Westinghouse Air Brake Technologies Corporation Q4 2007 Earnings Call Transcript

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 |  About: Wabtec Corporate (WAB)
by: SA Transcripts

Operator

Good morning and welcome to Wabtec’s Fourth Quarter 2007 Earnings Release Conference Call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. And operator will give instructions on how to ask your questions at that time. (Operator Instructions) Please note, this conference is being recorded and transcribed. Now, I’d like to turn the conference over to Mr. Tim Wesley, Vice President of Investor Relations. Mr. Wesley, you may begin.

Timothy R. Wesley

Thank you, Ryan. Good morning everybody, and welcome to our fourth quarter call this morning. I’d like to introduce the rest of the Wabtec team who are here; we have our President and CEO Neupaver, our CFO Alvaro Garcia-Tunon, and Pat Dugan, our Corporate Controller.

As usual, I will make some prepared remarks and then we will take your questions. We of course, will make some forward-looking statements during the call. So we do ask that you review today’s press release, as well as our SEC filings for the appropriate disclaimers.

With that, let me turn the call over to Al Neupaver, our President and CEO.

Albert J. Neupaver

Thanks Tim, good morning. What I'll do is what I normally do and that's cover our results for the quarter and we will take a look at the full year for 2007. We will talk a bit about our current market conditions and outlook for 2008, and update you on any significant events that are happening as far as our strategic growth initiatives. Then we'll have Alvaro, who cover the financials in a little more detail.

We have solid financial performance in the fourth quarter. It was a good finish to the year. Strong sales increase of 24% to a record 365 million for the quarter. We recorded EPS of $0.58 versus $0.53 a year ago quarter, but that $0.53 included a $0.08 tax benefit.

Our backlog remained over $1 billion for the seventh straight quarter. This is really worth noting, considering the fact that we had such a strong performance related to our revenues during the quarter and the year. We also had a good cash year. We were able to generate about a 140 million in cash flow from operations. We ended the year with a cash balance of about 50 million higher than a year ago, but even after spending 73 million for an acquisition and 18 million to repurchase stock. That’s a good cash performance, and that’s what really drives our ability to invest in the future and our growth strategies. Based on that ability to generate cash and our board's confidence in the company’s future, we decided to expand our stock repurchase program by an additional $100 million. We can now buyback up to a total of a 150 combined with the amount remaining on the initial authorization in 2006. We can repurchase up to an additional 113 million of Wabtec stock, while leaving us ample capacity to invest in acquisitions and internal growth.

Also today, we are reaffirming our previous guidance for 2008. Sales growth mid-single digit and earnings per share of about $2.50, this would be a growth of about 12% year-on-year. We are well positioned to achieve this growth. Even if certain segments of the US freight rail market are softer than in prior years. We have a very diversified business model. Our strategic initiatives are paying off and we continue to drive margins higher to our Wabtec performance system.

I'll talk a little bit about those strategic initiatives. We have good progress in the quarter on new product development. Our electronic train management system is really beginning to gain steam. Pilots are continuing with BNSF, the UP and at Metra. We announced in the quarter a development program with Norfolk Southern, to develop a vital electronic train management system. We’ve also had joint meetings all the railroads to discuss interoperability solutions. All this adds up to a high level of interest in ETMS.

Secondly, our electronic controlled pneumatic braking system, we equipped 300 coal cars for the Southern Company, which is being run by BNSF train right now. It's in revenue service between the Powder River basin and Birmingham, Alabama. We also have our ECP trains running in Australia and South Africa. The industry momentum is building for ECP. We also have finally completed our demonstrated running unit for our ultra-low emissions locomotive. We will be sending this to a class run railroad late in the quarter for service testing.

From a global expansion standpoint, we’ve been very busy. We expect another year of double-digit sales growth outside of the US. In South Africa, we completed a joint-venture to manufacture friction products and to set up a platform for other product sales in that part of the world.

In Australia, we have numerous opportunities for component orders including ECP braking. And during 2007 we were able to add an aftermarket service center to our Australia base. In China, we are diligently working forward to create a JV in that country and continue to expand our product offerings.

Let’s talk a little bit about the markets. Rail traffic was down in 2007 compared to a record 2006. So far this year, ton-miles are up around 2%. This traffic is going to be driven by the economy. As expected, rail car deliveries were down in 2007. Deliveries were about 63,000 versus 75,000 in 2006. Most industries analysts, excuse me expect low to mid 50,000 rail car deliveries this year. The backlog is high 76,000 with a large order rate entry in the fourth quarter around 24,000 that was one large order that was placed. The key point here in the fourth quarter, our freight group sales grew by 7% compared to previous year, and if you look at car deliveries during that same period they were down 17%. Once again, this demonstrates diversified business model that we talk about. Only about 20% of our business is tied directly to new freight car builds. The locomotive OEM builds are expected to be up in 2008.

Looking at the transit markets, they are strong drivers. Federal funding is there and passenger ridership is that all time high. Federal spending is up 6% this year ridership continues to increase across the United States. High fuel costs and environmental concerns about emissions could continue to drive this growth not only in North America but throughout the world.

I'd like to now just turn it over to Alvaro and have him give us a little more information on the financials.

Alvaro Garcia-Tunon

Great. Thanks, Al, and good morning everyone. Like we previously mentioned, we had a pretty good quarter and we’ve remained optimistic about the outlook for the future. To get little bit more of the specifics, sales were 24% higher and they hit a record $365 million about 60% of that, which I think is a more impressive statistic, came from an organic growth -- from internal organic growth. And this really reflects the benefits we believe of our strategic growth initiatives. The organic growth came from several units, one of which is WRL, which our transit car refurbishment unit in the UK. They had an increase in its business, and we also had continued strong sales of commuter locomotives in North America, and of course contributed to the overall growth primarily the -- our acquisition of BECORIT in Germany, a friction company in Germany and Ricon the transit lift manufacturer in California.

Freight sales, we are also higher than a year ago quarter and this was in line with our expectations. We’re particularly proud of this performance, Al touched on it briefly in just a second ago, we'd been able to offset lower demand for OE freight car components with growth in other areas. Primarily these other areas were our radiator division, which sells to the locomotive market, which has continued to be strong, and also our after market and our electronic units, their sales are particularly strong as well.

Operating margins for the quarter were good at 12.5%, this compares to 12.4% in the year ago quarter and for the year, though, we drove operating margin to 13.2 versus 12%, which is a nice improvement. And this is particularly a good improvement given the sales growth in the lower margin the transit segment of our business which went up from about 35% of total sales to about 46% of total sales year-over-year. Another notable financial, I guess, statistic to mention, was that the tax for the fourth quarter of this year was 35.3% versus 25.4% a year ago. Last year tax rate was unusually low. We had a release of evaluation allowance of about 3.8 million related to state tax NOL carry forwards. This year's quarter was more normal, but it was also beneficially impacted, because we released evaluation relating to a Mexican NOL carry forward. This amount net of other adjustments was about a $1 million and our tax rate for the year pretty much in line with our expectations for year-to-year 36.5 to 37.5 our tax rate for the years will normally vary somewhere in that range.

Working capital wise, we had a solid performance in the quarter. Total working capitals decreased by about 25 million, receivables were up slightly about 6 million partly based on the strong sales. Inventories were down by 10 million, this is a nice achievement. Payables increased by about 19 million. Working capital, right now at the end of the year stands about 10% of sales, which we believe is a good level for a company of our scope of operations. Cash at the end of the year, stood at about $235 million, the debt remained at $150 million, so we have significant flexibility to invest in our growth strategies and to continue to repurchase the Wabtec stock as Al mentioned earlier.

Miscellaneous items that you always try and cover in the phone call, depreciation for the quarter was 6.5 million versus 6 million last year. Amortization for the quarter was 1.6 million versus 1.2 million last year. And CapEx was 7.6 million versus 7.4 million last year, a very steady. For the year, depreciation was at 25.1, amortization was at 4.6 and CapEx was at 20.4.

In terms of where we are backlog wise, which again we try to give out in every call. The backlog still stayed pretty strong in spite of the record sales. It still stands at over a billion. The 12-month backlog, the backlog that we expect to complete and execute in the next 12 months, totals about $532 of that billion and you can break this down about a 154 in freight and 379 in transit. But the multi-year backlog, the total backlog is $102 billion, 225 million of that’s in freight, 796 million of that’s in transit and that's a normal split. Again, the transit is a backlog driven business but freight is not, it's more a current purchase order type business.

And that pretty much wraps up the financial summary, and I'll hand it back over to Al.

Albert J. Neupaver

Thanks Alvaro. Well we've had a record fourth quarter and full year results. Growth in 2007 demonstrates that our diverse business model is serving the company well. We have many reasons to be optimistic about the Company's future. The freight market still remains at historically high levels, we have a tremendously strong backlog, our growth strategies, global expansion, aftermarket growth new product development, and acquisitions are producing the results and providing future opportunities. The Wabtec performance system provides a continuing path for margin improvement and we've shown that. We have a strong management team and we're all committed to profitable growth.

With that, we'll take some questions.

Ryan, if you want to poll the audience for questions? Sounds like we have a slight technical problem that we're going to get resolved.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Brannon Cook of J.P. Morgan.

Brannon Cook - JP Morgan

Good morning, guys, nice quarter.

Albert J. Neupaver

Good morning, Brannon.

Brannon Cook - JP Morgan

I was hoping you guys could talk a little bit more about your growth expectations in the transit markets as we look to 2008. You've had a number of big contracts ramp up and drive pretty solid levels of growth. Could you talk a little about the visibility for what you see in terms of new potential business wins and organic growth over the next couple years in that business?

Albert J. Neupaver

Okay. In the transit market as we all know that was a transit bill that was passed and it was retroactively passed back in 2005, 2006 and that transit bill authorization goes through September 2009. And in that authorization, what you saw was a commitment of 6 to 8% of increase spending year-on-year. And the market place right now is really very strong, we have the strong backlog in the transit business. We think that we've seen the ramp up that in 2007 that we expected. As you can see from our guidance for 2008, we don’t expect a similar type of ramp up, but to maintain at a good level there are a lot of programs out there that -- large programs that we still have bids on. The one program that seems to be the center of attention when you talk about transit is the R-160 program and I can give you a little specifics on that. We'll be shipping the remaining of just the first third of that entire program in 2008. The options have been left for the second group, which is again about a third of that 1,760 car commitment and we would expect to start shipping that in 2009 throughout the year and in 2009, we will start seeing the business for 2010, the third portion of that contract. We – when you look at the other big transit order that we have, we only received the initial order from GO Transit on the locomotives. The options we should be seeing that portion later this year. The initial amount was 26 locomotives value of about a 120 million the second is I think 26, 27 locomotives, so would be an equal amount of revenue. And there is a lot other programs that going on North America. We also view opportunities from the transit standpoint as we continue to internally develop our products on the international basis where the market, on a global basis, is much larger than what we have in North America. The transit authorities are quite strong in Europe and there is a lot of development and we're seeing some business in Asia as well. So I think that the market is strong, will remain strong, and we're excited about those opportunities.

Brannon Cook - JP Morgan

Okay. That's helpful color. And a question on the share buy-back authorization. You guys have a stronger balance sheet than you've had historically. You have strong levels of free cash flow. I guess your preference has been towards acquisition in terms of cash uses, I guess, as we go forward given the strong balance sheet and strong cash flow, do you sense that you have the potential to perhaps execute on the share buy-backs a bit more quickly than you have historically? And provide kind of an update on your thoughts about uses for cash?

Albert J. Neupaver

Well, use of cash, and we just had a board meeting. Every board meeting we sit down and go through all the options and talk about what is the best way to utilize this good balance sheet that we have. And that's really, as you said, based on our ability to generate cash over time and the Wabtec performance system has done that and we think we can continue do to that. If we have our preference on how to invest the cash, we obviously, I think, the most healthy growth is always internal growth and we continue to focus strongly on developing our technology through new product development and market expansion in – of our existing products. Secondly, we would like to utilize this cash to grow through acquisitions and we're going to be very cautious. We're going to be very methodical and we're really going to make sure that we get the right acquisitions. Thirdly, is we would look for other options to deal with our cash, which is obvious that the board has supported a stock buyback program, a large one, and there is other options as well that we explore each and every meeting and we look at what we think is best for the company and our shareholders. So you would see continue a push in that direction. As far as what our plans are on the buyback, I think that I'll just say that it is authorized and we think that the stock price is such that buying back stock right now a smart thing to do for the company.

Brannon Cook - JP Morgan

Okay. Great. And just a last question on the acquisition landscape. Could you talk a little bit, you mentioned some of the opportunities potentially joint ventures internationally. Could you talk about that what's your scene in the marketplace? You know, the weaker economy here in the US is creating essentially more attractive evaluations and how the competitive landscape is for those acquisitions and that if they're fewer private equity parties, et cetera, how that's playing out.

Albert J. Neupaver

The acquisition pipeline it is very good for us. We're very busy. We've got a lot of activity going on. Some of that activity is really related to global expansion and -- they're not large opportunities, but they're obviously very time consuming and we're moving forward on a lot of those opportunities that are going to create growth opportunities going forward. We also have other opportunities that we're looking at. As far as the private equity involvement in the acquisition arena, we really haven't seen a decline at this point. I also feel that we're seeing that when the railroad was at its peak, the railroad sector, you saw a lot of people entering the market now that there is a softening or a decline. I think that there may be some people holding back a bit, but we've have good activity and we've explored a lot of opportunities. We're going to be very careful and cautious as to what we do with our money, especially when it comes to acquisitions.

Brannon Cook - JP Morgan

Okay. Thanks.

Operator

Our next question comes from Jim Lucas of Janney Montgomery Scott.

James Lucas - Janney Montgomery Scott

Thanks. Good morning guys.

Albert J. Neupaver

Good morning, Jim.

James Lucas - Janney Montgomery Scott

Two questions today. First on the market expansion growth initiative, could you give us an update there in terms of where you are currently and anything that we might keep an eye out for in 2008? And secondly, with regards to the international arena, you know, you touched in the last answer about in the last answer about International Transit presenting a lot of good long-term opportunities. Maybe bring us up to date in terms of some the things you've got going right now and if you could just expand a little bit in terms of organic versus potential acquisition opportunities that would help you expand in the international transit markets?

Albert J. Neupaver

Okay. First question, Jim, is related to our market expansion experience. Right now, we have about 10% of our business is outside of the rail industry. And the one product that has grown extremely nice for us is our heat exchanger business. We talked a little bit about this in the past and this has become a product that we have found that we have a tremendous amount of differentiation from others. This product was initially designed for the locomotive so it had a run a high temperatures, a very rugged environment. And, it has found its way to be able to be able to solve technical issues related to the [Operator Instruction [Progen] area. People like Caterpillar, Kohler, and others where they have to run at higher temperatures now in order to meet the emission requirement. And again, they're in a lot of rugged areas. So our capability there, we've been able to expand, not only in North America, but we think there is a lot of global opportunities as well for that particular business. The other area is that, as you know, we have a good strong position in friction technology, our braking products in both the transit as well as the freight area. We have tremendous amount of technology and acquiring BECORIT during late 2006, it just added a tremendous amount of technology to what we already had. Their capabilities are really related to testing and extreme environments and a lot of development work and we feel that there is tremendous opportunity in the friction area to really look for business opportunities in that particular area and some of the other industries. And we've already been able to take our existing products and apply it to mining, to the windmill power generation area, as well as some industrial applications on cranes and lifts. So I think those are two good examples. We have other products that we're doing the same thing with. So we will continue to push to take our existing products, technologies into those other markets. Again, improving on our diversity of the company, without getting away from our core competencies and our core capabilities. From an international standpoint, we think there is opportunity both organically and from an acquisition standpoint. When you start to look at a global expansion strategy what you rapidly find out that, that strategy has to be different for every different part of the world. There is cases where we have the capability to take and internally develop a product that we could apply in another part of the world. In other areas, where there is high barriers to entry, for example, South America, you have tremendous amount of tariffs and duties in order to sell into that area. So we need to have either a green field or an acquisition capability. There is barriers to entry as far as certification, especially in the European market where you have UIC requirements to get through and we're diligently working on our technology, which is different than the technology used in other parts of the world. So, every part of the world, the one model that has been extremely successful for us, has been our model in Australia and we've been able to -- we acquired a few businesses, but we've also taken some of our products and moved and started to develop businesses for our other product areas. And we've taken a lot of our technology product there as well. I hope that answers your questions, Jim.

James Lucas - Janney Montgomery Scott

That is very helpful. Thank you, very much.

Operator

Our next question comes from Art Hatfield of Morgan Keegan.

Arthur Hatfield - Morgan, Keegan & Company

Morning everybody.

Albert J. Neupaver

Hi, Art.

Arthur Hatfield - Morgan, Keegan & Company

Hey, quick question on seasonality and I know you're not giving guidance on quarterly earnings, but with the business mix shifting a little bit more towards transit, would that impact the kind of seasonal progression of revenue and earnings for the business going forward?

Albert J. Neupaver

The one thing about the transit orders, as you know, they're large. And what does happen sometimes, Art, is that you get delays in programs. And I don't think there is a time of the year where it makes that much difference as much as sometimes we'll run into a -- it could be a technical delay that may not -- we're involved whatsoever, but those delays on large projects, obviously could have an impact on the business. As far as seasonality from the transit, I'm not sure that there is much to it.

Arthur Hatfield - Morgan, Keegan & Company

Okay. So, is that because more -- for our modeling purposes we can see the earnings progression for the year flatten out theoretically as transit becomes a bigger piece of the business?

Albert J. Neupaver

I'm not sure that we could -- that's almost providing a little bit…..

Arthur Hatfield - Morgan, Keegan & Company

Okay. No that's fine. I don't want to…

Albert J. Neupaver

One thing related to and one thing I can't say is that when you look at our Wabtec performance system, continuous improvement is what we're about, and, you know, we've seen that margin improvement and whether it's driven by revenues or not and we kind of have a model that we see that, what the mix is going to be and we just drive harder and harder, continue to try to improve those margins as we go forward.

Arthur Hatfield - Morgan, Keegan & Company

Thank you. Just real quick, a clarification. Did I hear you correctly, when you were commenting on the R-160 that you did not – did you not receive any revenue on that in 2007?

Albert J. Neupaver

We had a little bit of revenue in 2007, yeah.

Arthur Hatfield - Morgan, Keegan & Company

[For bid].

Alvaro Garcia-Tunon

Yeah.

Albert J. Neupaver

Yeah, we started shipping 2007 and I'll – R-160’s have been shipping all throughout 2007, I'm sorry Art.

Arthur Hatfield - Morgan, Keegan & Company

Okay. So…

Albert J. Neupaver

We will continue to ship back through the year.

Arthur Hatfield - Morgan, Keegan & Company

Correct, but I – when you made that comment, I…

Albert J. Neupaver

I appreciate, you are making that clear, because no I didn't mean to say that if I did.

Arthur Hatfield - Morgan, Keegan & Company

Okay. So, you have been shipping throughout the year.

Albert J. Neupaver

Yes.

Arthur Hatfield - Morgan, Keegan & Company

And so, you are going to see a steady stay on that business into '08.

Albert J. Neupaver

That’s correct.

Alvaro Garcia-Tunon

Correct.

Arthur Hatfield - Morgan, Keegan & Company

Okay. And then, just real quick, you talked a little bit about the buyback and you commented on that I mean other issues relative to – how you want to spend your cash, is there anything to read in the buyback about the fact that there is really no large opportunities for acquisitions that you see in the marketplace?

Albert J. Neupaver

No, not at all. We just feel that, we are at a position and if you and if you -- we think that where we're valued as a company, it makes a tremendous amount of sense. A tremendous amount of sense to do what we're doing.

Arthur Hatfield - Morgan, Keegan & Company

Okay. And then, then finally Al, anything keeping you up at night, right now? Anything that kind of out there on the horizon that you're a little worried about?

Albert J. Neupaver

Yeah, we had a new grandchild, so my two other granddaughters have been over at the house and I'll tell you, I haven't slept in a week.

Arthur Hatfield - Morgan, Keegan & Company

Well, I'm glad it's that and not something else.

Albert J. Neupaver

No, actually, you know, I think from what is – you know, what concerns us, we're looking at this economy. I mean, I think that will the economy, you know that this is a sickly business. We don't run away from that brutal fact. We have to really have plans in place dependent on what we see ahead and we've got to continue to diversify our model and follow through with our strategic plan. So, I think the biggest thing that we're really worry about as a corporation, we are spending a lot of time talking about it, and preparing for it. And that's, what I am seeing the economy here in United States and we will have an impact on the rest of the world, now that we are more of a global company we were a year ago.

Arthur Hatfield - Morgan, Keegan & Company

Great. Thank you, that really helped.

Operator

Our next question comes from John Barnes of BB&T Capital Markets.

John Barnes - BB&T Capital Markets

Hey, good morning guys.

Albert J. Neupaver

Good morning John.

Alvaro Garcia-Tunon

Good morning, John.

John Barnes - BB&T Capital Markets

Al, congratulations.

Albert J. Neupaver

Thank you. It was a boy too, after three girls, so…

John Barnes - BB&T Capital Markets

There you go. There you go. See, I got my son out of the way early so now anything is gravy after that. So it's all good. Real quick, the tax legislation, this bonus depreciation, accelerated depreciation. You know, we've quizzed all the rails as to what it would mean to their CapEx budgets and I think on average I heard somewhere you could see somewhere between say a 10% or 15% increase in CapEx budgets in the next couple of years if there was some stimulus like that. I mean, do you foresee the same kind of increase in orders coming to you in the event that legislation gets done and there is some stimulus out there?

Albert J. Neupaver

We would think it'd be equivalent. I think that as you know, they distribute their capital budget about 70% to 80% on the wayside and the balance on rolling stock, I don't think they would change that balance. So if their number went up I think we would see equivalent. Now, are those packages going to get through there, that's a whole another story.

John Barnes - BB&T Capital Markets

Yeah.

Albert J. Neupaver

You know, and I think there is other legislation that is critical as well and that's the safety bill that has passed the house and that would have an impact because it’s really ties into train control somewhat. I think the -- any discussion of the re-regulation of the industry, tremendous negative from a political stand point and obviously if there was some incentives for the railroad, it would be tremendous, not just for us, but the whole industry.

Alvaro Garcia-Tunon

And the key to that John is when we do our planning, you know, we're kind of planning almost expecting the worst and a 10% to 15% bump in the spending, I mean, we can accommodate that very easily. So there wouldn't be any issue with us being able to accommodate an increase like that. I mean, obviously, we'd welcome it, and you know, it would be very easy to accommodate.

John Barnes - BB&T Capital Markets

Sure, sure. Okay. And then, you know, as you look at your planned CapEx, if those kind of incentives get passed, what do you think in terms, you know, are there any projects you've got in the pipeline that you would accelerate?

Albert J. Neupaver

Not really. I mean, I think we basically do our CapEx on an as-needed basis. You know, I think the thing that has the most impact on our CapEx is our QPS system and lean manufacturing where you basically are not as dependant on CapEx as other type of operations. And really, apart from what we need, the other key component of our CapEx is what we need for growth and I think right now, to be honest, we're in a fortunate position that we do have the financial flexibility to be able to invest in all those programs that we think will lead to future organic growth. So to be honest, the additional depreciation would be nice, but it's not going to be -- it's not going to make or break a CapEx decision at our level.

John Barnes - BB&T Capital Markets

Okay, very good. Going back to the question that was asked early on about the use of cash, I kind missed the part where you talked about the buybacks a little bit. I mean could you just – could you give us some insight into how you view buybacks? I hate the word opportunistic, I mean, it sounds like you're picking it up a day -- you know, a day when your stock gets trashed for some reason. And I recognize you want to buy smartly, but I just -- give us some insight into how you approach a buyback program?

Albert J. Neupaver

Sure. I mean, let’s start with the big picture, and really our approach is, you can take a look at the price of our stock. And we believe that the current levels, by our calculations, depending on how you do it and where is that day. But you're talking somewhere between 6 and 7 times EBITDA. Last time I did it was about 6.53 or something like that. So, we are right in the middle. And we think, if those levels, it’s an attractive buying opportunity. We believe in ourselves and we believe in our ability to execute to plan. So to us, the company stock is an attractive buying opportunity. How we go about, executing under the plan, which I think was your other question, is obviously price-driven, but I think we'd move in there now to -- we don't buy during quiet periods. We don't have a 10b5-1 Plan, which you can automatically execute during quiet periods, because we like the flexibility of an open market repurchase plan. But now that the quiet period will open up, we'll be out there buying aggressively, [I think].

John Barnes - BB&T Capital Markets

Okay, Al. And then last question, going back to the acquisition question. Al, your comment about 10% of revenue currently coming outside of the rail industry. You know, what would you be comfortable with as you make acquisitions? How far are you prepared to stray from what's been your kind of core expertise? Are you willing to let potentially 50% of revenue come from non-rail related things or are you kind of keeping it, would you prefer to keep a little bit more in the expertise?

Albert J. Neupaver

I think, when we judge acquisitions really the important, first important question is, is it strategic, is it not strategic. And we would prefer to stay as close to the core as we can. However, we feel that it is also important to take your competencies and your technological capabilities and expand those from that core. What we wouldn't want to do is -- we've really separated, we've actually analyzed this down to almost a little bit of a science and that we've categorized acquisition potentials in four columns and the fourth column to the side is just anything it's totally non-related to our business. And we really have no interest at all for doing that and as you go further to the left of this sheet; you would find that it's really in our industry core in the first column. What would you feel comfortable with? I think what you feel comfortable with is businesses that are close to your core. I really haven't thought of the -- and I don't know if I'd apply a percentage to that. We're really a rail company and I think that – we think that long-term rail has been the backbone of this country and will continue to be the backbone of this country for many years to come and we really believe in the rail industry. So we're not trying to become a different company. I think it's a compelling industry right now. It's a green industry. It's going to grow It's a green industry. It's going to grow. It's the only way that you could move people and freight from point A to point B economically with the price of oil where it's at and everything else. This is one compelling industry and I think that you're seeing other investors catch onto that. That's what attracted me to come over and work at Wabtec. All right, I think it's a great industry and we're not looking to change our core, but we also are realistic that if we have competencies that we can match up, that we want to take advantage of that.

John Barnes - BB&T Capital Markets

Good deal. All right. Well thanks for your time, nice quarter. I appreciate it.

Albert J. Neupaver

Thank you.

Operator

Our next question comes from Waymond Harris of Bear Stearns.

Waymond Harris - Bear Stearns

Good morning guys.

Albert J. Neupaver

Good morning, Waymond.

Alvaro Garcia-Tunon

Good morning.

Waymond Harris - Bear Stearns

I had a quick question or a couple of questions. During the quarter you announced ECP order that you talked about. I think interestingly that it was from a utility air shipper and actually not from a rail and I wonder if you could actually talk about how you guys go about attacking that market? Is it that your sales people are actually out there calling on the utilities or calling on the shippers, because they own a majority of the rail cars or is it really the rails forcing the shippers to really consider or to -- into buying ECPs?

Albert J. Neupaver

Yeah, what you find today is the class one railroads, they run the railroads, but they don't own the cars. And you really hit on a very important factor is that one of the reasons why the adoption of ECP hasn't already happened, the technology is proven, the cost advantage is tremendous, and the report that Booz Allen did and you can't take these numbers exact, I mean, I'm going from memory here. But if every train coming out of the Powder River Basin had ECP on it, the cost would be $400 million to do and the return on efficiency productivity and everything else is like 170 million. So it's almost a no brainer. The problem is who pays for it and who gets the benefit and unless it's a total railroad owned by, say the Southern Company, the utility, they don't get all the benefits of being able to move faster and whatnot. And that's one of the reasons that I think you haven't seen the adoption that we should see. Then you've got the other issue related to mixed cars, but in these unit cars, there is just -- there is no good reason and I think there is a lot of interest in moving forward and find ways to solve these issues. But the cars themselves are actually owned by the utility or the coal company.

Waymond Harris - Bear Stearns

Well, I guess what I was wondering is are you guys doing anything to try and -- or can you talk to the actual shippers to -- is there a value proposition or is it something that it's really just, the rails and the shippers have to work it out?

Albert J. Neupaver

Yeah, well, again that's an important question, because we really feel they're all our customers and we really need to be talking to the utilities, we need to the car owners. We also got to talk to the railroads themselves. We look at -- as all – every part of that is a customer voice. So, that is important, yes. Thank you.

Waymond Harris - Bear Stearns

And then just one last question, I know only 20% of your revenues come from the rail car manufacturers specifically, but just, Al, if you could give your thoughts that in the past couple of weeks there has been a 13D filing by American Rail Cars saying they would seek to do some sort of combination with Greenbrier and as a industry insider, so to speak, just your thoughts on how something like that might affect overall industry dynamics?

Albert J. Neupaver

I can't give you any specifics, but I think that in general you find that there are a lot of the rail car producers and I don't think that the consolidation effort of any railcar producer would have that much impact on the entire industry. For us, individually, we sell to all of them and we have a relationship with them. So we don't see any impact from it. There are – there is a lot of capacity at the various railcar builders.

Waymond Harris - Bear Stearns

And finally, I don't know, if I miss this or not, but did you give a specific percentage of your revenues that came from international during the quarter?

Albert J. Neupaver

I will give to you, we had about 40% of our business was ex-US in the – that was in the -- for the year, for the quarter was 43%.

Waymond Harris - Bear Stearns

Okay. Thanks guys. Have a good one.

Albert J. Neupaver

Thank you.

Operator

Our next question comes from Steve Barger of Keybanc Capital Markets

Steve Barger - Keybanc Capital Markets

Good morning.

Albert J. Neupaver

Good morning, Steve.

Alvaro Garcia-Tunon

Good morning Steve.

Steve Barger - Keybanc Capital Markets

I've kind of been jumping on a couple of calls, so let me know if any of this is redundant. But, on the freight side, can you talk about the opportunities for market share gains that remain in the US to help keep that sales growth performance versus industry deliveries going? Are there still a lot of opportunities there?

Albert J. Neupaver

I think from a market standpoint, we don't view it as a great opportunity for growth. We really have to technological new development taken, you know, newer products, because that market share really just flip flops a little bit between the players. So we don't view that as a growth opportunity going forward, Steve.

Steve Barger - Keybanc Capital Markets

Okay.

Alvaro Garcia-Tunon

But, here Steve with the new products does that I think we are developing, I think there are opportunities to develop leading positions within those new products.

Albert J. Neupaver

Right.

Alvaro Garcia-Tunon

And that's where we really our emphasis is.

Steve Barger - Keybanc Capital Markets

Okay. Well that kind of leads into the next question. Can you talk more specifically about your progress in penetrating some of the brick companies or countries I should say, Brazil, Russia, and into China, with respect to some of those freight components and is that a share opportunity or do you need the technology there as well or new products?

Albert J. Neupaver

Well, we are in some cases you do need different technology and there is some cases where it's a share issue. And those countries that have AAR type product, meaning, US product, where George Westinghouse extended his influence over the world and continues to it's matter of going in and getting share or bringing in technology that they're interested in. In those countries that use other technology or other basis and one of them is the European standard UIC, that's where we really have to have technological development in order to enter those countries or acquire a company that has that capability. We have some product that we are now selling into those areas and there is a lot of effort going on to get more products that meet those standards.

Steve Barger - Keybanc Capital Markets

Okay, great. The current funding environment, I think you talked about 6% growth on the transit side. Does your thinking change with respect to the outlook given, you know, some of the broader credit concerns, municipal or federal budgets and as it relates to housing re-pricing and tax collections? Or is that kind of ex all that?

Albert J. Neupaver

I think that that type of increase funding is in pretty good shape as long as the transit bill is there. Now each year, the budgets have to be approved and the spending has to be approved and sometimes they move things around. But if you look at the ridership, I think I read where New York City had 1.63 billion riders this last year was the highest level since 1951 and I stopped to get gas this morning on the way in and with -- as we all know, I mean, it is just – it's amazing. I think the push in transit arenas are going to continue and they are going to have to find ways to fund this particular growth that we're seeing right now and I think we're going to continue to see it.

Steve Barger - Keybanc Capital Markets

And the following to that is, European and Asian trains are funding, which I think is robust, but is there any way you can put a range around that or kind of talk directionally by region in terms of what kind of growth you expect as you put your plan together?

Albert J. Neupaver

We view that the European expansion, I think, is mid-single digits and will continue to be. But the expansion in Asia is double-digits. You're going to see double-digit growth. If their economies are expected to grow with that, the infrastructure has to grow even faster and that's throughout Asia, you know, India, China, we're seeing it all, throughout the world and we need to be in a position to take advantage of that.

Steve Barger - Keybanc Capital Markets

Yeah, and what percentage of your transit revenue comes from Asia right now?

Albert J. Neupaver

I could give you transit outside of the US, I don't know if I could give you a number for Asia right now. Do you know it?

Alvaro Garcia-Tunon

(Inaudible)

Albert J. Neupaver

Outside the US transit for the full year of – was 55% non-US.

Steve Barger - Keybanc Capital Markets

Right.

Alvaro Garcia-Tunon

I would say that, Steve, that it's a relatively small part of that, because when you start talking transit-international you start talking about friction products, you start talking about our car overhaul business in the UK.

Steve Barger - Keybanc Capital Markets

Right.

Alvaro Garcia-Tunon

And, so most of that is non-Asian, but I think what that does highlight is the opportunities that are available in Asia and that's why we're targeting that area so strongly, because we think we can improve significantly there.

Steve Barger - Keybanc Capital Markets

Okay. One income statement kind of question. SG&A in 2007 grew 14% in dollar terms, you still got 100 basis points to leverage on that line. How should we think about SG&A growth or inflation in 2008 and can you get further leverage relative to wherever that comes in?

Alvaro Garcia-Tunon

Sure. I think the one thing about SG&A, I think, if you take a look at the third quarter and the fourth quarter they were relatively stable. Actually the fourth quarter was down a little bit in the third quarter. And I would say somewhere in that range you always have a little bit in SG&A, an adjustment here and an adjustment there that's going to affect it. But for the most part, that's going to be a relatively good run rate. The reason for the increase from year-over-year is primarily due at acquisitions.

Steve Barger - Keybanc Capital Markets

Right.

Alvaro Garcia-Tunon

So, I think what – in general, I think where we are right now is relatively stable. We're very mindful of economic conditions and we are keeping a very, very close eye on SG&A, because of, particularly – I mean we always do that, but particularly right now given the fragile state of the economy, that's one thing that we're really focusing in on. So asset and acquisitions I think you'll SG&A continue to be very stable.

Steve Barger - Keybanc Capital Markets

Okay, great. And one last question. You talked about the 10% of the business outside rail, I'm specifically focused on the friction side there. You said mining, wind towers, and crane, all very high demand segments right now, and understanding that's a small part of the business, how fast can you grow those product lines and are they better margin or worse than say the consolidated operating margin?

Albert J. Neupaver

Obviously, we – the one thing about market expansion, typically you're a small player in a big market. All right, two things that are good about that, number one, you have a discretion whether or not you go into it and that discretion, obviously, is highly dependant on what the profitability of that particular entry is. Secondly, you're starting out a very low small market share, so you see more rapid growth than you're capable of, until you get a more substantial position. So those two factors really make it an attractive to be able to look at this strategic concept that we talk about this market expansion.

Steve Barger - Keybanc Capital Markets

And, the profitability of those product lines?

Albert J. Neupaver

In general the margins on those products, in general, are quite good. They are probably in total, slightly above the company average. One of the issues we have within reality again you got to product-by-product.

Steve Barger - Keybanc Capital Markets

Yeah.

Albert J. Neupaver

Is they don't get a lot of wear. You know the -- in essence the friction material that stops the windmill, the whole purpose of the windmill is to keep on going.

Steve Barger - Keybanc Capital Markets

All right,

Albert J. Neupaver

Or they stop it very rarely, so unfortunately you don't get quite the repeat business that you do with rail, but when you do get it the margins are attractive.

Steve Barger - Keybanc Capital Markets

Got it. Thanks very much.

Albert J. Neupaver

Thank you, Steve.

Operator

At this time, we currently have no more questions. (Operator Instructions).

Albert J. Neupaver

Okay Ryan.

Operator

Okay.

Albert J. Neupaver

No more questions, I think we'll sign off for today and we'll talk to you guys again in a couple months.

Alvaro Garcia-Tunon

All right, see you then, thank you everybody.

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