Westinghouse Air Brake Technologies Corporation (WAB) Q3 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Wabtec Third Quarter 2012 Earnings Conference Call. [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, Investor Relations. Mr. Wesley, please go ahead.

Thank you, Andrew. Good morning, everybody, and thanks for joining us on our earnings call for the third quarter. Let me introduce the people from Wabtec who are here with me. Our President and CEO, Al Neupaver; Alvaro Garcia-Tunon, our CFO; Chief Operating Officer, Ray Betler; and our Senior Vice President, Finance and Corporate Controller, Pat Dugan. Al and Alvaro will make their prepared remarks as usual, and then we will be happy to take your questions. We will, of course, make forward-looking statements during the call, so please make sure you review today's press release for the appropriate disclaimers. Al?

Thanks, Ken. Good morning, everyone. As you saw from our announcement earlier today, Wabtec had another strong quarter, with sales of $588 million and earnings per diluted share of $1.30. The company is operating well and its continued good performance, along with our outlook for the fourth quarter, led us to boost our guidance. As we'll discuss, our performance was driven by strong growth in both our operating groups, both freight and transit. So overall, our business is performing well, thanks to our diversified business model, our strategic growth initiatives and the power of our Wabtec Performance System. We're also optimistic about the long-term growth opportunities in our freight and transit rail markets, which is being driven by megatrends around the world, ongoing demand for natural resources, increasing global trade, increasing urbanization and the continuing need for infrastructure investment. Based on our results to date, the current outlook for the fourth quarter, we now expect full year earnings per diluted share to be $5.13 to $5.18, with sales growth now expected to be about 22% for the year, if EPS guidance is about 40% higher than the adjusted EPS last year. As you all can calculate, this bodes well for a strong fourth quarter. Our guidance assumes the following. Slow, continued growth in the global economy. In the U.S., we are seeing a general wait-and-see attitude toward major projects, probably waiting for the election to provide clarity on where we are headed in a number of key policy areas. It assumes that the U.S. transit market will remain stable. Our transit revenues are growing into the fourth quarter, based on our existing backlog of projects in the U.S. and internationally. We assume U.S. freight rail traffic will be stable, with car build slightly down. And lastly, we assume no major changes in foreign exchange rates. As always, we will be disciplined when it comes to controlling cost, focused on generating cash to invest in growth opportunities and ready to respond decisively to any changes in market conditions. Let's look at the freight rail market. In North America, rail traffic remains mixed this year. Through mid-October, car loadings were down 1.6%. Now, if we exclude coal, car loadings are actually up 2.6%. Intermodal traffic is up 4.7%. Of the 20 traffic categories that are followed, 11 are up so far this year, with particular strength in autos, petroleum products and lumber. We see no change in our OEM delivery estimates for the year. We expect more than 1,200 new locomotives to be built this year, that compares to 1,100 in 2011. Forecasters are expecting around 60,000-or-so new freight cars to be delivered in 2012. That compares to 48,000 in 2011. About 12,000 cars were delivered in the third quarter. Orders were stronger than expected at about 15,000. Thus, the backlog rose 5%, to almost -- or over 61,000. Globally, freight traffic is also somewhat mixed. Brazil's MRS had a 10% increase in carloads in the most recent quarter. In Russia, we see that traffic is up 4% in the month of September. In Australia, Genesee & Wyoming's traffic was down about 8% in the third quarter. South Africa meanwhile has a major multi-year investment in rolling stock that they've announced. And China has also announced a stimulus program that includes additional infrastructure investments, including investments in the rail sector. Looking at the transit market. We continue to see stable markets in the U.S. and abroad. In the U.S., ridership was up 2% in the second quarter. In 2012, transit car deliveries will be about 1,000. That's slightly up from last year. Bus deliveries will be about 4,500. That's slightly down from last year. This stability in the North American market continues despite budget issues and political uncertainties. After 3 years of short-term extensions and uncertainty, we finally have a new multi-year transportation bill. It's called MAP-21. This 2-year bill maintains funding for transit programs at about $10 billion a year. That's about where it's been for the past several years. The lifting of some of the uncertainty with this MAP-21 signing may help jump start some transit agency programs. If we look outside the U.S., transit is more of the culture and the economy, and we're seeing stability in the key markets. In Germany, for example, Deutsche Bahn had a 4% increase in ridership in the first half of the year. So even in these difficult economic times in Europe, transit authorities are moving ahead with existing programs. As I mentioned, we are seeing growth in the second half in transit, due to our backlog of existing projects and especially in our locomotive division. We will continue, as we have in the past, to focus on growth and cash generation. Our priorities for allocating free cash remain the same. Our first priority is to fund internal growth programs. These programs have accounted for 72% of our sales increase this year. The second priority; acquisitions. We've made 4 acquisitions already this year. And lastly, return money to our shareholders through a combination of dividends and stock buybacks. We bought back $6 million worth of stock during the quarter. Our growth initiatives also have not changed. Global market expansion, aftermarket, new products and technology and acquisitions. Let's talk a little bit about the progress we've made in each of those growth strategies. Global and market expansion. Sales outside of the U.S. were $285 million, that's 24% higher than the third quarter of 2011. Through 9 months, international sales accounts for 50% of our total versus only 33% 5 years ago. Growth in the quarter was driven by sales of new freight locomotives in Australia, our train control project in Brazil and acquisitions of Bearward and Mors Smitt. During the quarter, we announced several new international projects, including freight brake equipment for GATX rail in York and ECP product for Rio Tinto in Australia. We look at the aftermarket expansion. Aftermarket sales were $297 million or 51% of our total revenues. This grew by 5% compared to the prior year quarter. We have benefited from train control projects in the U.S. and Brazil and service and overhaul work in the U.K. New products. Sales of new products represented about 30% of our total sales for the quarter. These new products range from next-generation locomotives that meet Tier 4 emission standards to an oil-free compressor to aftermarket services in Brazil. Positive train control, PTC, of course, also fits into this category. Positive train control continues to be a growth driver, with sales expected to exceed $200 million this year. That compares to about $125 million in 2011. We do expect growth again next year. Acquisitions. We completed, as I said, 4 acquisitions so far this year, including Winco and Tec Tran in the third quarter and the LH Group acquisition that was completed at the beginning of the fourth quarter. Acquisitions have helped to drive top line growth. Acquisitions have accounted for about 28% of our growth year-to-date. And they also offer ongoing opportunities for margin improvement as we fully integrate them and apply the principles of the Wabtec Performance System. A little bit on these acquisitions that we've recently made. Tec Tran is the only U.S.-owned manufacturer of hydraulic braking equipment and related component. This is important because it helps car builders meet Buy America. Their sales were about $10 million. Tec Tran is a strong addition to our product line, with the technology that we didn't have, used primarily on light rail vehicles and streetcars, which is the fastest-growing segment of the passenger transit infrastructure market. Winco. It is in South America, Brazil, sales of about $15 million. They are a marketing and sales company with capabilities that include value-added engineering and assembly, service, technical support and logistics. Winco has an extensive network of customer relationships in the freight and transit market throughout Brazil. It also complements our existing presence in Brazil and expands our global footprint. The LH Group, with sales of about $65 million, is a U.K.-based provider of maintenance and overhaul services for transit. It complements our existing presence in the U.K. by enabling us to offer complete overhaul services for passenger transit vehicles and components. That includes engines and transmissions. About 10% of their sales are in non-rail markets. With that, I'll turn it over to Alvaro to talk a little bit about our financial results.

Right. Thanks, Al, and good morning, everyone. Once again, I'm pleased to be able to report our financial results. Sales for the third quarter were $588 million, the second highest total ever and 18% higher than last year. Of this increase, about 60% was from organic growth. Freight Group sales were up about 12%, with about half coming from organic growth and the rest from the acquisition of Bearward. As we expected, and I think we discussed this previously, Transit Group sales were up strongly, about 20% -- I'm sorry 27% higher than the year-ago quarter. About 2/3 of this was due to organic growth. We continue to expect this group to have higher revenues in the second half of '12 compared to the first half. Increased sales were also driven by new commuter locomotive projects, components for new transit cars and the Mors Smitt acquisition we'd already announced. Income from operations was also strong this quarter at $97 million. Operating margin was 16.5% versus 15.1% in 2011 -- in the third quarter of 2011. We're confident as usual that there's a room for more improvement over time. We can't give a specific number, but we think there's still opportunities there. Margin performance was driven by several factors: higher sales volumes, a favorable product mix and benefits from the Wabtec Performance System. For example, SG&A was 10.2% of our sales in this quarter compared to 11.6% last year. This is just one example that demonstrates our operating leverage and ability to manage cost. Interest and other interest expense was pretty stable, about the same. Other income or loss can fluctuate due a little bit to FX, and we had a small loss due mostly to paper FX translation losses. The effective tax rate for the quarter was 31.8%, which was lower than the year-ago quarter as we were able to close out several items at the state and federal levels. Both at the state, we were able to close out a couple of issues, and at the federal level as well. This was compared to the tax rate -- the year-to-date tax rate of 33.3%. So if you take a look at our numbers year-to-date, the tax rate is 33.3%, and you compare the 31.8%, this yields at a benefit of about $0.03 a share. We expect the rates to fluctuate over time, but we expect it to be in the fourth quarter plus or minus 33.5%. And you can see that, in general, this is consistent with prior history. For example, the year-to-date tax rate compared to last year is virtually the same. Cash from operations were about $83 million in the quarter and $114 million for the 9 months. For the quarter, this was a good performance, and we hope to continue that momentum in Q4. Working capital improved slightly despite our higher sales, and we're starting to see some incremental results from our internal improvement initiatives. For example, at September 30, receivables were $430 million, inventories were $392 million, and payables were $236 million. Adjusted for acquisitions and foreign exchange, we generated cash of about $16 million by reducing receivables, $2 million by reducing inventories a little bit and payables used up $16 million of cash. Our working capital -- our GAAP working capital, what we would call GAAP working capital, which is current assets less cash minus current liabilities was 15.6% of sales for the quarter. One of the unfortunate effects, it's probably the only downside, of our business becoming more global in recent years and as we continue to expand our sourcing programs into other low-cost countries outside of North America, this causes somewhat of an increase in working capital. Receivables tend to be longer, the days outstandings tend to be longer abroad. And obviously, if you source goods abroad, you have more inventory. But even so, we think we can do better, and we're continuing our initiatives to improve our working capital balances. In terms of cash, at September 30, we had $282 million in cash compared to $234 million at the end of the last quarter. Some of that cash will have been used for the acquisition of LH, post the end of the quarter. The debt at September 30, was $433 million versus $443 million at Q2. Few other miscellaneous items. During the quarter, we bought back 77,500 shares for about $6 million, and we still have $95 million remaining on our original $150 million buyback authorization. Depreciation for the quarter was $7.4 million, compared to $8.8 million in last year's quarter. Amortization was $3.9 million compared to $4.1 million last year. And CapEx for the quarter was $8.2 million compared to $9.4 million last year. Year-to-date CapEx-wise, we've spent about $25 million, and we'll probably end up in the low 30s, $32 million to $34 million, somewhere in that range, versus $38 million last year. That number's a little bit lower than what we provided last quarter. In terms of backlog, the backlog is still at a near record high at more than $1.5 billion. The total multiyear backlog is, like I said, about $1.5 billion. The transit portion of that is $953 million. The freight proportion of that is $558 million. The rolling 12-month backlog that we expect to execute during the next 12 months, in total, is $1.1 billion. In transit, that amount is $654 million, which is a record high for transit and the seventh straight quarter it's actually increased. For freight, it was still strong at $447 million. And these figures of course, don't include about $250 million-or-so of contract options that are not counted in the backlog until the customer exercises, but we are optimistic about them. And I think that pretty much concludes the financial summary, and I'll turn it back over to Al.

Thanks, Alvaro. Once again, we had a good quarter with strong sales, earnings, cash flow, as well as good margin performance. Our 2012 EPS guidance is now $5.13 to $5.18 on revenue growth of 22% -- of about 22%. Longer-term, we could not be more pleased with our strategic progress and growth opportunities we see. We continue to benefit from our diverse business model and Wabtec Performance System, which provides the tools we need to generate cash and reduce cost. And most importantly, we have built a strong and dedicated management team that is taking advantage of our growth opportunities. With that, we'd be happy to answer questions.

[Operator Instructions] Your first question comes from Tom Albrecht of BB&T. Thomas S. Albrecht - BB&T Capital Markets, Research Division: I think a lot of us -- it's such a murky demand world right now, and I wanted to just explore a couple of things here. There's always been some unusual patterns with freight revenues. And they were off about $50 million from the June quarter. How much was -- how much of that was because of railcar deliveries were 4,000, 5,000 units lower than in the June quarter? And how much of that was just maybe a slowdown elsewhere that you may have seen?

Okay. And we're looking at second to third, is that correct, Tom? Thomas S. Albrecht - BB&T Capital Markets, Research Division: Yes, the second quarter was $407 million, and you just did what, $354 million.

Yes. About what we saw, if we take a look at all of our freight car product groups, of that drop, probably if you say that it was around $50 million, probably $20 million of that was associated with railcar builds. Railcar builds were running about -- the deliveries were 12,000 this quarter and about the same as the quarter 2011. But obviously, the quarter before, we were at deliveries of 17,000, almost 18,000. But we also had less sales in some of our industrial product areas the gensets, heat exchangers that go into oil and gas exploration, the frac-ing part of the business. That accounted for a portion of it. We also had less sales from our locomotive group under the freight area. We had finished a lot of our freight locomotive sales in the second quarter. So in total, it probably only accounted for what, maybe 30%, 40% of that freight drop, and the other part was more finishing a project, which happens and the industrial heat exchanger area. We also had a little less in freight hardware related to PTC, especially in our MRS project. There was a little less sales in the quarter in PTC freight products as well. So I think those are the 4 main areas that we saw. Thomas S. Albrecht - BB&T Capital Markets, Research Division: Okay, that's helpful. And then kind of a follow-on, I know the goal is $200 million of PTC revenues this year. Is that pretty even at about $50 million a quarter, or has there been a ramp up through the year? And then maybe you could talk a little bit about what kind of year-over-year growth rate we can think about for transit in the fourth quarter.

Okay. 2 different questions, I think. First one was related to PTC. And what we saw at PTC, we were running at 50 for the first quarter, a little higher in the second quarter. And as I just mentioned, we saw a little decrease, probably about a 10% decrease. And it was all related to the MRS program where that is on a contract basis. So it really depends on how far along you are in the contract whether you could recognize revenues. We expect that to continue to increase. And as we've stated before, we said that we'll be over $200 million for 2012. We expect it to grow in 2013. We haven't really given a percentage number at this point. That would be something we do when we give out next year's guidance. Thomas S. Albrecht - BB&T Capital Markets, Research Division: Sure. And then lastly, I'll jump off the queue, just on transit. I mean, your thoughts there. I mean, it's been a single-digit grower. All of a sudden, it was 27, and I know it really wasn't all of a sudden, you've been doing a lot there. But can we now think that for the next 3 to 4 quarters, that this may be a 20-plus percent grower?

I think that we said early along in the year that we would see the transit sales go up in the third, and again, in the fourth quarter. We think that, that's exactly what we've seen. And we think that it'll get to a point and stabilize for a while. We had a lot of confidence early along because of our backlog of projects that we had. So we knew that we were going to get some revenue growth into the third and fourth, and I think that after we've seen that, I think we'll be looking at more stable markets in the transit area. And I think that's the beauty of our diverse business model. If you look at a quarter, like the third quarter, we really almost totally offset the freight with our transit business. And that's why we have the model that we have for our business.

The next question comes from Art Hatfield of Raymond James. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: I just want to follow-up on Tom's question about Q3. Sequentially -- and if I missed this in your commentary, I apologize, but sequentially, Q2 to Q3, what was the big driver for that? What was it roughly $30 million increase in revenue in the quarter?

The $30 million from second to third? Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: Yes.

The growth in transit was driven, half of that was acquisitions, the other half was backlog of projects, some of it, locomotives, some of it, large transit projects. So if you look at the quarter, we really only had an impact of acquisitions about $15 million. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: Okay. And then just -- I was looking at something out, Alvaro, when you went over the backlog numbers. And if I -- just to confirm a couple of these numbers, the 12 -- the total 12-month backlog for the company, is it roughly $1.1 billion?

That's right. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: And then multiyear is $1.5 billion?

That's correct. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: Okay, I'm good.

The next question comes from Scott Group of Wolfe Trahan. Scott H. Group - Wolfe Trahan & Co.: So just a follow up on the last couple of questions about the big acceleration in transit revenue. So it's been a couple of years since we've seen transit grow faster than freight. How should we think about the mix impact of that on gross margins and operating margins? It doesn't look like there was much impact in third quarter, but if we think that this is something that continues over the next year, how do we think about that mix impact?

Yes, I think that the mix impact of transit obviously, has a negative impact on the overall EBIT. However, as we've stated before, our continued effort is to strive to improve that margin especially during the times when we're growing. So I think it probably bodes well for our ability to increase margins even when the freight business comes down a little bit like it did during this quarter. Scott H. Group - Wolfe Trahan & Co.: Right, that makes sense. You mentioned a couple of times that the strength in transit felt like it was on the locomotive side. Within transit, is that a good thing or a bad thing if locomotives are what's driving the strength?

It could be a good thing or a bad thing.

In depends on the locomotive.

In depends on the locomotive and the project, but generally, we do well in our locomotive business. Scott H. Group - Wolfe Trahan & Co.: Okay, that's helpful. Maybe just think about the Wabtec performance, what is the goal every year? We're trying to get this much in savings out of a company. Is there a target that you set every year? Or what percent of inflation do you plan to or try to offset each year?

Yes. What we try to do, and we have about 45 different operating divisions that each prepare a budget. And each of those budgets, we expect the division to come in with action items related to margin improvement, with a target, understand a target of around 2%. And it's a combination of sourcing. It's a combination of sourcing, pricing and the Wabtec Performance System. Now, of that 3 different areas, we know that we're going to have inflation, we're going to have labor inflation, we're going to have material inflation, we're going to have other inefficiencies in our productivity endeavors. And we would like to see about a 0.5% improvement in each division after you account for the negatives that offset that 2%. So what we're looking for is a continuous improvement of about 0.5% in margins in our budget. That always doesn't happen, sometimes you have -- you don't get the savings you want and sometimes you have one-time issues and inefficiencies and warranty issues that will impact it. The other thing that helps is if you got volume growth like we have in this particular year. There's nothing that hides problems better than volume, and we had like -- so that's why we have pretty aggressive goals for each of the divisions. It's a very painstaking effort for everyone to come out with specific items that add up to those numbers. Some are able to do it and some come short. And some overshoot it. Scott H. Group - Wolfe Trahan & Co.: That's very helpful. And then last thing for now, I know you mentioned that you think that PTC is up again, in 2013, I know it's really early, but do you think it would be up again in 2014?

It is early to make that statement, and it really depends a lot on the Class 1s. Keep in mind that we talk a lot about the potential and the one potential that we've quantified for everyone is related to the onboard computer. And the onboard computer right now, there's about 18,000 to 20,000 locomotives that will need to be equipped with our product. Of that 18,000 to 20,000, only 4,000 have been equipped. Now, some of them have been conditionally equipped, so you have part of the equipment, but we upgrade it. So it's equivalent to about only 4,000 out of the 20,000 that we'll need equipped. We have a projection, so it really depends a lot on whether they start adding the equipment, during '13 or '14. So you could see I think the total opportunity doesn't change, whether they take more in '13 or less than '13, more in '14, it's a tough call right now. Scott H. Group - Wolfe Trahan & Co.: And just to follow-up on that, doing some quick math, so if we've done, call it, 20% of the locomotives and you've booked, I know not all the $300 million over the past 2 years is just for the locos

The freight portion that we booked, we talk about 25 and then we went to 125 and then 200, it's about 375. Of that 375, 200 of it is related to freight. Scott H. Group - Wolfe Trahan & Co.: So is it a bad thing to just take $200 million and multiply that by $5 million, to finish the other or whatever?

There's other things in there, so you just can't take and multiply it. I think what you can do is say that the units -- an onboard computer normally cost $30,000 to $40,000, and you can multiply that by, say, the 16 that's left, and you get an idea of the potential.

Your next question comes from Allison Poliniak of Wells Fargo.

On the MRS project, I remember if I recall correctly, it's a pretty sizable project. I think it goes through 2013. Is there any way to help us sort of gauge if 30% of the project done so far with the balance to be in 2013? Or anyway to help us clarify that a little bit?

Yes. And I'm glad you asked the question, Allison because last time, my crew here convinced me to give a number that may have not been totally accurate.

His crew was mainly Alvaro. And trust me I heard about it later.

It's a $160 million project. We, probably by the end of this year, will be about halfway through it. We should complete it in 2013, and there's options for another $80 million. And I don't know if we'll see those in '13 or whether that will go out to '14, we just don't know. It depends on the performance of the system.

Got you, got you. And then on, I guess just in general on the...

Last time we talked more of a larger number.

Last time I think somebody asked about the options. I think I gave him a larger number than that $80 million. But we checked it out, and it is about $80 million.

About $80 million, okay. And then on ECP in Australia, that's been a nice growth opportunity from you guys. Is there a way you could quantify that project or product, I guess, the loan in Australia are 30% of the potential cars that could have ECP getting outfitted, or where should we think about that number?

Yes, you actually -- you hit it almost exactly on the note. It's about 30% of the vehicles that could use ECP now have ECP, and they usually do it by -- it's almost a project basis. So you really have to -- we'll get another increment when the next project is taken on. So it's about 30% of the fleet right now.

The next question comes from Steve Barger of KeyBanc Capital Markets.

If you strip out tank car activity in the quarter, as you noted, there was a pretty big drop in delivery sequentially. And the non-tank backlog is at the lowest it's been since mid-2010. So just given those weaker dynamics for freight cars, are you starting to see more pricing pressure from the OEMs, or more competitive pressure in the market?

I'm not aware of any. We've always had it. It's always there. We're striving to give them the best total delivered cost. We're not seeing it, and I think that, that is a dynamic that you would see if it does soften. I think the softening in a way is -- the fact that the deliveries are at 12,000 this quarter, I think means that -- I think that the car builders are trying to use their heads, as well as the ultimate end customer and trying to prevent, I think, a steady state going forward. If you look at 12,000, if that was maintained, that would be a pretty healthy car build going forward.

And if I could add just 1 comment to that from, I guess, from a financial perspective, from a CFO control perspective. Because I think everybody focuses on tank cars, and I understand why, I mean, that's a large percentage of the orders, that's a large percentage of the deliveries. But I think -- and this is more anecdotal and is more logic than specific evidence, but I have to believe that the railroads go through the same process that we do here internally at Wabtec, which is that you have a CapEx budget for certain components. You have certain amounts for truck, you have certain amounts for this, you have certain amount for stations, and you have certain amount for cars. And to the extent that the tank cars are what you need the most, then you go ahead and order the tank cars, and you order fewer of the others. But I think, and this is just to me more logical than anything else, that as the tank cars get more of the equilibrium, there have been some other cars that they deferred in the capital budget because they didn't have enough budget -- money for everything, and that will revert back to a more normal ordering pattern. We've seen that in the past. And I have to believe that, that's part of the ordering pattern in the future. If they only have a certain amount allocated to cars, then it's going to tank cars right now because that's the highest demand. But once that -- again, once that reaches equilibrium, then you reach a more normal demand rate. So we'll see.

It's a good point. And just to take that one step further, do you have an opinion on what car types might be seeing some pent-up demand right now?

I think it was nice to see intermodal. I guess it's non-intermodal though, the flat car. You see in -- there's some still in there, covered hoppers, box cars. I mean, it's pretty diverse. It's good to see that diversity. And I think what Alvaro is saying could very well happen, and I've read some consultants feel the same way, that you're going to get to the point where you have to order some of these other cars.

Yes. And I think it's a good point about intermodal, if you take a look at the stats, and I'm just looking at the ARC Annual Report right now. Year-to-date, intermodal, which is the traffic has been up 5%, 6% year-to-date, the deliveries have been half of that of tank cars of non -- they break out the intermodal between 5 unit articulated cars and others. And so it's been -- intermodal has been pretty strong, and the traffic's been pretty strong. So I think if you were to pick on one that would probably be #2 in demand, I think intermodal would jump right at you.

Sure. So looking at the quarter itself, since you did have a moderation in the freight car build rate x tank, have you seen customers start to slow order activity to get their own inventories levels down? Or how you are you thinking about channel inventories? And I just asked that since your own inventory was, wasn't up a lot, but it was up $4 million sequentially in 3Q against the lighter build.

Yes. And one thing, I don't think we've mentioned too much during the phone call, Steve, but it certainly is a pattern is that normally, the third quarter is slower particularly in freight. Transit tends to go at its own pace. These contracts are very long, and it takes a lot to execute them. So transit tends to go at its own pace. But normal, year in, year out, the freight segment experiences lower sales in the third quarter because of seasonality. You have plant shutdowns for vacation, they have plant shutdowns for repairs. And you normally see a little bit of a dip in Q3. What we see in Q4, what we'll see when we experience Q4, but I think that seasonality is part of the decrease in the demand.

The other thing is if you take a look at the portion of our business that's really related to freight cars, I think this quarter gives you -- I think, again, and I said it earlier about the strength of our business model, the diversity that we have. When you see a drop from 18,000 to 12,000 cars being delivered, and our net impact is $20 million, and it's totally offset by some of the other areas. This gives you the idea of the strength of that diverse business model that we continually talk about. We are conscious of it, and it is a great product area for us. And we like being in it, but we also realize that, that cyclicality is going to be there. And sometimes it becomes a discretionary purchase, a capital purchase by the railroads.

And just one more question, I'll jump back in line. I think I may have asked this last quarter, too. The increase in tank car production sequentially was 8%, to about 4,500 cars, and obviously, you know that there's a tremendous backlog concentration of tank cars. Any thoughts on where quarterly production of tank cars can go just as you look through your -- the various customers that build them?

I've read. The only thing I've done, I've read about expansion at a couple of the car builders. And which would mean to me that there is a need for extra capacity to meet the demand. I don't know anything more than that other than I read it in a commentary area. It might even been a report that you wrote.

Because again, we tend to be revenue-neutral with regard to the type of cars. We don't put any more content on average, let's say, on a tank car than we would on a coal car. So a tank car versus say a coal car is not that critical to our financial results.

No. I understand. I was just trying to see if you have any information on if it's 4,500 now, can the industry build 6,000 a quarter or 7,000, any idea on what that capacity can go toward.

No, we don't have that information. I'm sorry.

Your next question comes from Liam Burke of Janney Capital Markets.

Alvaro, you mentioned that CapEx for the year, you'd anticipate it being in the low 30s versus last year which is in the high 30s. Is there any significant difference in those numbers?

Not really. Last year it was 38. I think in the last conference call, if memory serves me right, we said it'd be somewhere near that number 38 to 40, or something like that. And now, it looks like it's going to be a little bit lighter. And to be honest, we're not like -- we don't have to spend our CapEx budget or have it cut back next year. We try and spend what's necessary and what the units convince us is necessary. So there's nothing really significant to it. It's just the way they're rolling in. And again, the way we would do CapEx, we'll do what's needed, and if you don't spend it 1 year, you still get it carried over the next. It's not a question of when you do it. So I wouldn't read too much into that. It's just...

Okay. So it would probably be on a year-to-year basis. It may step up next year, but by and large, this is a nice reflection on your returns here.

Thank you.

And on the transit side in Europe, it looks like the spending is still holding up nicely. You've got a nice backlog of contracts. With the other 2 major competitors, Al, are you seeing any price competition?

There is. It does get competitive now that there's a third player, and I think that what we've tried to do is be a very responsible supplier. We're trying to sell our product on technology and the service and the Wabtec name and not on price. But I think to protect their marketplace, they obviously are willing to do what it takes to try to protect it. So there is some pressure there without a doubt. But again, since we have a small volume of business there and a small market share and there's just so much opportunity, we try to be selective in what we go after and don't try to go after everything. And I think our program is -- I'm feeling good about our incremental success rate year-on-year. And this week, we'll be reviewing the European budget and taking a look at next year and seeing what success we have planned for that.

The next question comes from Matt Brooklier of Longbow Research.

Al, a question for you. RSI has, I think, a 60,000 unit freight railcar number. You kind of talk to the number on the call. I guess at this point in time, and we're roughly 2/3 of the way through October, what's your conviction level that we do hit that 60,000 delivery number? And I guess what's the potential flex, either up or down, given your experience through different cycles?

Yes, I think if you take a look at what's been delivered so far this year, you had what 16 17 and 12 47. So I think the 60,000 looks good. I think if the build rate stays right there at the 12,000, 13,000. And I guess that's everyone's best guess right now. With a possible, if we start seeing orders continue to grow and the economy come back, I think that build rate and deliveries will go up next year. But I think most people, most consultants right now are suggesting low 50s to mid-50s is the number they're using. So that's about the only insight that we have on it right now.

Okay. And we're going through obviously a very strong tank car cycle and seeing good benefit in terms of deliveries. But as you look out to 2013, and, Alvaro, I think you talked to it previously, where is the potential for catch-up? I guess, what equipment types, cars specifically, potentially need a higher rate of replacement in '13?

Yes. I would think that if you look at the deliveries over the last year or so, it's been really centered around covered hoppers and tank cars. And we know that coal is -- right now, the demand for coal is down for power generation, and even the export's a little bit down. And so you have -- I don't think there'll be demand for the coal cars, but I think that intermodal, the way it's growing, at some point, you're going to see ordering for that type of car. You look at, there's cars specialized for building materials. I think that -- although right now, in the frac-ing area the covered hoppers, I think that's being impacted by not just the shale and the frac-ing, but also grain right now with the drought, there was an impact. And that could come back drastically. So I think the ones that you haven't seen much deliveries on are the ones that could be the drivers into 2013 and '14.

Okay. And back to PTC, you mentioned that some of the timing in MRS revenue was the primary driver of us seeing sequential PTC revenue decline, I guess from to 2Q to 3Q. Is that -- I just want to clarify that. It was MRS and, I guess, not on the transit or the U.S. freight side?

That's correct, yes. Actually, it was -- the decrease of the MRS was offset by the growth in the U.S. portion.

Okay. So you did see better PTC within the freight, the U.S. side of the product? Okay.

Right.

Got you. And maybe just talk a little bit to transit, U.S. transit opportunity for PTC. You've announced a couple of contracts, kind of where are we. And I know there's a number of cities or urban networks that need to adopt this technology. You've only announced a couple at this point in time. How should we be thinking about that moving forward?

Okay, there's 21 agencies that will need to work with PTC. Right now, we have signed contracts with Metrolink, which is the L.A. area. We have one with Denver. And we also have signed contract, I don't know if we have announced any of this, but we have been working with Amtrak in the Northeast. We've got a dialogue going on with a number of other agencies in North County, San Diego, Alaska Railroad, Caltrain. I would think that our conversations right now are going on with most of the transit authorities of some sort. Now, getting a contract signed with a transit authority is something that doesn't happen overnight, so we could be working a while, we could actually be delivering some product and not have the full contract signed in some of these. So -- and the thing that we've told people about it is it's hard to quantify, and we use the example that Metrolink has 100 locomotives, and I think we announced 27 million or something like that contract. North County in the San Diego area only has 10 locomotives. So you could see there's relative size to the programs, and it really depends on the scope that we're doing. We could go to a full scope where we do the prime contract or we could be a sub, just supplying the onboard computers. And we'll announce these as they get signed and try to give you an idea that you could better quantify what the opportunity is.

Okay. But again, 2 thus far announced, and we have roughly 19 to go. Not to say you're going to potentially be involved in those projects, but still a long runway at this point.

That's correct.

Okay. And just one quick little one. Other income below the -- or other expense below the line was roughly $1.4 million. What's in that line?

That's mostly where we -- most of the time, that's where you put your miscellaneous odds and ends, but the large majority of that number quarter in, quarter out, are paper FX losses. Those are translation gains and losses on intercompany balances and a few other items. We try and minimize them just to keep the variability out of it. But invariably, you have a little bit of creep in there. So that's normally the large, large portion of that amount.

The next question comes from Kristine Kubacki of Avondale Partners.

I admit I'm just trying to get a little bit better read here on the market and the economy, and you mentioned about aftermarket trends, but I kind of want to dive into the aftermarket for like freight U.S. Are you -- and I know traditionally that's followed gross ton miles growth or decline. Are you seeing any changes there on the cadence due to kind of maybe some of the choppy freight trends among some modes? I mean is there any disconnect that you're seeing on the gross ton miles maybe suggesting that maybe the railroads are pushing off maintenance a little bit at this point?

No, we're not seeing that at all, Kristine. As a matter of fact, if you look at the ton miles, which really track the car loadings almost to a tee here, it's down 1.7 and car loadings are down 1.6. So I was talking to a railroad CEO in the last month, and he said to me, he said, "Al, if someone told me that coal would be off as far as it is, and that we would be in a situation that we're in and we're still moving as much freight as we did even with coal off, I wouldn't believe them." And it just shows that the railroads -- the traffic is just not that bad considering how bad the impact of coal dropping that we've seen. And I think you add to that the fact that you have the drought and grain's off. So I think it really shows the strengths of the Class 1 railroads and how important it is to the economy. And so I just -- in the aftermarket, it does follow, it follows the volume. And I think that we're just not feeling that negativism from the aftermarket business at this point.

Okay, very good. And then, I can't believe it's gotten to me, but on PTC, can you give us a sense on -- I mean there's always stable rattling going on about delays and that. Can you kind of give us an up to date on where the Class 1s are, and how you're thinking about the 2015 deadline? And then can you also just think -- give us a little color on how you're thinking about the competitive marketplace there? Do you see an entrant coming in before 2015? Just some color around that.

Okay. I think that right now, we used the term during the prepared remarks, wait-and-see. I think that the railroads are in a wait-and-see about what happens in the election as to if there's a strategy to continue to lobby for a delay or whatnot. I think the FRA and the railroads have concluded that a full implementation will be very difficult by 2015. And -- but they -- I think they're all convinced that implementation is going to happen, whether it will be delayed 6 month, a year, and whether they'll get provisional approval so they could operate it and roll it out in a more reasonable fashion. I think that's the ultimate goal that people have. So I think there's still going to be talk around it. But at the end of the day, we're going to have a positive train control system that interoperates on the railroads. And any delays that exist from a technology standpoint will not be related to Wabtec. I mean, we've had -- this systems have been operating 5-plus years on the BNSF. Metrolink's talking about taking their system live middle of next year. Our MRS program, we'll start the pilot later this year. So the technology is there. Are the railroads able to interoperate is a question that I think still exists and a lot of work needs to be done. And we're going to support the railroads. As far as competition, I'm sure there's always people that -- we did it, so someone else could do it. We're conscious of that. And we try to be very responsible to our customers and meet deadlines and support the technology. I think that the fact that this interoperability between the railroads gets so complex, that it would be very hard for the railroads to try to bring on other systems. And a matter fact, it will be very costly, but that doesn't mean they can't do it.

The next question is a follow-up from Tom Albrecht of BB&T. Thomas S. Albrecht - BB&T Capital Markets, Research Division: Alvaro, just a quick question. Given the acquisitions and that, do you have an approximate SG&A and amortization level for the fourth quarter?

Yes. I would say for the fourth quarter, I think the run rate on SG&A, I think the run rate for this quarter was pretty consistent with the second. And I think going forward, for the fourth quarter, you can -- it'll be roughly somewhere in that range obviously.

It's about 60.

Yes, it's about 60. We've added LH early in this quarter, so you'll see a little addition from that. But what happens with the acquisitions, and we've talked about this before, the first couple of quarters when they're out of the gate, the net bottom line financial effect is negligible because you basically have -- you have to write up their assets to the inventory and the backlog to the estimated realizable value. So until you fulfill the backlog and until you turn over the inventory once, you're basically operating at basically almost breakeven on those items. So the financial -- the net bottom line effect will be negligible, but it will have some effect on the run rate of SG&A. In terms of what we call purchase price accounting, it's that amortization, that onetime accounting of the inventory and the backlog, in this quarter, it wasn't too much compared to the prior quarters. In this quarter, it was about $1.7 million, in the prior quarter, it'd been about $0.3 million, so it increased. The amortization for those recent acquisitions increased by about $1.4 million, $1.5 million. It was pretty similar to last year. Last year, it was $1.3 million. So similar last year, higher than the second quarter of this year by about $1.4 million. And we project that to drop a little bit in the fourth quarter to about $0.5 million, $1 million-or-so, somewhere in that neighborhood. So it fluctuates a little bit, but it's not too material of an amount.

[Operator Instructions] Seeing that there are no further questions, I'd like to turn the call back over to Al Neupaver for any closing remarks.

Okay, we'll talk to you next year. Thank you very much.

Thanks, everybody.

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