was related to freight. So there is still quite a ways for the freight to go. If you look at the transit market for PTC, there's only a few transit agencies that are really that far along and out of the 20 plus agencies that are going to be required to have some form of PTC, there's only a few of them that have progressed that far and some of them, we are still not under firm contract with these agencies, so there's potential there.

On the international basis, we continue -- international represents about 25% of what we have -- revenues that we've reported. The other 25% would be transit, but, on the international front, we will be finishing up our MRS project in Brazil. We are talking to a number of railroads about future potential projects. This project becomes I think a great example of what can be done with a railroad and the advantages that they are getting. I think other railroads will -- it will open up their eyes and I think internationally we still will have a long way to go.

And that said, that is just the implementations that we are talking about and as you mentioned in your question, there's an opportunity where we've got to service this installed base and as the installed base gets larger, some of these units have been out there since 2008. So we are already upgrading and servicing some of this installed base. That will create a continuous revenue.

The other thing that we focus on, we want to make this a total business over time and that is by taking what we now have as a computer onboard and using that computer to help with not only the safety, but also the efficiency and the productivity of the railroads by adding enhancements. So whether that be throttle control, fuel management, movement management, data acquisition, message processing, interfacing with the dispatch and back office servers. So using it for health monitoring of the trains. So there's just a myriad of things that we are working on to grow this into a business model. I think that we obviously have a business plan and a model, which we are really not ready to share other than the general statements I made, but this will be a continuous business and a growth opportunity for us as we go forward.

That's really helpful, Al. That's great color and I guess to follow up on some of the items that you listed and products that you listed you could integrate into this system. Given the rails are very focused right now in North America on improving velocity on the network, getting service back to, quote/unquote, normal levels, are you seeing more demand from the rails for those types of products? You listed a few things, but at what point should we expect to see a benefit from some of these products that can be integrated into the PTC system? Is this something we could see this year, is it next year? Some kind of timeframe might be helpful.

I think some work has already been done and I know that a lot of the railroads are already applying throttle control and getting some -- seeing some advantages there. There's other work on other enhancements. We will not be the supplier of all enhancements. However, the computer will be the central brain of that operation, so we will have to have some kind of interface with some of these things and we are working on a number of these enhancements ourself. I think the railroads are doing it as they can. They still have a monumental task to complete and get the safety plan approved by the FRA in the time period that they are talking about. They are all earnestly working and as you know, there is probably three or four versions of bills that are in the Senate that would extend the deadline. So we expect that is going to have to clear itself up by the end of the year, but I think everyone's still working hard to try to get it complete and at the same time, if we could integrate some of these enhancements, I see a great willingness and openness to look and evaluate every one of them by the railroads.

Okay, great. And last question, just to clarify something on the foreign exchange impact. Pat, you mentioned the $125 million revenue headwind this year. The EPS headwind you are assuming, I know before it was $0.10. Is it fair to say that is closer to $0.12 to $0.13 now?

Yes, I think that is fair. It has been -- obviously as the exchange changes month to month, quarter to quarter, it will adjust, but that's probably about right.

Just to clarify, the $125 million, that is for the remainder of the year, so we had $39 million in the first quarter. The $125 million is for the remainder of the year, so the full-year impact is larger than just the $125 million.

Got it. That's helpful. But still the $0.12 to $0.13 EPS impact, it is fair for -- is that for the full year or for the remainder of the year?

That is going forward.

That's the remainder.

Yes.

Okay. Okay, great. Thanks so much for the time today, guys.

Matt Brooklier, Longbow Research.

So I just wanted to circle back to transit and revenue being probably a little lighter than we had anticipated. Are you able to rank during the quarter what the headwinds, how much of the revenue maybe shortfall was related to FX, how much of it was related to, I guess, the timing of contracts and then if there was anything else in the quarter that maybe was a greater headwind than you had anticipated? If you could give some color on that.

Okay, as we reported, and I think both Pat and Ray and maybe, Ray, you could add some color to the actual numbers here, but with transit flat year-on-year basically is $3 million down. If you look at FX year-on-year, about almost $30 million of that was negative and from acquisitions was a plus $60 million. The other major impact was we had a large contract that we completed in the first quarter of 2014 for the locomotives that we delivered. I think Pat mentioned that in his comments. That was about a $50 million contract that we completed in difference between quarter-on-quarter.

So if you look at transit year-on-year and you adjust it for all those impacts, we would have been down about 11% and if you adjust for that contract, we would be slightly up and that is why going forward especially with the -- and if you look at the $125 million FX that we are considering as a headwind going forward, a lot of that is in transit because of the fact that this is -- they are more international than they are -- than we are here in the states. So we expect to see those headwinds continue.

The other thing that we mentioned was we have a larger pending order backlog than we had in our previous quarter and that pending backlog is probably higher by about $100 million and what that entails is some options that we can include in the backlog and also some notices to proceed without a signed contract. And a lot of those are transit-related. So I think I gave some color and maybe, Ray, you could talk a little bit more about the transit markets?

Yes, without getting into too much detail, Matt, really we have orders in transit and pending orders, as Al said, around the world. We have a pretty significant order we just picked up, but it takes a while. You go from -- the way it works in transit, normally you get a notice to proceed. You get a letter of intent before you get a final contract, so you basically get a notice to proceed to start working on a contract. And, for instance, just to give you an example, we have a large order for a class of vehicles to overhaul classic vehicles in the UK. We have a notice to proceed on that. We are still -- so we are actually starting work on that. We are investing in some capital equipment to support that order. That order hasn't actually been signed yet, but final contract and when it is, it will be booked and it will be a long-term order like most of these -- three, four, five years.

We have a similar situation in South Africa. We have one in Singapore. So there's a lot of orders that are in the pipeline that are going to come to fruition. We are in a similar situation in China. I just got back from China and we have a couple orders there that are in the same exact state. And all these have FX impact. So I think in the transit side of the business, the transit market, as you know, is 5 plus times bigger outside the US than it is international. We are picking up orders internationally, as we have said in previous calls and we are dealing with the economic environment in those regions.

Yes, the other thing I would like to add, one of the things that we've always talked about, the strength of our business model is the diversity of our business model and that we feel that it is very important to have a good transit business because we view it as being countercyclic to demand. Right now, as everyone knows, there is a strong freight market and we are definitely in position to take advantage of that opportunity, but at the same time we are also working hard to fill up our pipeline with projects on the transit side to support us when -- we are realistic. We realize there is going to be a downturn somewhere along the line and we are preparing our business model to support and work as best as we can through any change that happens.

Okay, helpful. And then oil and gas exposure, I think it's about 5% of your total revenue and just curious to hear your thoughts on kind of what you saw in the quarter and if the headwinds that you did experience, if that was also in line with your expectations, or if that fluctuated from what you had anticipated as we went through first quarter?

Yes, oil and gas business impacts our rubber business, it impacts to some extent our heat exchanger business and as I have said in my comments, we are monitoring changes there. It's not a big impact on our business and we anticipate business as usual in that market sector.

Okay. And just one last question, Al, of the $900 million to $1 billion of PTC revenue that you have generated thus far, can you talk to how much of that right now is being or has been derived from either aftermarket or services and your thoughts going forward on how much that could contribute?

Yes, keep in mind a lot of -- we can't really answer your question precisely, but whenever we put PTC equipment on an other than new locomotive, we do classify that as aftermarket and we haven't really quantified for you all what our aftermarket revenue generated today. Maybe that is something we could look at into the future. I think it is important to point out that, of that $900 million to $1 billion there, that is not -- some of that is installation and not an installed base. So the installed base is some fraction of that number as well and I think it's important to point that out.

Okay. Helpful. Appreciate the time.

Samuel Eisner, Goldman Sachs.

On the 60 basis points of year-on-year margin expansion, is there a way to parse out what is the driver of this? Obviously, freight is growing faster than transit, so it seems like there's a good amount of mix benefit there, but just want to understand productivity savings, pricing gains, anything of that nature that you can help us bucket out the margin expansion on a year-on-year basis?

One thing, Sam, that we only talk about mix when it's negative. When it is positive, we say it is because of our good operating capabilities. So I think it's across the board. There is no specific item. I think it's a continual effort by Ray and his entire team to focus on margin improvement. As you point out though, when you have more sales as a percentage in freight than in transit, you're going to have the mix effect that is positive, and I think there's another positive that happens when you look at FX and more of the transit is affected more by FX. So again, it's the same thing with the margin. So there's a positive impact from that. But I think there's a lot more there to have that kind of margin improvement. It really takes a focus on continuous improvement, which we are just not going to quit; we are going to continue.

And maybe, Sam, just real quickly, so we have talked in the past about the different business councils we have in all of our key business areas that run process contingency across our Corporation. So there's productivity improvements that -- continuous improvements -- that we are focused on in each of our key business processes across the business. We also -- across the Corporation. We also have the continual push on our Wabtec Performance System, our lean process, so we have expectations for improvements there, cost efficiencies and then we have the sourcing savings, we have the -- (inaudible) quality initiatives that we've talked about in the past.

Let's just take this oil question that Matt brought up a minute ago. So we anticipate the challenges in those businesses that I mentioned, the rubber business, for instance, so we don't just let the downturn in the market happen. We react to it; we are proactive. We are taking costs out of our rubber business. So we have -- they are targeted initiatives that we are addressing that [put a base in] the market. So we have corporate wide uniform programs that are addressing our overall productivity improvements, operational efficiency and costs and then very specific programs in the areas that we anticipate there is going to be changes, downturns in our business. So restructuring, headcount reductions, all those things we are reacting in a proactive way as we anticipate changes in the market.

And just a follow-up on that relating to Fandstan, I think that for those that were able to attend that event, I think we saw there was a lot of, I guess, opportunities within Fandstan. Can you just maybe give us an update of where potential improvements in working capital dynamics or even the cost structure of Fanstan stand?

Yes, we have had already a lot of significant improvements in the Fandstan business, [Karl Heinz Coomer] and Michael Grunwald who lead that organization, a group exec and the head of Fandstan, have really done a tremendous job in those areas just bringing those businesses together to collaborate in product development areas, as well as customer delivery areas. We also have initiatives in place to rationalize productlines, to move production to lower-cost countries. So there was no commonality in the sourcing organization there before. That has been put in place, so there's a lot of very specific actions that have been taken.

Got it. That's helpful. And then if you think about the backlog, and I think if you break down the orders in that backlog, it seems as though that the freight orders for the past two quarters have actually declined on a sequential basis. So I was just curious if you can give some context behind what you are seeing on the ground within the freight segment in regards to the order levels because, on a country basis, the backlog now is down from $1 billion last quarter to now $900 million. It's back to third-quarter levels, so I just want to understand how orders are trending within the freight segment.

I think the freight segment, there's a lot of competition there and maybe there's a small change, but we don't anticipate, at least in the short term, any significant changes. We are still picking up a lot of business on the freight side and there's a lot of discussions going on on the freight side, so --.

Yes, I might point out we are seeing the headwinds from the international commodity pricing. So that is a negative impact and those typically have a longer lead time, so if you look at the US freight market, we truly don't get a lot of visibility beyond a couple weeks to deliver something. So I think the only change or impact that I think might be real is the fact that, as you know, the demand for commodities -- iron ore, coal and such from Brazil, Australia, South Africa -- are down and I think some of that is reflected in what you are seeing, Sam.

I'll hop back in queue. Thanks.

Scott Group, Wolfe Research.

So I don't know if you said this or not, but the 10% revenue growth for the year, what is the latest thought on what freight is up and what transit is up within that?

Let me see if I understand your question. We said that freight was going to carry almost all the 10% and half of that would be from acquisitions, the other half from internal growth. If you are asking how much of the FX is associated with freight and transit -- is that what you are asking, Scott?

I guess that would help too and you kind of answered the first part of the question, but, yes, how much of that $120 million of FX from here is transit versus freight?

I don't have that in front of me. Maybe someone else does, but I think a majority -- by majority I mean greater than two-thirds -- would be transit. The other third or so would be freight. Is that about right, Pat?

I think that is right. I think you would have to do a little more analysis, but I think over two-thirds of it is going to be in the transit segment.

Okay. So you've got currency a bigger headwind than you thought initially and probably some of the energy markets and rail volumes doing worse than people thought. What is the offset here that is doing better than you thought to even keep the revenue guidance unchanged?

I think that our performance in the first quarter really is a strong reflection of our business model and we've got a lot of tailwind associated with the headwinds. And the fact that we could manage our business because it is diverse and we keep focusing on the things that we could control. We can't control the FX but we sure can control how we fill the pipeline, how we fill the backlog. Right now, freight, especially in North America, is strong and there is a lot of activity around trying to meet the deadline on the train control, which that should continue as we progress forward. So I think that those kind of things are very positive and it's really related to our business model and the diversity that we have.

Okay. And then maybe just last question again for you, Al. So the currency is a headwind, but the weaker euro presents some opportunities because if you were to do acquisitions in Europe, they are cheaper today than they would have been. Do you think about that as a driving factor of a deal that you would like to do that maybe makes more sense today than it did six months ago, a year ago?

It's not a major factor. We look at deals on the basis of strategic fit and secondly, you've got to be opportunistic. So I think that it really doesn't change our view of being more aggressive or less aggressive. There is more activity in the acquisition area. The pipeline is pretty active right now and it is more competitive than it was a year, two years ago. So we continue to want to be opportunistic and keep our pipeline full and active in the acquisition arena.

And sellers are smart enough to adjust for FX too, so you've got to take that into account.

Okay. Thank you, guys.

Mike Baudendistel, Stifel.

I just wanted to ask you, I was intrigued by your comments that you have plenty of capacity on ECP to ramp that up if need be, if that is part of the safety regulations. Have you had discussions with [TIMSO] that lead you to believe that there is going to be -- likely be part of the upcoming safety regulations?

We have no indication. We are in the total dark as to what is in that regulation, like probably everyone else at this point. And from a capacity standpoint, I just want to remind everyone, last time I gave a little review on ECP, I just want to remind everyone we have -- there is greater than 40,000 units out there that are operating around the world right now and those have been shipped over the years, so it's not a --.

And Mike, we did not say that we expect ECP to be part of regulation. As a matter of fact, we expect it not to be and we haven't anticipated it in the guidance. So all we are saying is if a decision is made, we are positioned effectively to support our customers. That is basically the message.

Great. Thanks for that clarity. Then I also wanted to ask related to the other question on acquisition opportunities, does the lower energy prices at all set up better acquisition prices around the world just related to energy specifically?

I haven't really thought about that and I haven't measured it, but my gut would say that it probably has not created any opportunities because it's not -- as you know, it's only 5% of our business, so I think not, but I would really have to think about that a little bit more.

Okay, great. That's all my questions. Thank you.

Liam Burke, Wunderlich.

With the stronger dollar, are you seeing any pricing competition outside the US on pending deals?

We haven't seen much of it. I can't say that it's nonexistent, but it has not been a major factor up to this point.

Okay, and Pat, you highlighted the $60 million in CapEx this year. Are there any specific projects that you can highlight outside of PTC or ECP that are going to -- that are on the front burner for higher than average return?

We have a couple really good projects going through right now. One is associated with extending our friction business. The friction business I have talked a lot about as it relates to new technology because sometimes people don't really think about that as a high-tech area, but it really is and so we have a very significant investment in Europe in that area as one example.

Great. Thank you.

Kristine Kubacki, Avondale Partners.

Most of my questions have been answered. So on the fly, Ray, you talked a little bit about that you just got back over from China and a little bit about a new order there. Can you talk a little bit about what is going on on the ground there and what your longer-term strategy is in that market?

Yes, it depends on how much time you have, Kristine. Let me give you just the highlights. It's really a pretty dynamic situation. China always is, but in particular right now because CNR and CSR are being merged together into a new mega transportation and organization called CRC. That company is being merged basically to be able to focus now internationally -- to compete internationally. They already essentially dominate the entire market within China. We supply into them in several different areas. We set up a JV for brake systems, for instance, and the order I was referring to was a new order for a metro brake system to be supplied through CRC.

We also mentioned in an earlier call that the Chinese, in this case, it was CNR, won an order or were selected as low bidder for an order in Boston. We believe we have a good opportunity to supply the major subsystems for that vehicle. We have couplers on vehicles that are being supplied into Brazil, Argentina. We have brake systems that are being supplied for locomotives in China. Those are all companies associated with this mega company, CRC.

So we met with obviously all of our businesses, but we also met with the customers over there. They have pretty aggressive strategies in place and plans to grow their share worldwide and I think it will be interesting to see how that evolves. Their focus is (technical difficulty) because they are on other parts of the world.

Okay, that is very helpful. And then just my last question, on the non-rail piece of the business, can you remind us what percent of your total business that is and kind of ex-oil and gas, as we've talked about that at length, how is that business doing?

Our industrial business -- we refer to our industrial business as the non-rail portion. It is about 15% of our overall business.

And we are seeing headwinds on the oil and gas, but the other parts of the business are kind of flat to a little bit under pressure.

Okay. That's helpful. Thank you very much, guys. I appreciate the time.

Thom Albrecht, BB&T.

I wanted to just clarify a couple questions from earlier on. I don't remember if it was Pat or who, but when you were talking about organic growth was 25% of the total, I wasn't sure if that was 25% of your consolidated revenue growth, or if you were talking about within freight, which grew 32% and 25% of that was organic and only 7% acquisitions. Is that the way you meant that?

Yes, the 25% was looking at the total sales for the quarter and the 33% was specific to the freight area. But then the rest (inaudible) is going to be a net of acquisitions and FX and other impacts.

Okay. So freight is much more organic, is that what you are saying?

Yes, the growth is from existing businesses and just when you go do a comparison and period over period, you don't have as much of an impact of acquisitions in the freight area.

If you adjust for FX and acquisitions on freight, (technical difficulty) is plus 27%.

Okay, okay. And then I am assuming that the SG&A, which was quite a bit lower than what I was looking for, is also impacted by the FX, but do you have some thoughts on that just for the second quarter, Pat?

Yes, so when you do a comparison to the fourth quarter, it is lower than the fourth, but that really comes down to some discrete items. We will have some items related to compensation or benefits that one quarter versus another will be a little higher or a little lower than they were in a comparison. But when you look at kind of a run rate for your model, I think we are right around that -- about an $88 million to $90 million per quarter and I think that's the guidance we gave in the last call and I think that's a good number to work with going forward.

Okay, yes, that is what we have been modeling. So the discrete was just incredibly more discretionary I think is ultimately what you are saying?

Yes, we get impacted by like I said compensation, healthcare costs, and those can go up and down, so we tend to look at it on a full-year basis and I think that guidance would be good.

Okay. And let me see here -- that's all I've got. Thank you very much.

(Operator Instructions). Cleo Zagrean, Macquarie.

Good morning and thank you for your patience and also for your insight into project wins and the foreign currency impact. I am following up on a couple of prior questions. On currency, on Scott's question, can you help us understand again the drivers of your improved view ex-currency since last quarter since you are able now to raise guidance despite the higher FX headwind? Is it the areas hit by foreign exchange that are growing stronger than you expected at the end of last quarter or is it the West that is performing above expectations, freight, transit, productivity improvement, anything you can help us understand and move on from here on an ex-foreign currency basis? Thank you.

Cleo, as I think we have said and I'll reemphasize it a little bit here is that the freight markets in North America are obviously strong and helping us drive the top-line growth. We also are getting the benefit of growth in our new product area, some of which or a majority of it is PTC-related. And thirdly is the growth of the acquisitions. They have accounted for -- I think we just pointed out about 75% of the total growth for the quarter. So I think those are probably the best thing that we have going for us is from a growth standpoint. Is that the answer to your question, Cleo?

Yes, that is very helpful. So just focus on the biggest drivers. And to follow up on acquisitions, you did mention that the pipeline remains active even if the competition is also intense. Where do you see the most promising opportunities? If you can go into any detail as to freight versus transit, US versus ex-US, any details to help us understand how (multiple speakers) might contribute going forward.

Yes, it's a whole universe of opportunities that we must remain silent on what we are working on because none of which -- nothing -- you can't count on anything until it's completed and so what I will say is we are pretty active. We are very active right now in a number of areas and hopefully we will be able to have something we can report on to you shortly.

Yes, what we can say is we have opportunities in every one of our market sectors and there's more opportunities than we have capacity to pursue. So we have a very disciplined process that we go through to funnel those opportunities and prioritize them and we have some really good ones we are focused on right now.

Can you go maybe in further a little bit of detail as to what creates these opportunities? Is it bigger companies looking to sell out of private equity shops or just growth overall? What drives opportunities now versus say the prior year?

I think we have always had good opportunities -- I've been with Wabtec almost seven years, Cleo, and I don't -- it goes up and down a little bit, the strength of the pipeline, but I don't ever recall (multiple speakers).

The only factor that is just common sense. I think everyone realizes that people want to sell when things are good and there is at least a horizon where they stood good otherwise they don't maximize the value of what they are offering to the marketplace. So that is why you would see a peak in the middle of a recession on the downturn. There are obviously less opportunities going to be presented at that time and what is presented at that time are normally things that you wouldn't want because they are in distress.

Appreciate it very much. Thank you.

Samuel Eisner, Goldman Sachs.

Just a quick follow-up here on free cash flow. So it seems like you have pretty good free cash flow on a year-on-year basis in the first quarter. What is your expectation for free cash flow as a percentage of net income this year? And then if you could comment about free cash flow in the face of transactions. In particular, are you looking at only proprietary or private transactions, or is there anything in the public domain that has sparked your interest? Thanks.

The second question we can't answer. The first question is that obviously from a cash standpoint, the one thing that we are really focused on is having our cash flow generated from our operations to exceed our net income and that is something that I think that we are very focused on repeating that after last year. We had a -- year-on-year. Obviously come up a little short on that in the first quarter because some of the items, discrete items, that have some kind of seasonality with it, but the overall goal is still to do that.

Thanks.

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

Again, we want to thank you for your continued support, questions, and we look forward to talking to you again. Thank you.

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