Westinghouse Air Brake Technologies Corporation (WAB) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Wabtec Third Quarter 2013 Earnings Release Conference Call. [Operator Instructions] Please note, this event is being recorded. Now I would turn the conference over to Tim Wesley. Mr. Wesley, please go ahead.

Thanks, Steve. Good morning, everybody. Welcome to our third quarter earnings call. Let me introduce the other Wabtec people who are here with me, our Chairman and CEO, Al Neupaver; Ray Betler, our President and COO; Alvaro Garcia-Tunon, our CFO; and Pat Dugan, our Senior VP of Finance and Corporate Controller. As usual, we'll make our prepared remarks and then take your questions. Please do refer to the -- today's press release for the appropriate disclaimers, as we will make forward-looking statements during the call. Now before I do turn it over to Al, I'm going to give a brief commercial here for our Wabtec Annual Investor Conference, coming up next month here in -- at global headquarters in Wilmerding, November 11 and 12. Dinner with management on the 11th, and then the meeting itself will be here on the 12th, a series of management presentations, plant tour. And we hope that you can join us. We have about 35 to 40 people already signed up. But there's always room for more. So if you do need more information about that, please give me a call or email me. Al, go ahead.

Thanks a lot, Tim. Good morning. We had an excellent operating performance in the third quarter, with sales of $631 million and earnings per diluted share of $0.76. These results represent third quarter records and the second highest quarterly total ever for Wabtec. Backlog has held steady at near record levels of $1.7 billion. Overall, our businesses are performing well in what is still a slowly recovering global economy. We have been successful, thanks to our diversified business model, our strategic growth initiatives and the power of the Wabtec Performance System. We remain optimistic about the long-term growth opportunities in our freight and transit rail markets. These markets are driven by trends such as increasing global trade, urbanization, infrastructure investment and increasing demand for more environmentally friendly technology. We have the products, the services, our customers need. We have the financial strength and the capacity to invest in growing our businesses around the world. Today, we increased our 2013 EPS guidance slightly. Based on our year-to-date results and outlook, we now expect full year EPS to be between $3 and $3.04 with a sales growth of about 8% for the year. The midpoint of that EPS guidance is about 17% higher than our 2012 results. Transit is driving our top line growth for the year due to our strong backlog in both U.S. and international, as well as acquisitions in this market area. Freight revenues should continue to improve into the fourth quarter. Our guidance assumes the following: Continued growth in the global economy; the U.S. and European transit markets remain stable with the emerging countries driving growth. Our transit revenues are growing based on our existing backlog of projects in the U.S. and internationally. We assume that U.S. freight traffic will remain stable with OEM locomotive and car builds down 10% to 15% for the year. We assume no major changes in foreign exchange rates and a slightly lower tax rate for the year. As always, we will be disciplined when it comes to controlling costs, focused on cash generation to invest in growth opportunities and ready to respond decisively to any changes in market conditions. I'd like to ask Ray to discuss what we're seeing in our key markets. Ray?

Thanks, Al. Stability is still the theme of our transit markets, both in the U.S. and internationally. In the U.S., ridership is up about 1% in second quarter and is flat year-to-date. In 2013, North America transit car deliveries will be about 900, bus deliveries will be about 4,500, and both figures are same as last year. Transit funding in the U.S. is also stable. It remains about $10 billion, about where it was for the past several years. This stability in North America market continues despite budget issues and uncertainties about the long-term transportation build. Outside the U.S. we're seeing stability in the developed markets and growth in the emerging markets. Ridership and funding in Europe, for example, remains stable. We continue to see good growth opportunities in countries such as China and South Africa. Our growth in transit has been broad-based, with a little more than half of it coming from outside our traditional U.S. market. In NAFTA [ph] , freight traffic is up year-to-date. Total traffic is up about 1.6% compared to the first 9 months of last year, and this was driven by 3.7% increases in intermodal with general commodities and merchandise traffic flat. Growth and shipments of chemicals, oil and gas, aggregates and motor vehicles has offset the decreases in coal and other commodities. Still, expect OEM rolling start deliveries in 2013 to be lower than 2012 by about 10% to 15%. About 1,200 new locomotives were delivered last year, and we expect that to be around 1,000 to 1,100 this year. It looks like the industry will deliver around 50,000 or so new freight cars this year compared to 59,000 last year. In the third quarter, about 12,600 cars were delivered, which is about the same as Q3 2012. Third quarter orders were good at about 12,800, which drove the backlog to almost 74,000, which is the highest since 2007. And for the second quarter in a row, tank cars represented less than 50% of new orders. So we have started to see other car types start to pick up, which is what we expected. Globally, freight traffic is also mixed. China is still growing, but not at fast as predicted, and so, there is some ripple effect in the mining countries, especially countries like Australia, Brazil and South Africa, where we've seen a little bit of weakness. Al?

Thanks, Ray. As a corporation, we're going to continue to focus on growth and cash generation. Our priorities for allocating free cash have not changed. We're fortunate to have the financial strength to invest in all of them. We want to fund our internal growth programs first as product development and capital expenditures. We want to fund acquisitions. We had 2 acquisitions in the third quarter, and that makes 3 for the full year. We also want to return money to our shareholders through the combination of dividends and stock buybacks. Today we announced our regular quarterly dividend of $0.04 per share, which our board has now increased 3 years in a row. We also had a 2-for-1 stock split in the form of a 100% stock dividend earlier this year. Also in the third quarter, we bought back 93,000 shares for about $5 million. We still have about $70 million in authorization remaining, and we expect to continue to use it. With our strong cash generation and balance sheet, we have more than adequate flexibility and capacity to invest on our growth strategies. Those strategies, I'd like to remind you, are global and market expansion; aftermarket expansion; new products and technologies and acquisitions. Let's talk a little bit about the progress we've made in each of those. From a global market expansion standpoint, our sales outside of the U.S. in the third quarter was over $300 million, at 48% of total sales. That's versus about 1/3, 5 years ago. We continue to make good progress in our international markets. We were selected to provide brake system for locomotives that a Chinese company is supplying to South Africa. We are also negotiating joint ventures with 2 companies that would provide us a presence in Russia, the largest freight rail market in the world. We take a look at aftermarket expansion. Overall, our aftermarket sales were $358 million. That's growing 21% compared to the prior year. Aftermarket represented 57% of our total sales in the quarter. Acquisitions have contributed to this growth and we're also expanding organically in areas such as locomotive services in the U.S. and component servicing in Australia. New products, a very important aspect to our growth strategy. We continue to focus on it, representing about 1/3 of our total sales. We won additional orders for our newly developed low-emission locomotives from Go Transit, a commuter agency that serves Toronto. This was for 10 units at a price of around $60 million. This is a follow-on order from a couple of years ago. This model features twin engines that meet Tier 4 emission standards and will improve fuel efficiency compared to the customer's existing locomotives. They include many components and systems manufactured by other Wabtec units. A little update on positive train control. Our sales in the quarter were about $60 million. Revenue should continue to increase into the fourth quarter for PTC products. During the quarter, we announced the $9 million contract with North County in San Diego, where we will provide equipment and services for their installation of PTC. We're working with several other transit agencies in the U.S. and expect to make future announcements. As we all know, there's still talk about the delay -- the deadline. Nothing's changed so far. The latest report that we've had from the federal government, the government accountability office has suggested, that any delay, should be on case-by-case basis, rather than a blanket multi-year extension. We remain focused on doing our part to help the industry meet its deadlines and requirements. Our fourth strategy, acquisitions. As I stated earlier, we acquired 2 companies during the quarter, and we have an active pipeline of opportunities. We continue to be very selective and disciplined in our approach. We acquired a company by the name of Longwood Industries. Longwood is a manufacturer of specialty rubber products, with annual sales of about $70 million. This business complements an already existing rubber business that we've had for years. Longwood serves a variety of markets including oil and gas, transportation and industrial industry. They offer growth opportunities, especially with its capability for being able to bond rubber to fabric and rubber to metal, as well as other specialty products that they have developed. The second acquisition in the quarter was Turbonetics. Turbonetics is a manufacturer of radial turbochargers with annual sales of about $15 million. If you remember, earlier this year, we acquired a company located in the U.K., Napier, which makes turbochargers as well. They have a different technology; they use axial technology, which is ideal for larger turbochargers. This particular technology that Turbonetics has serves a variety of industrial markets, including aerospace and marine and provides technology for us to be able to penetrate into the rail market that uses turbochargers. What I like to do now is ask Alvaro to give us a little bit of a financial update.

Great. Thanks, Al, and good morning, everyone. We had a solid quarter in a challenging environment, so I'm pleased to be able to review our financial results with you today. Starting with sales. Sales for the third quarter were $631 million. This was 8% higher than last year. Organic growth contributed about 2%, about 1.6% of the increase. And acquisitions contributed to the rest of the growth. Transit Group sales increased due to revenues from our backlog of existing projects, as well as from one of our acquisitions. The Freight Groups sales, however, decreased about 4% compared to last year, mainly for 2 reasons. Lower OE volume and, consequently, lower sales of components for locomotive and freight cars in NAFTA, as well as reduced natural gas drilling activity, which has resulted in lower demand for industrial heat exchangers that are used for gen sets in that market. In terms of margins, as we've discussed, we are always striving to drive our operating margins higher and we achieved that during the quarter. Operating expenses increased, but this was due mainly to acquisitions. They were still on the 12.4% of sales, slightly lower than last year. Controlling costs as you well know, is paramount for us and we also try to take advantage of our operating leverage. For the quarter, operating income was $110 million or 17.4% of sales compared to 16.5% of sales in the year ago quarter. Margin performance is driven by several factors, including higher sales and benefits from our Wabtec Performance System. As a result of some delivery delays, we recorded a pretax charge of $1.9 million in cost of sales for contract charges on our locomotive division this quarter. We wanted to point this out, because it's a relatively large charge. In terms of interest, interest expense for the quarter was $3.8 million versus $3.1 million, last year, increase is due to higher debt due to acquisitions. Other expense included a pretax $1 million loss from foreign currency translation. This is non-cash. Is strictly paper, and it arises from translating balance sheet items into US dollars. We sometimes hedge to minimize economic i.e. real gains and losses arising from FX rather than paper, but can sometimes have these paper gains and loss. In terms of taxes, the effective tax rate was lower than normal due to a benefit of about $2.2 million related to changes in deferred taxes in foreign jurisdictions. This item occurred because of late legislation, which was enacted in the U.K. during the quarter. This legislation reduced the tax rate from 23% to 21%. Essentially, we reduced our deferred tax liability to account for the change in rate which resulted in the gain. Our normal effective rate going forward we still expect to be plus or minus 32% especially in the fourth quarter. And then just to wrap it up, earnings per diluted share were $0.76 versus $0.65 in the year-ago quarter for a 17% increase. In terms of cash flow, we have generated $85 million year-to-date, which puts us behind last year's pace. We are disappointed in that. And one of our key goals for the rest of the year is to improve on this performance. Working capital increased slightly, in part, due to acquisitions. At September 30, receivables were $570 million, inventories were $400 million and payables were $288 million. Our working capital, excluding cash, was about 20.9% of sales at the end of the quarter versus about 18.4% at June 30 this year. Part of the reason for the increase is receivables arising from our long-term contracts. In essence, our collections are lagging behind our costs. We believe, we can do a better job of matching our cash inflows with our costs, and we'll strive to do so in the future. Also, as our business has become more global and as we expand our sourcing programs into other low-cost countries, this affects our working capital requirements. Even so, we continue to think there are plenty of opportunities to reduce working capital, both with inventory and receivables, as well as the project cost that I mentioned earlier. In terms of cash and debt. At September 30, we had $281 million in cash, mostly outside the U.S. The balance at June 30 was $215 million. At September 30, we also had debt of $542 million compared to $397 million at June 30. The debt was increased due to acquisitions. Also during the quarter, we completed a $250 million bond offering. The bonds, which have a coupon rate of 4.375 -- 4 3/8 and mature in 2023 were rated investment grade by Moody's and S&P. We used the proceeds to reduce our revolver and for general corporate purposes. Some of the plenary items we always review during the call. Depreciation was $8.2 million in the quarter compared to $7.4 million last year. Amortization was $3.9 million in both quarters. We had CapEx of $9 million versus $8.2 million in the third quarter of '12. For the first 9 months of the year, CapEx was about $24 million -- $24 million, $25 million. For 2013 -- for all of 2013, we'll probably end up somewhere in the mid-30s for CapEx. And shareholder's equity, I think we typically get a question asking what our shareholders' equity balance is -- was $1,512,700,000, and that's a preliminary number. But I think, we can use that for the time being. In terms of backlog, we've maintained the backlog at a near record high, and 10% higher than a year ago. The multi-year backlog, that is the total backlog was about $1.7 billion, slightly higher than June 30. But it gets lost in the rounding to be honest. The transit backlog was $1.17 billion versus $1.18 billion in June 30, so we're very stable. The freight was actually higher, $512 million versus $490 million in June 30. The rolling 12-month backlog what we expect to execute in the next 12 months, which is really a subset of the multi-year backlog. The total is about $1.1 billion, again, slightly lower than June 30. Transit was $630 million versus $671 million in June, and freight was $433 million, an increase of a little bit of over the $409 million in the second quarter. And also, I should emphasize that those figures don't include about $200 million of contract options that are not counted in the backlog. We don't count the backlog until it's a legally binding obligation. And with that I'll turn it over back to Al.

Okay, thanks a lot, Alvaro. Once again, the company's performing well, with good margin performance and the backlog at near record levels. We are anticipating another record year. We raised our EPS guidance to $3 to $3.04, on revenue growth of about 8%. We remain extremely pleased with our strategic progress and the long-term growth opportunities we see. As countries around the world continues to invest in freight rail and passenger transit infrastructure, we continue to benefit from our diverse business model and the Wabtec Performance System, which provides the tools and the foundation we need to generate cash and reduce cost. With our experienced management team and dedicated workforce, we're able to take advantage of our growth opportunities and respond to any changes in market conditions. With that we'd be more than happy to answer your questions.

[Operator Instructions] And the first question comes from Scott Group with Wolfe Research.

Wanted to just follow up on the backlog a little bit. So it's been kind of leveling off, as you point out the past few quarters. What does that tell you about revenue growth over the next year or so, excluding acquisitions? Should revenue be flattening out ? Is that the way to think about it? Or is that not right?

I think, when you look at the backlog, I think, here's 2 things that you have to understand. First of all is that we never get a lot of visibility in the freight markets. And we do have long-term visibility in the transit markets. And as Ray said in his prepared remarks, we're seeing stability in the transit markets around the world. We're growing in the market share area, but it is a stable situation. We really expect the freight markets to continue to improve. If you compare the freight markets to where they were last year and you look at it quarter-to-quarter, we were short in the first quarters to tougher comparisons. Now we're actually seeing more growth in the freight area. We expect to see that in the future. And that won't be reflected in as much into the backlog. We just don't have the visibility that we have in the transit market. So I wouldn't agree that it needs -- the revenue is flattened off. But I think, if you look year-on-year, 2012 to 2013, most of our growth has been from the acquisition area and not from internal growth. Now there was a slight change in that this quarter. We actually grew -- it was 75%, 77% through acquisitions. But we did see some internal growth, which is a good positive trend, considering the fact that the third quarter -- the seasonality in the third quarter has always been somewhat lower than the second and fourth quarter. I just want to point that out. So when you look at the backlog, I think there's a lot of factors that go into it, and hopefully, that answers your question.

Yes. That's very helpful. Just a follow-up of you're talking about on the freight side picking up. Now that the order book has been a little bit more balanced, and it's not just tanks, would you expect the quarterly run rate of deliveries to start picking up?

Yes, it will. Because as you know, I mean, the tank car capacity is at its limit. They're able to make, I don't know -- 7,500. And that's the deliveries you're seeing every quarter from them. And so we get covered hoppers and orders in other areas. I think that you'll find that they'll be able to deplete that portion of the backlog a lot quicker. I think, right now, if you look tank cars, you got about 8 quarters at the current rate.

Right, I was going to say, I think, we're booked in tank cars through 2015, but they do have capacity in the other areas. So you would expect that capacity to be filled as other orders start to come in. I think you're absolutely right.

Okay, good. Just 2 more things. First, on PTC. Did you say that you think it picks up in fourth quarter and then, as we think about '14, are the customers, the rails giving any sense that they're going to slow their pace of investment with a potential for a delay? Or would you think we have another year of up revenue in PTC next year?

It's hard to call right now. I think that we -- as we said earlier, we expected it to continue to increase throughout the year. There's obviously a lot of work that's going on. We really haven't really given any guidance yet on 2014 and what we see. Those are some things that we're working on now as we go through our budgeting process. Hopefully, we can speak to that a little better when we give guidance for 2014. We do expect it to continue to pick up. The good news in the PTC area is that I think right now, we have 2 of the railroads that are in the field testing. And we expect the other 2 major railroads to start that in the near future. And that in itself creates a demand. So that would be a positive. I think, that if we look into '14, it's just hard to call. I think, there's a lot of moving parts, there's a lot of discussion around any delay or no delay. And the railroads have a lot of options that they have to consider when they're trying to allocate their capital spend.

Yes, makes sense there. And just last thing, so you mentioned South Africa a couple times. Maybe give us some color on how big your business is in South Africa or what your share is like. I feel like I keep hearing about a big investment coming on the transit side in South Africa, and just want to get sense of kind of what the potential upside could be there.

Well, I'm going to ask Ray to talk about the large opportunity that exists there. But I want to point out, when you talk about a large investment in South Africa, there's 2 things you have to take into consideration. Nothing happens overnight, and the investment is an investment over next 20 years. So there's large numbers going around. But it's not all going to be shipped or handled in very short period of time. And to get a order through the process down there, it's bureaucracy at its worst.

Yes, I think, the reason you keep hearing about South Africa is because of the process that Al just explained. It takes a long time for anything to come to fruition. But there is planning in place and funding in place to upgrade their overall transportation network. And in particular, on the locomotive side, there are -- there was an initial order that it's already been let for 95 electric locomotives. We've won the brake system contract for that. The Chinese are supplying the locomotives; we're supplying the brakes. There'll be a follow-on order of a purported 599 electric locomotives. Obviously, that's not been let yet, that's in the process of coming to market. They will be bid on by international locomotive builders. Additionally, South African government has communicated that they'll to go out for 465 diesel electric locomotives. Again, international locomotives builders will bid on that, like GE, the Chinese, the Europeans. We will bid to those locomotive builders for various components and subsystems. And on a transit side, there's already been announced a large order of thousands of transit vehicles. And the reason, I don't want to be specific about the number is because it's going to be let in options, so the initial order will probably be for around 600.They've talked about numbers from 3,000, 6,000, 8,000 over a 20-year period. But that's going to take place over the long term. But ALSTOM does have the initial order. We, along with our competitors, have bid to ALSTOM for subsystems on those vehicles. ALSTOM has not awarded the subsystems yet. So we can't talk about in any detail the specifics of that process.

And the next question comes from Allison Poliniak from Wells Fargo.

Al, you had mentioned, sort of the fall-out of the slowness [ph] in the Chinese economy, impacting some of the international freight markets. But Alvaro, your comments didn't seem to suggest that impacted Q3. I mean, was it not significant enough? I mean, how should we be thinking about that?

See the international markets, I think to be honest, they come and go. Brazil, definitely slowed down a little bit on their export activity to China. You're starting to see signs of it in Australia. But then again, this morning, there was a report that -- and I forget exactly what it was, but the Chinese -- actually industrial output rose significantly which people are saying, "No, no, no. Geez, no, don't discount China. China is going to be very steady." And there's going to be a consistent need for their products. We've seen, I guess, the best way to describe it is we've seen a little softening and it's impacted our results a little bit. But it hasn't had a major dramatic impact.

Yes, I think, there were lot of projects, Allison, that were in the works. And what we're seeing now, they haven't taken projects off the table, but they delayed implementation a little bit on new projects. And I think, that's the concern [ph] area that we just want to identify for you.

Okay, perfect. And Alvaro, you talked quite a bit the past few quarter about improving working capital. And I know acquisitions certainly impacted that number this quarter. Is there any way to -- it may not be exact numbers, but from a core perspective, have we seen improvement in that number or are we still sort of stuck?

To be honest, I think, we can get -- I haven't seen improvement in that number. I've actually seen a degradation in that number. And that's one of the things that internally we're really focusing on. I touched about it a little bit in the prepared remarks. But basically, one of the things that I'm just trying to be frank, is we could have done better is on our long-term contracts. We could have matched our cash outlays to the anticipated receipts much better. And as a result, we've had a buildup in receivables associated with those contracts. One of the things we're going to try and do is stress collection efforts to get those receivables more in line to where they should be. And in the future, make sure that we match them up better. That's an area we can definitely improve on, and we're not happy with where we are right now.

I think what we're doing a great job of blocking and tackling. But when it comes to the larger contracts, it's an area where we need better match of cash flow. There's no question about it, and we intend to get better in that area.

Okay. And then last, is there any -- I know, we are closer to the end of that Brazilian PTC project. Any updates that you guys are willing to share in terms of that progress?

Yes. The progress down there has been excellent. And right now, we're in the phase where we're running the trains there, their utilizing the train control system. We're probably, I think, our implementation rate now is probably around about maybe 50%, 60% of the lines, Ray?

Yes.

And what we're doing is, we're helping, we're assisting the operations with our key people right now. And I think, the project as we see now it will be fully complete within the next 12 to 15 months. And to take on a project -- a turnkey project to put in an entire signaling system is something that we've never done before. And to implement it the way that our team has, I can only compliment our management team that has worked on it. It's been a -- it's going to -- been a great project so far. We'd like to see the cash flow a little better with it, as we stated. But I think the project itself has been a success and I think the customer would agree with that.

And now the next question comes from Rhem Wood with BB&T Capital Markets. Alfred Rhem Wood - BB&T Capital Markets, Research Division: To stay on the Brazil for a second, so they did exercise the second half of that contract?

No, they have not. And there is a good -- there's a good -- I think that's a good example when we talk about the impact of China. They, right now, are reviewing whether -- what's the timing of that second option. How can they get some of the benefits without fully implementing that option. Because I think, Brazil, like Australia and other parts of the world are saying, "What is going to be the demand?" And it has lot to do with -- the demand ties into the pricing of iron ore and pricing of coal. And so, that's a good example of one of those areas where it's going to happen. It's there. But they have not executed that yet. Alfred Rhem Wood - BB&T Capital Markets, Research Division: Okay, that's good color. And then, can you give a little color -- to go back to PTC, just the Q3 breakdown between kind of domestic and international in freight and transit. It sounds like -- I mean, it just sounds like that given the recent moratorium on towers, the 15% to 20% revenue growth rate for this year is still in play at least in the fourth quarter. But just kind of a little more color on any delays you expect over the next couple of quarters?

Yes. I think that if you take a look at what we've shipped in the PTC area right now, about 60% of that has been in the U.S. freight markets. About, maybe a little less than 20% in transit and maybe a little more than 20% in international, which really is tied to Australia and there are some projects over there. We have small one and the MRS project. As we said, we think that PTC sales will continue to grow into the fourth quarter and we really haven't given any guidance beyond that. Our original goal of 15 -- 10% to 15% growth in the year, still possible. But we'll see what happens in the fourth quarter. Again, the railroads, this is a big capital expense for them and they have to make the right decision whether they delay putting some of those onboard computers on or not. I can tell you that all the projects and everything is moving ahead forward. Some of the capital expenditure, it's tough to call within a quarter or the next quarter right now. Alfred Rhem Wood - BB&T Capital Markets, Research Division: Okay. And then, just the last one. Any update in announcing a partner in Russia and kind of what's going on there?

Like any negotiation, we wanted to indicate that we're targeting that market. It's a large freight market. We're working with partners. However, it takes time. Every little sentence needs to be read, understood and the contract needs to be understood. And this is a new market for us where we want to be very careful. We want to protect our intellectual property. And we want to take advantage of the market. And so, it's just going to take time. We just wanted let you know that we've made a good conscious decision. It's one of our strategic initiatives that we want to grow in that market area.

And I just want to emphasize a couple of things. But one, it's a huge market. In terms of market size, you can almost say it's big as the U.S. in certain respects, and a little bit smaller in others. But it's a big market and we just want to enter it carefully and do it properly for the long term.

And the next question comes from Art Hatfield with Raymond James. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: I hate to kind of keep on PTC, but just a quick question. Based on the comments that you've made so far today, it sounds to me like your contribution going at least for the next year, if we think about '14, and that Brazil is probably going to be consistent with what it was in '13. What is the wildcard, I guess, to getting growth next year? Is it the U.S. freight market or is it transit or is -- am I wrong in my thinking about Brazil for next year?

Yes. I -- first of all, I don't believe it's a wildcard, Art, at all. I think that the plan is an incremental plan. It's going to require and what we will see is all those areas. We'll see transit continue to develop. We'll see the U.S. freight market continue to develop and we'll see other international projects. MRS will continue to develop as well as others. This is a long-term business as we've told you. And we're pretty excited about the opportunity. I don't think there's wildcards or any kind of mystery to it. We just haven't provided the 2014 guidance. And I don't think it's right to give it on this particular call. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: No. I'm not asking for guidance and I guess, maybe wildcard is not the best term. But I'm just saying kind of where does the -- what creates the volatility within the business, I guess?

I don't anticipate a lot. I know, we really don't anticipate a lot of volatility with it. We think that the railroads are going to continue to develop. We think that the transit authorities that we're working with will be moving their programs along. I think, it's a great positive story that will continue. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: Are you seeing anything with the transit? The word on the transit authorities has been a funding issue. Have you heard anything or seen anything from them in that regard?

They sure are doing a lot of work without funding. If that's the case, we've got a number of projects going on and there's 20-plus agencies. I can't name more than a couple, but is in very serious discussions or negotiations on the contract at this point. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: Okay, that's helpful. Then just finally, I want to kind of if you could, Al, address kind of the longer-term strategic or your acquisition strategy longer term. You've done a great job of layering on small acquisitions. But as you get bigger, do you think about changing the strategy at all and maybe, thinking on a larger scale, both kind of within your markets or maybe getting larger within some of the ancillary or tangential markets that you serve with regards to your acquisition strategy?

No. I think, that we've been extremely happy with our acquisition strategy. And as we've always stated, we're going to continue to be opportunistic. I think the real beauty of Wabtec and its acquisition strategy is that we have the capability of doing a super large one and we could continue doing small ones. I don't feel that there's a driving need that we've got change the strategy. Obviously, as you grow, when you want to maintain double digits growth, an acquisition makes up about half the -- our anticipated growth into the future from our strategic planning process. You may have to do more or you may have to look at bigger ones but, again, we're just going to be opportunistic. We never feel that we have to do an acquisition. And we'll continue to approach it that way. What we're seeing in our pipeline is opportunities across the board. We also -- we want to stick pretty close to our core competencies. We're not about to go out and start another leg. We really like the rail business. We do not want to get our management distracted. They know how to deal in the rail businesses. If there's businesses that are close to the core technologies and the capabilities we have. A good example is that Longwood has some other markets as did Napier and Turbonetics. All those are businesses and technology that we understand in the markets we understand. If we continue to find those kind of opportunities, we'll continue to grow in those areas. Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division: Last question on that. Really my last question overall. Your balance sheet is extremely healthy. So you're not constrained financially to be very opportunistic, if the right kind of large acquisition comes on? Are you constrained from a people standpoint internally or do you have the infrastructure in place to be opportunistic along the size scale?

I think that we've proven that we've been able to grow through acquisitions. I think that people asked what are some of the concerns you have. I think anyone that doesn't put at the top of their list as far as the concerns, is making sure that you have to management talent and the capabilities to absorb those things. When we look at acquisitions, one of the key criteria is that they have good management and that management is capable to come along. If we don't feel that we have the management team to do it, we're not going to do it. That's part of that discipline that we talk about. One thing that you have to realize when you do go bigger and if you did that one opportunistic thing, it will distract your management. The bigger the businesses are, sometimes the tougher the cultural change is and it may take longer. So you have to really gauge how strong your management team, how strong your company is to take these on. And you have to be opportunistic. But there's times when you may want one that you don't go after because management is not there to run it.

And actually if I can a couple of things, Arthur. This is Alvaro. The first is, as I think everybody knows we operate the company pretty thriftly. I mean we don't have a lot of people sitting around, looking for work to do. And when you operate like that, you don't necessarily have a lot of excess talent. But again, we haven't found that to be a constraint. Because we have the acquisition has good internal management, or we can go out and get it. And I think we've been very successful, one, in getting good management; and two, having a good leadership development process and succession strategy so we're not caught short. And the second point is, I think, we found -- to be honest, I think it makes common sense, the larger the acquisition, the better the management. What we found is, with some of the smaller ones, geez, you may have an owner who's retiring and he takes a lot of the knowledge with him and how do you replace that? But a larger acquisition, typically the company is better run; has audited financial statements; it has bank financing; it has to provide reports; and it has much more capable management. So in terms of acquisition size, I don't think we'll be constrained at all from doing a larger one because typically they do have better management. And if not, we know how to go out and get good management. So to be honest I don't see that as a constraint at all.

And the next question comes from Samuel Eisner with Goldman Sachs.

So a couple of questions on the guidance here. Obviously, you raised the EPS guidance and you maintained the revenue guidance. Given the fact that you are now closed on Longwood as well as Turbonetics. So I guess, what are the implied kind of organic guidance for the company?

We gave you, I think, that in the announcement for -- obviously, Turbonetics was done before, so that's been in the guidance. But the revenue related to Longwood, when you look at the fourth quarter, I think, that we're talking about the...

about $15 million.

Yes. $15 million to $17 million. So it's not going to make up a large part of that. So the rest would become internal growth.

And in terms of EBIT earnings, Sam, basically what happens -- we've discussed this in the past, about what happens is the accountants make you write up their backlog and their inventory on hand basically the net realizable value. So what happens is your first quarter or 2 out of the box with any acquisition, as you turn over that first layer of inventories, you work through the backlog. Basically, they take all the profit out of it. We call that PPA or purchase price adjustment internally, just for shorthand. And after a couple of quarters, typically 2 or 3 quarters, it works its way through and you resume normal profitability. But in terms of EBIT, I would expect any benefit would be minimal in the next couple of quarters from the acquisitions.

I appreciate that. And then when I look at your backlog, in particular the freight backlog, it looks like orders this quarter for the freight business were up about almost 30% year-on-year and that's following about 4 quarters in a row of down orders. So I'm just curious is there anything in particular within freight that is causing orders to see a pretty significant step up on a year-on-year basis or just help me understand that a little bit better.

Yes. I think what you're seeing -- any increases in the first 12 months, over -- close to 90% of our freight backlog has been shipped out in the first 12 months. So what you are seeing is an uptick in that marketplace. And it's reflected in the sales.

Is that primarily because of recent acquisitions or pure organic?

Both. Smaller amount of acquisition, I think, in this case.

Yes. I think it's mostly organic...

I don't have the exact number but I would -- that would be my gut.

But to emphasize what Al said, is the freight backlog, it's about 433 in the next 12 months out of a total of 512. So typically, the freight visibility, and Al alluded to do this as well, is about 12 to 18 months. After that, you don't have too many freight orders.

Understood. And then when I think about Europe, it sounds as though you're potentially kind of prototyping with some of the larger European manufacturers over there. Are we getting any closer to kind of that marquee order coming in from Europe or you guys are going to get in with one of the large transit authorities?

As we do with everything, margin improvement, how we run our business, everything is incremental. And it's just going to be an incremental thing. There's no one big breakthrough that's going to be a watershed event that says that we have arrived. We will have arrived over time on an incremental basis. And that's how we approach that market and the rest of our business.

Great. And then the lastly, just housekeeping. In terms of price versus cost, I mean how are you guys thinking about that relationship going forward?

Sam, could you please repeat that? I'm sorry.

In terms of price versus cost, just curious what you guys are seeing on the pricing front and given the fact that steel prices have moved up slightly of late. How were you thinking about that entering 2014?

Generally, when we see commodities move, it doesn't create a tremendous opportunity for us although it's an indication that we got to be careful. Because we tend to put the commodities on a surcharge basis. So there's an automatic price increase related to our commodities. I think it's a very important practice and that discipline is so critical when things change rapidly. So in general, pricing is still difficult. To say it's easy, I'd be misleading you. But we do have pricing opportunities and we are seeing some costs up. I think right after this meeting, we're going to be looking at our health care costs and I reviewed those numbers. I don't believe that this new Affordable Care is a negative. I mean, a positive. It's definitely a negative as far as costs. So those things we have to overcome.

One last point. Because basically to give credit to the crack team here, Pat produces the numbers and Tim has them there ready at hand. Acquisitions only added about $8 million to the freight backlog when compared to last month. So like I said, what you're seeing there is pretty much organic.

And the next question comes from Liam Burke with Janney Capital Markets.

We'll start. Alvaro, you mentioned that aftermarket sales were up 21%. You had a nice year-over-year step-up in gross margins. How was the contribution of the product mix, including aftermarket affecting gross margins this quarter?

See, that -- it's a good question. But unfortunately, it's a tough one to answer because -- overall contribution margins are 30% and obviously, relatively easy to calculate. What happens is, in aftermarket is you have different segments in which, to be honest, have different contribution margins. Typically, when you're selling proprietary parts, you have a much higher contribution margin. When you're selling services and labor, the contribution margin tends to be a little bit lower. But again, all that's lumped into aftermarket. And we don't do a contribution margin calculation by segment. But in general, the aftermarket contribution margins would be healthy. Freight OE contribution margins are very healthy; transit, it depends on which element of transit you're talking about.

Okay. And then, Al, you mentioned the contract -- the PTC contract in San Diego on the transit system and mentioned you had a few more that you couldn't announce. How is that part of the PTC ramping up?

I think it's nicely moving along. It takes a long time when you're dealing with municipalities and we're not the only one that's negotiating. There may be a prime engineering firm that we're working with. So you got 2 or 3 firms that need to agree to everything. It just takes time. But that doesn't prevent us from starting the work and the design and engineering work with them. And it comes in phases. We just don't like to announce anything until we've got a signed contract. And as you know, contract management in a business like ours is just so important. And so I think it's moving along pretty well. There's going to be a lot of work that needs to done in the transit area. I think a number of agencies, Metrolink out in L.A. is moving along well. San Diego project now and there's others, the Denver project, and that's a whole new line -- a railroad line. And that's moving along real well. So I think the others hopefully stay tuned. We'll give you the information as soon as we can.

And the next question comes from Matt Brooklier with Longbow Research.

So I just wanted to follow up, another PTC question for you, if you will. But trying to get a sense for -- we're in our third year of PTC work, I was just curious to hear if you have a sense for how much of PTC revenue currently is being generated by aftermarket activity.

Okay. I think, very little aftermarket. There are some -- we would classify a lot of this in aftermarket. Because if you put something on in an old train, and also, installation, training costs and things like that. But the installed base aftermarket generation, we're still in the development phase of the technology, especially in our operate-ability [ph]. Now you go to a system like Metrolink, they're talking about having an operating system in a short period of time or even our MRS project, where we're the prime contractor. I mean, we already need to be talking about the aftermarket and we should see revenues generated from that here in the near future. So it's starting, but it isn't a major factor up to this point.

Okay. So -- but it does sound like at some point, that potentially does start to turn on in '14. And could start to contribute to I guess overall EBITDA margins.

You're correct.

Okay. And the prior guidance that you had provided, longer term in terms of aftermarket as a percentage of total sales, and I know this is just the overall for the company. But is 10%, still a good number to use for PTC, moving forward.

Yes. I think 10% of an installed basis is just a thumb rule. We think that when you get into software and electronics, it may be a little higher than that. But that's a good thumb rule.

Okay. And then on the MRS side, with the PTC contract, when are you through the entirety of that particular contract? I think at some point in '14, and then when do we have some potential clarity as to whether or not that -- I think it's an $80 million option, could be potentially executed.

Yes. We'll know more of that as we get into '14 and look at the global economy and how things are going. But I would think that the MRS project will probably be completed late '14, early '15.

Okay. And then, you outlined a pretty sizable amount of potential activity within the South African rail market. I think it's over 1,000 locomotives that will be built. Just trying to get a sense for I guess potential contract awards, the timing of those. I know there's -- you mentioned before there's a decent amount of bureaucracy, as you move to get -- be involved in those contracts. But I'm just curious to hear as to the timing of potential contract awards on those locomotives and also the, I think, the transit vehicles that you mentioned.

Yes. The good news is that they started. They did award the initial 95 so locomotives. They've announced that ALSTOM is going to be involved in the transit vehicles. Those are positive. We started working on this, Ray, 18 months?

Yes.

Two years ago. So don't expect anything to happen overnight.

Okay. But I mean, you've been in negotiations. It sounds like for almost 2 years at this point. So potentially, we're getting a little bit closer towards the end of that process. And then we could...

We're excited about the opportunity. We're definitely going to be very aggressive in trying to participate as far as the amount of revenue that would be generated in, say, the near term to '14. We haven't quantified that, at least to the point where we would discuss that. Hopefully, when we do give the '14 guidance, we'd give you a little more color on that at that time.

And the next question comes from Greg Halter with Great Lakes Review.

One for you on amortization. It bounces around a little bit, obviously, the second quarter. I'm sure it's related to the M&A work and so forth. But what number is probably good to use going forward? I think we're using 5 but it seems like it should be closer to 4.

Let's see, because in the current quarter, it was pretty stable with last year. And obviously, like you said before, it's impacted by acquisitions. Right now, it's at about 4. I think, going forward, slightly bigger because we did make 2 acquisitions pretty recently. I'd use about 4.5, Greg. It's not a big number. It'll get lost -- the changes almost get lost in the rounding. But I would make it somewhere around there.

Okay. And how much of your business now would you say is outside of rail? I think we've been saying it's like 15%.

It's still about 15%.

And there's been no discussion of the ECP and just wondering if you could comment on what's going on there.

Ray, you want to take that?

Yes. ECP is still very much strategic focus for us. We're pursuing both national, domestic and international opportunities. For instance, we have a nice installed base market share in Australia. There's other opportunities that are coming up in Australia, just like the ones we talked about in South Africa for various products. BHP is out with a bid for ECP in other associated electronics equipment. So, Greg, we're looking at all opportunities for ECP and pursuing those and I think we're pretty happy with our progress in that area, but we're trying to grow our market share worldwide also.

All right. And I know, you don't disclose the segment margins until you file the Q or the K. I guess, Q in this case. Directionally, can you comment whether or not they're up or down year-over-year?

Tim is shaking his head, saying...

[indiscernible]

We just -- we'd rather just wait until we issue the Q for the reasons we stated before. Until it's filed, nothing is final, so we'd rather wait until they're final before we give any preliminary indication.

All right. I thought I'd give you a chance.

I know. I think it was a good try. I admire the effort. I appreciate that, Greg.

And then in Europe now, we talk about the fact that you're there now and you can bid on stuff. And what you can bid on increases continually as you get qualified in different areas. What is that number now? I mean, are you talking $500 million that you can bid on? Obviously, you don't get it all, but what can you bid on now?

Yes. One of the things -- the market is 5x the size of the U.S. But some of that market is aftermarket. So you need the installed base. The other thing that you'll find is the markets are stable. So larger projects right now -- not seeing as many as you saw 2 or 3 years ago. So hopefully, as the global economy continues to improve, it's going to be a lot more projects. We haven't seen large ones. We've seen a lot of small ones, a few of which we've won. So we're making progress.

And is there funding, obviously by individual country, different -- handled differently than we handle here in the U.S.?

No. It's the same. I mean, transit is...

State, federal funding, it's -- you have a mix between local, federal funding. In some cases, like in Europe, you'll have European Commission funding, but the same bureaucratic process in the transit side.

All right. And one last one for you, I think, Alvaro, you mentioned that there were some delivery delays in your comments. Could you couch those...

Right. Sure. We took a charge for -- and it was larger, it was large amount. So we just wanted to highlight it. Some people were aware of it. But in -- with a couple of our locomotive contracts, there was a delay in the scheduled delivery which caused some damages. So we went ahead and accrued those in the current quarter.

Will those be delivered and show up in revenues in the fourth quarter?

I'm not sure when they'll be delivered, but we've taken care of the damages accrual. And they will show up in revenue when delivered. One of the key elements of the revenue though is that on these large locomotive contracts you're recognizing revenues with percentage of completion. So as you deliver, you're not going to get this huge bump up in revenue. You recognize the revenue pro rata as you do the work and as you go along.

Try to match the cost to the revenue.

Right.

And there are no more questions at the present time. So I'd like to turn the call back over to management for any closing remarks.

No, just thank you, and I hope that you all can make our investor conference here. What date is it, Tim?

November 11 and 12.

11th and 12th, We're going to have a great dinner. So you got to show up the 11th.

Great. We look forward to seeing everybody, then. Thank you.

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