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Westinghouse Air Brake Technologies Corp. (NYSE:WAB)

Q4 2013 Earnings Conference Call

February 19, 2014 10:00 AM ET

Executives

Timothy R. Wesley – Vice President of Investor Relations and Corporate Communications

Albert J. Neupaver – Chairman and Chief Executive Officer

Raymond T. Betler – President and Chief Operating Officer

Patrick D. Dugan – Senior Vice President and Chief Financial Officer

John Mastalerz – Vice President and Corporate Controller

Analysts

Allison A. Poliniak-Cusic – Wells Fargo Securities LLC

Justin Long – Stephens, Inc.

Art W. Hatfield – Raymond James & Associates, Inc.

Scott H. Group – Wolfe Research, LLC

Matthew S. Brooklier – Longbow Research LLC

Samuel Eisner – Goldman Sachs

Liam D. Burke – Janney Capital Markets

Thom S. Albrecht – BB&T Capital Markets

Greg W. Halter- Great Lakes Review

Ken R. Zener – KeyBanc Capital Markets, Inc.

Operator

Good morning, and welcome to the Wabtec Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

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

Timothy R. Wesley

Thanks, Ed. Good morning, everybody. Welcome to our fourth quarter earnings call. Let me introduce the other Wabtec people who are here with me, Al Neupaver; our Chairman and CEO, our President and COO; Ray Betler, our new CFO, Pat Dugan and I also want to introduce to you our new Corporate Controller, John Mastalerz, John joined us recently after many years with Heinz, most recently as their Corporate Controller. As usual on the call today, we’ll make our prepared remarks and then be happy to take your questions.

During the call we will certainly make forward-looking statements and we just ask you to review today’s press release for the appropriate disclaimers. Al?

Albert J. Neupaver

Thanks Tim. Good morning everyone. We had a good operating performance in the fourth quarter, we had record sales of $682 million and earnings of $0.76 per diluted share, these results were impacted by after-tax expenses for some restructuring actions of about $0.03 per diluted share. These items were unusual in nature, so we wanted to point them out to you.

As a result of the strong finish to the year, we ended 2013 with record sales, record earnings and a record year end backlog of about $1.7 billion. We also continued a very important streak. Wabtec finished 2013 as the only company in North America on any exchange, year end stock price has increased for 13 consecutive years.

Our business is performing well and that’s thanks to our diversified business model, our strategic growth initiatives and the power of Wabtec Performance System. We’re very optimistic and excited about the long-term growth opportunities in our freight and transit rail markets, which are being driven by compelling trends around the world.

Today we also issued our 2014 guidance, we expect full year earnings per diluted share to be about $3.45 with sales growth of about 15% for the year, this EPS guidance is about 15% higher than our 2013 results, we had some assumptions with our guidance and I would like to go through those with you.

Continued modest growth in our global economy, U.S. and European transit markets remains stable with the emerging markets driving growth, our transit revenues should grow based on our existing backlog of projects in the U.S. and internationally. U.S. freight rail traffic grows modestly, with OEM locomotive and car builds also growing. So far this year traffic is about flat.

Our guidance assumes no major changes in foreign exchange rates a tax rate of about 31.5% for the year. We have also assumed that the acquisition that we announced last week Fandstan Electric will close by the end of the first quarter. So it is included in our guidance.

As always, we will be disciplined when it comes to controlling costs, we’re going to stay focused on generating cash to invest in growth opportunities and we will be ready to respond if market conditions change. I thought I might talk a little bit about our markets. One of the reasons we’re so optimistic about Wabtec‘s future is that we’re involved in very compelling markets.

These markets freight, rail and passenger transit are large, they’re global and they are growing. According to our UNIFE study the world rail supply market exceeds over a $100 billion with annual growth of about 3%. Western Europe, Asia-Pacific and NAFTA represent about 75% of that total market.

Rolling stock, the segment that we are involved in is the largest segment and outsourced services is the fastest growing segment. We play in both of these. Around the world our customers are focused on improving safety and efficiency and that’s where Wabtec plays an important role. The markets are also compelling because of an efficient transportation system and a robust infrastructure are essential, the global economic growth in both developed and emerging countries.

Finally, secular trends are also driving investment. That’s awareness of environmental issues and benefits, urbanization, deregulation, energy evolution.

I'd like to ask Ray Betler to dive a little deeper into our markets and explain how we view them going into 2014. Ray?

Raymond T. Betler

Okay, thank you, Al. We announced our freight traffic was up about 2.1% last year led by a 4.4% increase in intermodal. So far this year, traffic is off to a slow start, it’s down about 1% mostly due to weather issues across the country. The OEM rolling start deliveries in 2013 were lower than in prior years, was about 53,000 freight cars and 1,000 locomotives delivered.

In 2014, we expect about 60,000 freight cars and about a 1,100 locomotives to be delivered. Globally, freight traffic is also mixed. China is growing, but not as fast as expected, and as you might expect that has a ripple effect on the mining countries like Australia, Brazil, and South Africa, so we’ve seen some weakness there.

As you know, we’re focused on increasing our global footprint, where we see opportunities and markets that are larger than our traditional aftermarket. For example, the global installed based for locomotives is about 110,000, was about 35% of that fleet in Asia-Pacific, 25% in Russia, and 20% in the U.S. The global installed base of freight cars is about $5.2 million and about 30% of that is in the U.S., 30% in Russia, followed by 20% in Asia-Pacific.

On the transit side, stability is still the same, both in the U.S. and abroad. In the U.S., ridership is up about 1.5% in the third quarter and was flat year-to-date. In the UK, ridership is up actually about 3.9% in the most recent quarter. In Germany, estimate show about an increase of about 1%.

In 2013, North American transit car deliveries were about 1,000, plus deliveries were about 45,000, and we expect that to be essentially the same for 2014. Transit funding in the U.S. is stable, it stays around $10 billion, and that’s about, where it’s been over the past several years. This stability in the North American market continues despite budget issues and uncertainties about long-term transit spending and the long-term transit bill, which is up for discussion sometime this year.

Just as with the freight market, we’re focused on global growth where the market trends are larger than in NAFTA. We estimate the global installed base for transit cars to be around 330,000, was about 55% of those in Asia-Pacific, about 20% in Europe, and only about 5% in NAFTA. And even in these larger markets more established than ours, investment is still strong. For example, the transit agency in Munich plans to double its spending this year to expand and modernize their system. Al?

Albert J. Neupaver

Thanks a lot Ray. As we go forward, we will continue to focus on growth and cash generation. Our priorities for allocating this free cash remain the same; fund our internal growth programs that includes CapEx, fund acquisitions. We spend about $220 million on three acquisitions in 2013, returned money to shareholders through a combination of dividends and stock buybacks.

During 2013, we bought back 507,000 shares of stock for about $33 million, and we announced a new $200 million buyback authorization. We’ve also increased our quarterly dividend for the third-year in a row. We remain focused on increasing cash flow by managing cost, driving down working capital, and controlling capital expenditures.

Our growth strategies remain the same, global and market expansion, aftermarket expansion, new products and technology, and acquisition. As we look at some of the progress we’ve made on each of these strategies, global and market expansion. Our sales outside of the U.S. were a record $1.2 billion, a 3% higher than last year’s total, just under 50% of total sales versus about one-third five years ago.

We continue to grow our presence in Australia, South America, and China from both internal growth and acquisitions. We present – we recently won a locomotive brake order in South Africa that we believe positions us well for future business there. We’re working to develop new business opportunities in Russia as well. Aftermarket expansion, overall our aftermarket sales were $1.5 billion another record year, that made up 57% of our total to growth of 13% compared to the prior year.

This growth is due in part to acquisitions and internal growth initiatives. We are expanding our service offerings around the world especially in the UK, where we are the leading provider of rolling stock overhauls and maintenance. In the area of new products and technology, we continue to have tremendous focus on this area with about 38% of our 2013 sales came from new products. That was 30% a year before. We define a new product, as any product that was introduced in the last five years.

We have many internal development projects such as electronic braking, oil free compressors, locomotive services, and internal brake system and integrated brake system for the European freight market, and, of course, positive train control, which gets the headlines. PTC represented about $235 million of our sales in 2013, that's about a 10% growth in 2012. We expect more growth this year probably in the range of another 10% to 15%, as we continue to work with the railroads and other industry suppliers to deliver an interoperable system by the 2015 deadline.

As you know, there has been discussions about extending the deadline, we certainly can’t predict whether that will happen or not. But we have analyzed how a delay would impact Wabtec, and we do not think that it will have a meaningful impact on our business.

In the acquisition area, we completed three transactions last year, and have already announced one this year. Combined in 2013, combine the 2013 acquisitions and the ones we closed in 2012, the two of those contribute revenues of about $160 million with about half in each group.

Let’s talk a little bit about our recent acquisition and that’s Fandstan Electric. We are extremely excited to sign an agreement to acquire this company and expect to complete the transaction by the end of the first quarter. Fandstan makes highly engineered components, mainly pantographs and third rail products, including shoe gears. They have strong intellectual property. They have a strong engineering and technical capabilities. About 60% of their business is transit and 40% is industrial/energy.

This acquisition meets all of our strategic criteria, new products. There is no product overlap whatsoever with Wabtec. Aftermarket 30% of their sales are in the aftermarket. They have an installed base in more than a 100 different countries. If you look at the distribution of their business, 50% of it is on the Continent in Europe, obviously a target area for us, 20% in the UK, where we already have a good platform, 20% in Asia, where we’re focused on growing, and 10% here in the U.S.

We have a strong management team that will continue in with the business. Annual revenues are about $235 million with margins slightly less than our current transit margins. We see significant opportunities to improve the margins, using our lean and sourcing activities, applying the Wabtec Performance System, but this will take time and lots of hard work.

In 2014, we will see significant sales from Fandstan, but minimal earnings accretion due to integration cost and purchase price accounting charges. Long-term, we think Fandstan will be an excellent addition to our portfolio. Just to mention the other acquisitions in 2013, Napier manufacturer of engine turbochargers and components for a variety of markets, Turbonetics a specialty turbocharger for smaller engine and Longwood Industries, a manufacturer of specialty rubber and seal products for rail and industrial markets.

What I would like to do is turn it over to Pat Dugan, our new Chief Financial Officer, and have him talk a bit about the numbers. He is replacing our good friend Alvaro Garcia-Tunon, who is probably listening in today.

Patrick D. Dugan

All right. Well, thank you, and I’m happy to speak to these numbers, and I appreciate the opportunity. Sales for the fourth quarter were a record $682 million, which is 12% higher than last year. Of this increase, a little more than half was from organic growth.

In the Freight segment, the sales increased 14%. A portion of that is due to acquisitions and our organic growth is from – increases in our Electronics business and from the freight car companies that supply the freight car build.

Transit segment sales also increased 9% and that really is spread across a number of different product lines and different business units. For 2014, we expect to see revenues increase in book of our operating segments, so we’re expecting that to continue.

Operating income for the quarter was a record $111 million, which is about 16.3% of sales. As Al discussed earlier, in this quarter we did record some pretax charges of about $3.8 million, which is spread between our cost of goods sold and our SG&A, and that’s really primarily for restructuring actions and we point these out simply, because as you are aware of those larger items.

For the full-year of 2013, our operating margin was 17% that is a 60 base improvement better than – basis point improvement from last year. Interest and other, our interest expense for the quarter was $4.6 million, that’s slightly higher compared to a year ago, that’s really the result of some additional average outstanding borrowings and those additional borrowings were caused by the timing of our acquisitions and the money that we used to complete those transactions.

Other income is about $915,000 and that really stems from some accounting that we did at year end related to various joint ventures. Our tax rate for the quarter was 31.2% last year, it was 33.3%. And we expect our annual rate going forward to be roughly 31.5%, although we expect individual quarters to have some variability simply due to the timing of certain discrete tax items.

When you look at our balance sheet, our working capital has improved slightly despite our higher sales. Our year-end accounts receivables were $555 million, inventories were $403 million, and payables were $327 million. Just something to point out is our business has become more global and we expand our sales and our sourcing programs into various countries that does affect our working capital requirements. Even so we expect that we have plenty of opportunity to continue to reduce our working capital.

Cash at year end was $286 million that’s mostly outside of the United States and if you compare that to September 30, September 30 balance was $281 million. Our debt at year end was $451 million, when you compare that to the third quarter which was $540 million. And our cash from operations on a cash flow, we generated $236 million for the year which is about the same as last year. I’ll point out that is the third year in a row that we’ve generated more than $230 million in cash from operations. A good performance, we’re happy with that, but hope to continue to have improvement in that area end into 2014.

Just a couple of miscellaneous items that we always get questions on our earnings calls. I just wanted to point out, our depreciation expense for the quarter was $9 million, compared to $7.6 million in last year’s quarter. A slight increase really related to the acquisitions that we completed in the year. Amortization expense is $5 million which is flat with both quarters and our CapEx for the quarter was $17.6 million versus $11.3 million.

For the year CapEx expenditures were $41 million versus $36 million, and in 2014, we expect to spend about $50 million including the Fandstan acquisition. Some information on our backlog, we ended the year with a record year end high of $1.7 billion in backlog that’s higher than September 30 and about 2% higher than a year ago.

You can split that backlog between transit and freight as $1.2 billion for transit and $512 million for freight. When you look at our rolling 12 months backlog, which is a subset of the total backlog, the 12 month backlog is $1.1 billion which is also higher than September 30th. The transit portion of that $1.1 billion is $651 million and freight $447 million.

I just want to point out that those figures do not include about $250 million of contract options. We don’t count them in our backlog until the customer exercises those options.

So with that, I’ll now turn it back over to Al.

Albert J. Neupaver

Okay, thanks a lot, Pat and before I summarize I just like to take this opportunity especially to this group of people that know Alvaro. I just want to personally thank him for his tremendous contributions over the eight years that I’d been here and longer than that he is really been here since about 1995 when his company was acquired by Wabtec. And he truly was a major contributor and probably most importantly was a tremendous business partner and was definitely good, contributed to our success. And I am very happy to say that he will continue in an advisory capacity and working with us into the future. So thanks ever so much for your years of service, Alvaro, and our continued friendship.

In summary, once again we had a good performance in the fourth quarter and for the full year. Let’s take one final look at 2013 and then I would like to, I know in the company we’re focused on 2014 and moving forward. Our revenues increased 7% to a record $2.57. Income from operations increased 12% to a record $437 million. EPS increased 16% to a record $3.01 and our backlog ended the year at a new record $1.7 billion quite an accomplishment for 2013.

Now, looking ahead into 2014, we are anticipating another record year with an EPS guidance of about $3.45 on a revenue growth of about 15%. We couldn’t be more pleased with our strategic progress in the long-term growth opportunities we see. As countries around the world continue to invest in freight, rail and passenger transit infrastructure.

We continue to benefit from our diverse business model in the Wabtec Performance System, which provides the tools we need to generate cash and reduce cost. We have an experienced management team that is poised to take advantage of our growth opportunities and ready to respond to any changes in market conditions.

With that we’d be more than happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Allison Poliniak of Wells Fargo. Please go ahead.

Allison A. Poliniak-Cusic – Wells Fargo Securities LLC

Hi, good morning.

Albert J. Neupaver

Good morning, Allison.

Allison A. Poliniak-Cusic – Wells Fargo Securities LLC

Good for 2014, Al could you give us sense of where that revenue growth is coming from in terms of acquisitions and then both freight and transit, how you are breaking that out?

Albert J. Neupaver

Sure, sure if you look at the 15% growth, which are going to have is the Fandstan acquisition will make up about, say that contributes 50%. And if you look at the other 50% half of that will be acquisitions that were closed in 2013 and the other half internal growth. So what is that mean that means that will probably end up with mid single-digit internal growth for the year and that’s really inline with our long-term strategic plan.

Allison A. Poliniak-Cusic – Wells Fargo Securities LLC

Yes, perfect and then, just on the transit side. Yes, go ahead.

Albert J. Neupaver

One other thing, I’ve got to answer your second part Allison and I apologize, the second part of your question…

Allison A. Poliniak-Cusic – Wells Fargo Securities LLC

I forgot that too.

Albert J. Neupaver

The second part of that question, it’s really going to be split probably right down the middle, we are going to get half in freight and half in transit.

Allison A. Poliniak-Cusic – Wells Fargo Securities LLC

Okay, perfect, and then just touching on transit, with the uncertainty funding as we sort of enter the end of next year or into this year, actually, are you guys sensing any increase slowing down in terms of new projects, until they get some color on what’s going to happen there.

Albert J. Neupaver

I think that what we have seen over the last two years, and what we are seeing right now, we’ll continue to see in the future is, there is just an assumption that it is accepted across the industry, that the funding will be there it may not go up, but the $10 billion that is allocated to transit across the U.S. will be there Ray, I don’t know if you want to add any color to that.

Raymond T. Betler

Yes, thanks Al. I agree with Allison, its there is some momentum associated with the transit industry, because of the long-term nature of a contracts, it takes multiple years to get them funded, multiple years in the bid process and then once they are funded, they last three to five years, followed by the aftermarket opportunities. So there is plenty of momentum in the transit market and there is no indication in the government side, that it’s not going support transit. So we’ve seen a lot of new contracts come in, we’re in the bid process for some pretty big one. So I feel pretty confident.

Allison A. Poliniak-Cusic – Wells Fargo Securities LLC

That’s great. Thank you.

Raymond T. Betler

Thank you, Allison.

Operator

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

Justin Long – Stephens, Inc.

Thanks congrats on the quarter and good morning.

Albert J. Neupaver

Good morning, Justin.

Raymond T. Betler

Hi, Justin.

Justin Long – Stephens, Inc.

Hey, looking back at 2013 your incremental margins were very strong and this is even more impressive given your growth was primarily driven – are really driven by transit, it tends to be lower margin relative to freight. As we look ahead to 2014 and look at your guidance, it seems like it implies a lower level of incremental margins. Could you just talk about what’s driving this, whether it’s a mix in freight and transit and you touched on that a little bit or something cost related?

Albert J. Neupaver

When you look at contribution margin, we’ve openly discussed that we feel that a good number for us would be 25% contribution margin on incremental revenue and we have had some great success this year. I think if you look at the year – total year it was at 25%, obviously less than the fourth quarter, but some of that you talk about the – what impacts that, okay there is a number of things.

Number one is a continuous drive to improve margins through our Wabtec Performance System and we target improvements in our plan and we expect people to deliver on that. You mentioned the second aspects and that’s our transit margins are generally lower than our freight margins. So that mix has an impact. The other positive impact that we’ve had in, if you look at 2013 our aftermarket business grew very nicely and that is typically a good margin business.

The other thing it impacts margins is quarter-to-quarter. We talk about all this internal growth and it’s our number one target for what we do with cash generation. This internal growth doesn’t always show up that we – in a way that we discuss it because it’s cost that we incur in order to develop the market certification cost in Russia, establishing our marketing organization in Europe, building our platforms in South America, all these costs sometimes flow differently to the P&L throughout the year. So that has an impact. We’re very pleased on how we did perform in 2013, if we take a look at 2014 and how our plan rolls out, the internal growth will be the most profitable growth.

We will have expenses associated with trying to grow our business in each of those strategic initiatives, so that will have an impact. We feel that there will be an impact, when I talked about the mix of being 50% freight and transit, the absolute number, the percentage growth will be about the same. But freights are bigger portion of our business so from an absolute standpoint that should have somewhat of a positive impact. So that mix will have that impact.

And we’re very conscious about continuously improving those margins over time, if you look at the Fandstan acquisition, as I stated their margins are right around or slightly lower than our transit margin. So that will have an impact, in addition to that we have integration costs that were impacted.

We also have the PPA that will impact that PPA being the purchase price accounting. So those are some headwinds that we must try to overcome, but we still think that we should see good margin growth, as we go through the year in 2014.

Justin Long – Stephens, Inc.

And that’s really helpful detail, and I appreciate it, and as a follow-up, my second question, I was just wondering what the level of activity was like in terms of your pipeline of potential PTC related projects, are people sitting on their hands right now waiting to see if we get an extension, are there still some opportunities you’re working on that are pretty close?

Albert J. Neupaver

Yeah. I don’t believe that anyone has ever just step back and hopeful that there is going to be an extension, so they won’t do. I think the Class I railroads that have been feverishly working to try to get this project implemented. And the transit authorities as well, some of the problems with the transit authorities I think are really related to funding. And what you’re seeing, we’re not seeing any let up whatsoever, we still see a lot of projects that we’re working on.

We hope that we’re in a position that we could announce a few of these in the near-term, but there is tremendous amount of activity going on. And I think the biggest effort that you’ll see in 2014 is that almost all the railroads the Class I railroads will be shifting from laboratory testing to field testing. And you will even see some of the Class I will be going into probably, almost the approval stage for the product safety plan as well.

And you have some of the transit authorities like Metrolinx that is really looking at trying to put this in revenue service in the short-term, so you’ve got a tremendous amount of activity that’s going on, it’s a very complex project, it’s a very costly project for those involved. But I do not see anyone taking the foot of the pedal.

Justin Long – Stephens, Inc.

Okay. Great. That’s helpful, and then, maybe one last quick one, on your conversations with potential joint venture partners in Russia, is there any update on that front?

Patrick D. Dugan

Not at this point, we continued to work with two different groups right now, we’re working hard to try to get a formal arrangement and create say a nice long-term opportunity, we’re obviously very cautious in entering any new market. And Russia is one of those that we’re taking our time and making sure that we don’t get too far ahead of ourselves without understanding the market. So nothing to report, but I think in the near-term, we should be able to give you more information.

Justin Long – Stephens, Inc.

Right. I will leave it at that, I appreciate the time today.

Albert J. Neupaver

Okay, thanks a lot.

Operator

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

Art W. Hatfield – Raymond James & Associates, Inc.

Thank you. Good morning, everyone. Hey, I want to go back to this margin question, because based on the guidance that you’ve given and just kind of going through a rough cut of the numbers, I am getting a pretty flattish or flat or very small improvement in operating margins for 2014, can you and you talked about some gives and takes. But can you talk about what maybe the biggest headwinds, one the biggest headwinds to margin improvement in 2014?

And secondly, given the size of the company now, and you’ve had great success for the last few years in improving that operating margin, I guess going forward should we expect the lower level of incremental improvement there just given the size of the company?

Patrick D. Dugan

Well, let’s first, let’s start out by every time you improve on margins, the next increment is more difficult, okay.

Art W. Hatfield – Raymond James & Associates, Inc.

Right.

Patrick D. Dugan

There is just no question about it. As we look at 2014, we have a goal and our plan we will improve margins. And those margins improvement will come from all the things we’ve ever done in the past. And we will continue to drive those. If you look at the headwinds, I’ll try to explain them again. I think part of it is that you have a large acquisition that won’t be – that will be a headwind, okay, and I think I talked about it there even with their margins, but we’ve got integration expenses and we get this purchase price accounting. How that works is that all the profits that’s inside the – whether it’s in the backlog or in inventory has to flow out. And then you have an ongoing amortization of your goodwill.

So there is an impact from those as it flows out on the large acquisition like it is and then you add in the integration cost. As far as other headwinds, there that’s probably the biggest one. I think you are going to see us improve our costs related to sourcing, we’re going to improve our costs related to our efficiency and productivity in the plants. We’re going to grow our aftermarket business, which is going to help.

We’ve got internal growth that we’ll be kicking in. But we also and I want to tell you that it’s not a headwind, but it’s a reality. We do invest in internal growth, and if we want to take advantage of a market in China, if we want to take advantage of a market in Russia, if we want to take advantage in these markets, we fund it as we go, okay.

We are funding straight out of the profit, so those costs are impacted, and it’s hard for us to try to explain to you when those costs will hit, know how much they will be in any given quarter, let alone a year. So we do the best we can in the planning process to identify those costs, and that’s where our guidance is. But I think that I don’t know my number show a pretty nice, it shows improvement in the margin even with the things I talked about. I don’t know if my math was off, sometimes it is.

Patrick D. Dugan

I can tell you 15% and maybe my interest expense is too high, and how I calculate it for the acquisitions. But I’m getting a flat margin year-over-year, so maybe we need – I need to take this offline either.

Raymond T. Betler

Yes, you should talk to Tim that we are able to at least, if there is something wrong with your model, but again, we can’t provide anymore than we have legitimately. So if there is a question, we actually, I believe the numbers show an improvement in margin.

Albert J. Neupaver

Well, look, I could come up with a small improvement to, I guess is what I ‘m trying to figure out as you for the last several years, you’ve been able to grow margin, close to a 100 basis points on average a year. And I guess is, what I’m hearing from you in your explanation is that, if you didn’t have some of these internal investments, if you didn’t have Fandstan as a headwind, that kind of growth is still the ballpark, where the company should be.

And what I’m trying to gather from all this is if that is reality and maybe I’m looking at it differently for 2014, or if there is a new reality given the size of the company as you said, each incremental margin point gets more difficult to obtain if we’re getting to a level there where we should think inherently about that type of growth, that margin improvement in the company to a lower level going forward as we have in the past.

Raymond T. Betler

Our goals and incremental improvement are no less than what they were in the past. So I would say that we still are not at the point, where we think that margin expansion isn’t a good opportunity for us, okay, so all right.

Art W. Hatfield – Raymond James & Associates, Inc.

I’m just – no I – that’s helpful. I will talk offline. What I’m really trying to get is when we say margin expansion, are we talking 30 to 50 basis points a year or 100 plus, and that’s kind – that’s a huge differential between those two. And so, I’m trying to gather within my head really how we should be thinking about margin improvement going forward?

Albert J. Neupaver

I think we have the opportunity for good margin improvement going forward.

Art W. Hatfield – Raymond James & Associates, Inc.

Okay. Thank you.

Albert J. Neupaver

Okay. Thanks, Art.

Operator

Our next question comes from Scott Group of Wolfe Research. Please go ahead.

Scott H. Group – Wolfe Research, LLC

Hey, thanks. Good morning, guys.

Albert J. Neupaver

Good morning.

Raymond T. Betler

Good morning

Scott H. Group – Wolfe Research, LLC

So I don’t want to, keep this margin discussion go back, I have one quick follow-up on that. As I just do the math on adding 200 million of – roughly 200 million of revenue for Fandstan and but very little operating profit based on what it seems like you guys are guiding to. That’s about a 100 basis point margin drag this year. So implying that kind of the rest of the business is seeing 100 plus or better margin improvement. I think that’s the point you’ve been trying to make out, are we on the same page on that?

Patrick D. Dugan

Yes, what – I hate to give numbers as you know, but we’re on the same page. Your explanation and my explanation, you probably did a better job than I do.

Scott H. Group – Wolfe Research, LLC

Okay. And just two other things; one, what are the implications evolve the weather we are having here in the states, is there going to be a good aftermarket opportunity for you guys this year or are your products different that wouldn’t see a benefit from that?

Albert J. Neupaver

Now we do see a benefit and it’s primarily in our aftermarket area that, this weather has just been extremely difficult to keep the equipment running and it’s hard on the equipment and we see a pickup and a lot of the overhaul products that we have.

Scott H. Group – Wolfe Research, LLC

When do you think that start to show, is that show up kind of in first quarter or is it take a couple of quarters to play out?

Raymond T. Betler

It usually shows up almost immediately. We don’t have much of a backlog in that area, I think our lead times are four to six weeks max.

Scott H. Group – Wolfe Research, LLC

Okay. And then just last thing on the – just kind of an update on balance sheet and uses of cash. So any final decisions on with the Fandstan deal, how much of that was cash and how much was with revolver? And then do you have just – you’ve got a new buyback announcement, what’s your view on incremental uses of cash flow? Do you think its buybacks and acquisitions, and do you think this is a big enough deal, where maybe you slowdown and don’t look for other deals this year is how you think about use of cash going forward?

Raymond T. Betler

Yes, the use of cash will continue. Number one priority will be internal development, number two will be acquisitions and we will not slowdown. Number three is stock buyback and dividends that we’ve increased the dividend three years in a row. Our stock buyback was taken, we had used up a good portion almost more than half of 150 we will back up to 200 to give us that flexibility. So those are the ones. As far as the financing of Fandstan, obviously we haven’t closed the deal, but maybe Pat, you could give some color on what we think we’re going to do.

Patrick D. Dugan

Yes, we have cash reserves and balances at overseas that we’re going to take advantage of using those. We’re not going to have to finance the whole acquisition. We’re still studying and assessing the most efficient and cost effective way in order to complete the deal. But we’re going to – we’re looking at a range of 40%, 50% maybe higher of the acquisition being using available cash reserves and the remainder being barred.

Scott H. Group – Wolfe Research, LLC

Okay, that’s helpful. And then, maybe Pat you just have a view on kind of where you want to take the leverage of the company anything different than what Alvaro had said in the past?

Patrick D. Dugan

No, nothing will be different than what Alvaro said in the past. I mean we’re committed to maintaining our credit ratings and we have the constant communication with the rating agencies, and so they’re aware of our acquisition profile and our plans on growth expectations. So we’ll continue to execute as we always have.

Scott H. Group – Wolfe Research, LLC

All right. Thanks a lot guys.

Raymond T. Betler

Thanks.

Operator

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

Matthew S. Brooklier – Longbow Research LLC

Hey, thanks, good morning. So just a question on Fandstan did carry with it, kind of a lower margin profile than some of the deals you’ve done over the past, let’s say, 12 to 18 months, it sounds like, it’s not going to contribute that much with respect to earnings in 2014, and you could walk through the reasons for that. But my question kind of boils down to, where do you think you can take margins on Fandstan? Can you get it up to where transit is currently, could it be above that, and then what’s the timing of improving the overall margin profile on that business?

Raymond T. Betler

Okay, Fandstan, let me explain the business a little bit and then will help you understand. The business was privately held. It was held by Laurd and Lady Tanla was their names and they had it in their names a trust and they hired an individual by the name of Michael Bosserman, who was our Managing Director that ran the business.

He ran it out of London and what you had is a lot of separate businesses that are located, you got a manufacturing in Germany, you got manufacturing in the Netherlands, you got manufacturing in the UK, you got some manufacturing in China, Australia, the U.S., sales offices throughout the world. They build a nice business over the years really focusing on high-tech products, almost 60% of it going into the rail business and about 40% into industrial businesses.

Their technology is really the ability to take and transfer energy from one position to another, and that’s what mainly their reason for existence was electrical current, data collection, and distribution solutions.

So it’s a great basic business that was run as just kind of a many Wabtec in a sense with divisions out there. What we need to do is, we need to take a look to understand the business and find ways to integrate that business into our business model. There is a lot of opportunities to – in order to do that. We think it will take sometime. We think by the end of 2014 most of that integration will be complete. Most of the opportunity that we see in the business is just not a fixture of business. Just keep in mind that their business goals and objectives was based on a family business and not a public business. That is the culture that you need to transform.

This is not a problematic business, it’s a good business, sound business, that if we apply our Wabtec performances, we apply our international platform. If you look at it as 30% of it is aftermarket, the have an installed base in 100 countries, we could grow that. If you take a look at these industrial markets and also their rail products and you look at our distribution throughout the world we’ll improve their revenue over time, it won’t happen at first. So what really this is a great acquisition, we want to be honest and upfront with everyone, but it’s going to take a little bit of time to get the results we are going to get out of it. There is no reason why this couldn’t be equal or better than the average of the company, not just a transit business.

Matthew S. Brooklier – Longbow Research LLC

Okay, that’s very helpful color there and then as we are looking out 2014 PTC revenue, what is the growth composition of that look like, you gave us the aggregate number for the year, but how much contribution are we getting from the freight side and then how much contribution comes from transit.

Albert J. Neupaver

Yes, if you look at the amount of revenue we’ve from PTC in total since we start reporting back in 2010, it’s been about $600 million. And about a little more than 50% of that is come from U.S. freight and U.S. transit has been about 25% and little less than 25% more like 20% from our international opportunities.

In 2014 we expect that distribution to be about the same. We don’t see either one, I think that if there would be any, I think if would into 2015 and beyond probably transit and international may got a different percentage, but in 2014 I think that breakdown is pretty accurate to what we think we’re going to see right now.

Matthew S. Brooklier – Longbow Research LLC

Okay. That’s helpful. And then just final question and if you could remind us or if you talk do it in the past. Is there a big difference between PTC margins within freight versus transit?

Albert J. Neupaver

No, no difference.

Matthew S. Brooklier – Longbow Research LLC

Okay. Appreciate the time.

Albert J. Neupaver

Great, thank you.

Operator

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

Samuel Eisner – Goldman Sachs

Good morning, everyone.

Albert J. Neupaver

Hi, Sam.

Samuel Eisner – Goldman Sachs

Just going back on PTC, my misunderstanding or I could have this wrong, I thought PTC revenue in 2013 was going to be closer to $250 million, its sounds like came in at $235 million, so is that $15 million differential is that just maybe in wrong or is that maybe a timing issue that’s been pushing out to 2014?

Albert J. Neupaver

It’s a timing issue Sam, your number was right. So it could catch on your part, but it’s not that this is lost business or anything, it really comes down to a timing issue, we expected a little more hardware being delivered in the fourth quarter and a lot of that has been put off.

So on these projects the other thing it happens on large projects we had anticipated some revenue recognition potentials by meeting milestones on our MRS project, and those milestones really we’re not met and moved into first quarter of 2014. So those two impacts brought us down a little bit, but its not, I think it’s just a timing situation and, okay.

Samuel Eisner – Goldman Sachs

Yes. Understood, thank you very much, and then on your backlog I think about 30% of your backlog now is freight with about 70% being transit, that’s move – that mix has moved around pretty good amount over the last few years, so just curious how you guys are the thinking about mix going forward in 2014, should we maintain current levels, and then a second part to that freight orders this quarter of course the $390 million I think are highest on an absolute basis perhaps in the company’s history. So just curious what’s really driving that the significant strength in freight orders?

Albert J. Neupaver

Okay, let’s deal with the first question and that question is do we expect the mix between transit and freight to continue? In 2014, yes, we’re going to see an equipment growth, so the percentage breakdown of those two businesses should be about the same when you look at the annual percentage not necessarily fourth quarter or the third or second. Just take the annual percentage of freight and transit and you will see about that mix in 2014.

What’s driving freight I think if you take a look at freight and you compare it to the fourth quarter of last year, there is a gain obviously coming from the rail build. I think that fourth quarter last year deliveries were probably around 11 or 12, this year we’re up around almost 16, so you have some growth there.

The other thing that we’ve seen that we really didn’t think we would see, we saw some locomotive business that had picked up. We also had a few large contracts that came to an end in the fourth quarter. The other thing it happened is that the acquisition amount in the fourth quarter was a lot of the freight was from acquisitions.

If you look at the 2012 to 2013 in the fourth quarter, about $40 plus million, $47 million was freight and $33 million of that $47 million was acquisitions, maybe along within Turbonetics all ended up in the freight, third and fourth quarter, the whole growth was freight, very little growth from transit and that was about 17% – $17 million of that $49 million, $50 million was acquisitions of 30%. I think the one thing that is good and we’re looking at third to fourth and if you look at the fourth quarter 2012 to 2013 is that in both cases, most of that growth was internal growth, where we had not seen that in the previous quarter. So that’s a real plus, I think that our internal engine is starting to pick up, and that’s what drove some of that business in.

Samuel Eisner – Goldman Sachs

Thanks. And then just two more housekeeping items here, the restructuring charges announced in the quarter, what specifically were they for and what you expect to payback beyond those?

Albert J. Neupaver

Okay. What we’re doing there is two things that two primarily things, one is we announced in the late last year that we were going to relocate most of the manufacturing for one of our transit lines from a plant in California to our plant down in San Luis Potosi in Mexico. This should have a very positive impact going from a high class platform, a high real estate area to an already existing infrastructure in a low cost labor platform. So we should see good margin improvement based on that. The other thing is as I mentioned, we finished some large orders especially in the locomotive area and with the completion of some of those orders we needed to restructure our business and their severance cost related to that.

So that is not so much an improvement as right – putting the right level of cost in with the business, but there is a bit of restructuring that’s related to that. Okay.

Samuel Eisner – Goldman Sachs

I’m trying to sneak one more and just on the acquisition on Fandstan, have you guys called out how much purchase accounting, should be and my estimates close to maybe $6 million or $7 million, but just kind of curious how you guys are thinking about that?

Albert J. Neupaver

We don’t have an exact number at this point.

Samuel Eisner – Goldman Sachs

Right.

Albert J. Neupaver

On the purchase accounting, we estimated and then Pat wanted to explain the process and then when we understand we could maybe give you more color, okay.

Patrick D. Dugan

We’ll have short-term expense amortization cost related to step-up and backlog value and inventory value. We estimate that to be in the $5 million range, but we expect that also to change because that’s we have to get in to some of the integration process and really make sure we understand and account for that properly. There also be some additional long-term amortization expense related to other intangibles and all those things are being worked on and we expect to finalize as we go through 2014.

Samuel Eisner – Goldman Sachs

Thanks so much.

Operator

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

Liam D. Burke – Janney Capital Markets

Thank you. Good morning Al.

Albert J. Neupaver

Good morning, Liam.

Liam D. Burke – Janney Capital Markets

Al you announced a contract during the quarter to supply a Canadian transit company with low emission locomotives, is this a trend with increasing environmental standards throughout the world, is this an opportunity that you could take worldwide or is this just one-off?

Albert J. Neupaver

It’s something that really you could probably going to see more and more and that’s taking some of the older locomotives and getting it upgraded to tier 4 capabilities. I think this might be the first tier 4 re-powered locomotives delivered. We hope to see that as a business opportunity going forward. Ray, you might want to expand because I know you are close to that project.

Raymond T. Betler

Yes, it’s exactly, Liam it’s our first opportunity to introduce tier 4 technology, which is a specification requirement for 2015. So one we’ll be the first to introduce it in North America and it’s for application and go transit, when we have a strong installed base and we have other ongoing contracts.

Liam D. Burke – Janney Capital Markets

Great and then Al, the big part of the aftermarket growth was in services, is that I guess Pat’s question, are the margins on aftermarket service equal or approximate the aftermarket product profitability?

Albert J. Neupaver

Generally, yes our aftermarket business usually get better margins as many companies. I think the service part of it is less than the parts, but both when you average them together, we have better margins in our aftermarket business, but service is less than parts.

Liam D. Burke – Janney Capital Markets

Great, thank you.

Albert J. Neupaver

Thank you

Operator

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

Thom S. Albrecht – BB&T Capital Markets

Hey guys a lot of my question have been answered, but I would like to clarify a couple of things. So on the $3.8 million charge I know you said it was kind a split between the SG&A and COGS, but just as a run rate going forward especially now with Fandstan, what should we think about at least right now for quarterly SG&A rate?

Albert J. Neupaver

Yes, we think our SG&A rate going forward should be somewhere in the $75 million range, fourth quarter was slightly over $70 million, and we think with the addition of Fandstan it could creep up to the $75 million. Again that’s also something we’ll access and review, make sure that we are all catching the cost consistently.

Thom S. Albrecht – BB&T Capital Markets

Sure. And then I calculated about $142 million of acquired revenues last year including the little bitty of the transit item penciling at about $2 million there, but what was the purchase price for all of the acquisitions I think you gave it earlier in the call how much you spend on acquisitions last year?

Raymond T. Betler

220

Thom Albrecht – BB&T Capital Markets

Okay. And then were there any adverse foreign currency issues in the quarter. I am thinking especially Australia, but maybe other place?

Raymond T. Betler

I will give you just a few – if you look at 2013 third to fourth revenue was impacted positively 6.7 if you look at compare fourth quarter 2012 to 2013 it was a negative about a million and if you look at year-to-date it was negative but 2015, 2016 and you are right the main once it were Australia and Brazil

Thom Albrecht – BB&T Capital Markets

Okay. That’s all I had. Thank you very much.

Raymond T. Betler

All right.

Operator

Our next question comes from Greg Halter of Great Lakes Review. Please go ahead.

Greg W. Halter- Great Lakes Review

Yes, good morning guys and thanks for taking the questions.

Albert J. Neupaver

Yes, hi Greg.

Raymond T. Betler

Yes, hi, Greg.

Greg W. Halter- Great Lakes Review

Regarding the MRS, you made some comments early about the milestones, what are your expectations their and their implementation of their PTC system?

Albert J. Neupaver

We feel that will be in good position to have that system, totally operating, no later than the first quarter of 2015, most of it should be running later this year, because of the pullback in China for some of the mining demands, resources. I think the option that we’ve talked about will be delayed. I think I was work another $80 million near. So…

Greg W. Halter- Great Lakes Review

That’s delayed but not lost from that contract?

Albert J. Neupaver

No, no I think that we have every indication that they are getting the, advantages that they had anticipated in the benefits that they had planned for out of the system and I think is the system becomes fully operable, it will even be better.

Greg W. Halter- Great Lakes Review

All right, and regarding the ECP business, can you discuss how that is performing and whether or not there is any movement to foot in the U.S. given improved being shift by rail and accidents and so forth, and I know you guys have a big stress on safety at Wabtec?

Albert J. Neupaver

We still see a lot of interest as well as implementation of ECP trains throughout the world, Australia, Brazil lot of pilots running and South Africa as far as the U.S. we have seen little or no interest at this point, I think they are preoccupied but a lot of other things, I think ECP get mentioned sometime and you talk about what could happen if you had an electrified train a line that ran through the train, could it help somewhat, when you look at safety and hand brakes and another things, but there is a lot going on in that area.

Greg W. Halter- Great Lakes Review

All right and a couple of housekeeping items, Pat do you have the approximate equity balance and total assets at the end of the year?

Patrick D. Dugan

Yes, shareholders equity is 1,517 million and total assets, $2.8 billion.

Greg W. Halter- Great Lakes Review

All right and regarding the OEM and aftermarket, you have that breakdown either for the year or the quarter and both freight and transit either in percents or dollars or whatever you may have available?

Patrick D. Dugan

Yes, I have it. So for the year the freight breakdown was 49 OEM, 51 aftermarket, and transit, the breakdown was 36 OEMs, 64 aftermarket.

Greg W. Halter- Great Lakes Review

All right, great. And then one last one on the PTCO, I’ve read a couple of stories about some contracts from a couple of the transit agencies that are reportedly awarded, but they haven’t seen you guys put out a release on that yet and just wondering how that process works and maybe this is what you were mentioning earlier Al.

Albert J. Neupaver

Yes, we’re working with all the transit authorities, which you did see was related to the New York metropolitan transit authority. There was a contract that was announced that Bombardier and Siemens would upgrade the access system. That’s a different system that’s used in the Northeast Corridor that is not the type of system that we sell for the freight lines as well as the transit lines that use commuter rails.

This system is a system that requires that they announced was electrified system that is upgrading the current system. I think the system was originally installed. Boston was the designer of the original system, and I think this is just upgraded to make sure that it fully is positive train control on all segments at the rail road. So it’s a different product and different application market.

Patrick D. Dugan

Great. You are right, we do you see sometimes the agencies will make awards, but that doesn’t mean we’ve actually signed contracts, and that’s pretty typical on transit that there can’t be a lag between when they may make a contract awards and when we make science.

Greg W. Halter- Great Lakes Review

Okay. Yes, there were couples that were outside of New York that I know. All right thank you. We’ll be so looking for those in the near future hopefully.

Albert J. Neupaver

All right, great.

Operator

(Operator Instructions)

Albert J. Neupaver

Okay. If there is no…

Operator

I apologize. Our next question comes from Steve Barger of KeyBanc Capital Markets. Please go ahead.

Ken R. Zener – KeyBanc Capital Markets, Inc.

Hey, guys. This is actually Ken Zener for Steve, how are you?

Albert J. Neupaver

Good.

Raymond T. Betler

Good, how are you?

Ken R. Zener – KeyBanc Capital Markets, Inc.

Good. Hey, thanks for taking my call, I know as such a couple of questions regarding Fandstan. I was just wondering if you could talk about different color on Fandstan seasonality, if that’s anything like the rest of your business. And you also talked as to how the product exposure, it doesn’t really overlap with any of your other businesses. And I was just wondering if you can give some color as to how tough you think that is going to be to integrate and how to grow those product lines?

Albert J. Neupaver

Okay. First one seasonality is probably similar to ours, the fact that they have a larger percentage of business in the European community might suggest third quarter vacation period, holiday periods could impact that, but I don’t think it’s that much different than ours. As far as the integration I think it will be a complex integration not because we’re not familiar with the product or the markets we call in the same customers, just there is always cultural issues that we need to make sure that we’re sensitive too and we do a proper integration and take advantage of all the opportunities that is there.

Ken R. Zener – KeyBanc Capital Markets, Inc.

Great thanks and then one last question for you, could you talk to the capital structure of Fandstan going forward, just kind of give us an idea, what kind of incremental interest expense we should be looking at?

Albert J. Neupaver

We talked a little bit about how we’re going to finance this and it’s still, we’re still assessing the most optimal and efficient way to do it, so we’re thinking that it’s going to be a combination of the cash available on hand in Europe and financing from our existing revolver and we’re thinking 40% to 50% will be using cash we have available.

Ken R. Zener – KeyBanc Capital Markets, Inc.

Got it. Thanks guys.

Albert J. Neupaver

Okay, thank you.

Operator

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

Albert J. Neupaver

Okay. Thank you very much. We’ll talk to you in April.

Operator

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

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