Westinghouse Air Brake Technologies Management Discusses Q2 2012 Results - Earnings Call Transcript

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Westinghouse Air Brake Technologies (NYSE:WAB)

Q2 2012 Earnings Call

July 24, 2012 10:00 am ET

Executives

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

Albert J. Neupaver - Chief Executive Officer, President and Director

Alvaro Garcia-Tunon - Chief Financial Officer, Executive Vice President and Secretary

Patrick D. Dugan - Vice President and Controller

Analysts

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

Scott H. Group - Wolfe Trahan & Co.

Matthew S. Brooklier - Longbow Research LLC

Kristine Kubacki - Avondale Partners, LLC, Research Division

Gregory W. Halter - LJR Great Lakes Review

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Samuel H. Eisner - William Blair & Company L.L.C., Research Division

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

Operator

Good day, and welcome to the Wabtec Second Quarter 2012 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Tim Wesley, Vice President of Investor Relations. Mr. Wesley, please go ahead.

Timothy R. Wesley

Thanks, Keith. Good morning, everybody. Welcome to our earnings call for the second quarter. Let me introduce the people from Wabtec who are here with me, the President and CEO, Al Neupaver; Alvaro Garcia-Tunon, our CFO; Chief Operating Officer, Ray Betler; and our Senior Vice President Finance and Corporate Controller, Pat Dugan. Al and Alvaro will make their prepared remarks as usual and then we'll be happy to take your questions.

We will, of course, make forward-looking statements during the call, so please make sure you review today's press release for the appropriate disclaimers. Al?

Albert J. Neupaver

Thanks, Tim. Good morning. As you saw from our announcement earlier today, Wabtec had another record quarter. Our sales came in at $610 million and our earnings per diluted share was at $1.33. The company is operating well. And this continued good performance, along with our outlook for the second half, led us to increase our guidance for the year. As we will discuss, our performance was driven by strong growth in our Freight Group. Overall, our business is performing very well, thanks to our diversified business model, our strategic growth initiatives and the power of our Wabtec Performance System. We are in compelling growth markets around the world and we remain excited by our future growth opportunities.

Based on our second quarter results and current outlook, we now expect the full year earnings per diluted share to be at -- between $5.10 and $5.15, with sales growth now expected to be about 20% for the year. This EPS guidance is about 40% higher than our adjusted EPS was last year.

Our guidance assumes the following: the global economy grows modestly; U.S. freight rail traffic is stable, with car delivery rates slightly down compared to the first half; the transit market remains stable with our transit revenues growing in the second half driven by our existing backlog of projects; no major changes in foreign exchange rates, and our recent acquisitions, Mors Smitt and Tec Tran, are included. As always, we will be disciplined when it comes to controlling costs. We'll be focused on generating cash to invest in growth opportunities and ready to respond decisively to any changes in market condition.

We'll first look at the freight rail market. In North America, rail traffic is mixed so far this year. Through mid-July, car loadings are down 1.4%. However, if you exclude coal, these car loadings are actually up 2.8 %. Intermodal by itself is up 4.5%. Of the 20 traffic categories that are tracked, 13 are up so far this year, with particular strength in autos, petroleum products and lumber.

In the OEM part of the freight rail market, both drivers are very positive. We expect more than 1,200 new locomotives to be delivered this year comparing to almost 1,100 in 2011. Forecasters are now expecting about a 60,000 or so new freight car to be delivered in 2012, new freight cars that is, compared to 48,000 in 2011. Nearly 18,000 cars were delivered in the second quarter. Orders were stronger than expected at about 16,400, 32% higher than the first quarter. Backlog is at about 59,000 cars.

Globally, freight markets have remained fairly healthy. Brazil MRS had a 6 -- 4.6% increase in car loads in the most recent quarter. And in Australia, Tennessee and Wyoming saw a 3.5% increase. Other countries have announced large investments in the freight rail systems. In response to a 10% increase in traffic last year, Transnet of South Africa committed to a large multiyear capital program. China is talking about another stimulus program with a heavy rail component.

The transit market. We continue to see stable markets in the U.S. and abroad. In the U.S., ridership was up 5% in the first quarter. In 2012, transit car deliveries will be about 1,000. That's slightly up from last year. Bus deliveries will be about 4,500. That's slightly down from last year. After 3 years of short-term extensions and uncertainty, we finally have a new multiyear Transportation Bill. That's a 2-year bill. It's called the MAP-21. The 2-year bill, which maintains funding for transit program at about $10 billion per year. This is a funding that we have seen in the past over the last several years. MAP-21 may jump start some programs since transit agencies now have funding certainty.

Outside of the U.S., transit is more a part of the culture in the economy, and we are seeing stability in the key markets. Even during these difficult economic times in Europe for example, transit agencies are moving ahead with projects. The obvious exceptions are countries like Greece, Spain and Portugal, which are not big markets for us.

As I mentioned, we expect to see growth in the second half in transit due to our backlog of existing projects, especially in our locomotive division. We will continue to focus on growth and cash generation. Our priorities for allocating free cash flow remain the same: fund internal growth programs, first; second, acquisition; and thirdly, return money to shareholders through a combination of dividends and stock buybacks. Our growth strategies also haven't changed, global and market expansion, aftermarket expansion, new products and technologies and acquisitions.

Some of the progress that we have made in the global and market expansion: Sales outside of the U.S. were $312 million. That's 32% higher than the second quarter of 2011, through 6 months, 51% of our total versus about 1/3, 5 years ago. Growth in the quarter was driven by sales of new locomotives in Australia, our train control project in Brazil, aftermarket sales in the U.K. and the acquisition of Bearward, which closed in the fourth quarter. In addition, we won some small international orders for bogey equipment in Italy and high-speed brake disc in South Korea.

Looking at the aftermarket expansion. Overall, aftermarket sales were $313 million or 51% of the total. This grew 7% compared to the prior year quarter, benefited from our service growth in the U.S. as well as train control project in Brazil and overhaul projects in the U.K.

On the new product front. Sales on new products last year were about 35% of our total sales and thus far this year, we're running about the same. These projects range from new generation locomotives to oil-free compressors to aftermarket services in Brazil. Most of our PTC revenue also fits into this category. PTC continues to be a growth driver, with sales expected to exceed $200 million this year compared to about $1 million -- $125 million in 2011 and $25 million in 2010.

We completed 2 acquisitions recently, Mors Smitt and Tec Tran. Mors Smitt is a European-based manufacturer of electronic components for rail and industrial markets. Some specific components are relays, measurement devices and controls for rolling stock and signaling. They have sales of about $60 million annually, 50% of which is in Europe, 10% in NAFTA, 20% Asia and 20% rest of the world. Mors Smitt adds to our product line with a mission-critical electronics. It expands international business and has a 25% aftermarket component. The acquisition closed late in June so it had no impact on the last quarter.

Tec Tran is the only U.S.-owned manufacturer of hydraulic braking equipment and related components. This helps car builders meet Buy America requirements, sales of about $10 million. It is significant and strategic in that it adds to our product line with a technology that we don't currently have and that is hydraulic braking equipment. This type of equipment is primarily used on light rail vehicles and streetcars, which are a growing segment of the passenger transit market. This acquisition provides growth opportunities as part of Wabtec, given our global reach and financial strength. With that, I'll turn it over to Alvaro.

Alvaro Garcia-Tunon

Thanks, Al, and good morning, everyone. Results for the quarter were pretty straightforward, and I'm pleased to be able to give you the details. Sales for the first quarter were a record $610 million, which is 27% higher than last year. Of this increase, about 80% was organic and the balance from acquisitions. Freight Group sales were up about 46%, with most of that coming from internal growth, as well as rebounding markets. OEM sales in the Freight Group nearly doubled due to increasing demand for components for new freight cars, locomotive sales in Australia and the acquisition of Bearward that Al discussed briefly earlier. Aftermarket growth resulted mainly from expanding our service and PTC revenues. Transit Group sales were slightly higher than last year and 9% higher than the first quarter of '12. We continue to expect this group to have high revenues in the second half compared to the first half.

In terms of income from operation, we had a strong performance this quarter, totaling a record $101 million of profits from operations. Operating margin was 16.5% versus 15% last year in the second quarter, excluding the special items that we mentioned in today's press release. This is the highest operating margin we've had since the late 1990s, but we still believe there is room for more improvement over time.

Margin performance was driven by several factors: Higher sales volume gave us operating leverage; a favorable product mix with [indiscernible] freight sales as opposed to transit and benefits from the Wabtec Performance System all helped to result in the improvement. Actually, operating margins would have been a little better but we booked a $2.4 million charge in the Transit Group to reflect higher-than-expected costs on a locomotive project.

SG&A was about the same if you -- as last year if you exclude the special items from the year-ago quarter. It was actually lower as a percentage of sales, 9.7%, compared to 12.2% in the year-ago quarter, excluding the special items.

Interest and other. Interest expense was about the same, and other income, normally, we have a small amount there due mostly to pay for foreign exchange translation gain. That could be a gain or a loss, and in this quarter, it was a small gain. The effective tax rate for the quarter was 33.7%. This is similar to the rate in the year-ago quarter if you adjust for the tax benefit we had in that quarter. If you make that adjustment, the rate from last quarter would have been 33.5%, and I think going forward, you can expect it to be 34% or so, give or take, a couple of basis points.

Cash from operations was about $30.5 million in the quarter, which is not as much as we'd like, and what happens is, the increasing sales are resulting in increasing receivables. We'd like to improve receivable collections as we go forward, but right now, they're a little bit higher and they're resulting in cash not being quite what we expect.

Working capital increased in the second quarter as you would expect given the higher sales in the recent acquisitions. Just to give you a couple of numbers, you can jot down if you'd like. Receivables for the quarter should be around $442 million; inventory, $389 million; and payables, $250 million. Adjusted for acquisition, our working capital was up about $50 million in the quarter. As a percent of sales, which is for us the key statistic to keep track of working capital efficiency, our net working capital is about 15%. This has crept up a couple of percentage points since the beginning of the year, our working capital as a percent of sales, and that's one of the things that we're going to strive to bring down as we go forward. As our business has become more global in recent years and as we continue to expand our sourcing program into other low-cost countries outside of North America, this also affects our working capital requirements and we need to take that into account. But we still think there are plenty of opportunities to reduce it. And like I said, we'll continue to focus our efforts on that.

Cash. At June 30, we had $234 million in cash compared to $269 million at the end of the last quarter in '11 -- at the end of the first quarter in '11.

Debt. At June 30, we had $443 million in debt versus $386 million at the end of the first quarter. Most of the increase was due to the Mors Smitt acquisition in late June and we'll be -- we'll expect to repay that with cash generated during the year, as well as cash transfers from other foreign units.

A few miscellaneous items. We bought back almost 300,000 shares, about 299,000 during the quarter for about $22 million. And we still have about $100 million remaining on our $150 million buyback authorization from the board. A few other numbers to jot down. Depreciation was $6.7 million for the quarter compared to $6.6 million last year, pretty stable. Amortization was $3.3 million this quarter, about the same as last year. And CapEx was about $6.3 million this year versus $5.4 million last year.

I think for the year, you can probably expect CapEx to be about $44 million, give or take, versus $38 million last year. Our backlog, it's still at a record high. We set a new record slightly expanding the total in the backlog. The multiyear backlog was $1.6 billion. Transit was $963 million of that total backlog and freight was $629 million of that $1.6 billion. That's the total backlog. Then the backlog that we expect to execute during the next 12 months totals $1.2 billion. And transit's a record $646 million of that and freight is $531 million of that total. And with that, I'll give it back to Al.

Albert J. Neupaver

Thanks, Alvaro. Once again we had a great quarter with record sales, record earnings and backlog and good margin performance. Our 2012 EPS guidance is now between $5.10 and $5.15 on revenue growth of about 20%.

Longer term, we couldn't be more pleased with our strategic progress and the growth opportunities we see. 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 has taken advantage of our growth opportunities. With that, we'll be happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Allison Poliniak, Wells Fargo.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Al, could you just give us some thoughts on the acquisition environment just given the macro concerns? You guys have been pretty active. Our multiple is starting to become more active. Are people sort of giving up in this environment right now?

Albert J. Neupaver

Our acquisition pipeline is actually very busy right now. As you know, we are very selective on what we try to approach. And we're very disciplined in trying to close the right acquisitions. We are seeing quite a bit of competition in that arena. But there is an ample number of acquisitions that we have in the pipeline right now.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Great. And then you touched on this a little bit, but going back to Europe, I know it's more of a transit-focused market and you guys are really active in trying to grow that region. How has the macro situation really impacted your growth ideas going forward albeit the next 2 years?

Albert J. Neupaver

I think we stay on track. We have a very sound strategy and that is to build a business up in Europe in both transit and freight. Although the freight market is smaller, I think there's opportunities for us to participate in that market. We're making slow but positive movement in both of those areas. I think the opportunities are still there, and I think long term, it will be very good market growth area for us. A good example of that is the acquisition of Mors Smitt and last year's acquisition of Bearward. We continue to want to build that credibility and platform in that market area, which is a much larger market area especially in transit than it is here in North America.

Operator

And the next question comes from Art Hatfield from Raymond James.

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

Just a question on the expense line. The cost of sales line was a little bit higher than we would have thought, but conversely, SG&A was a little bit lower. So I think the net-net was a better overall. Can you talk a little bit about if there's anything unusual going on in those numbers? It looks like SG&A was down sequentially from Q1, just what the drivers were there and if that's something that we should -- how should we think about that going forward?

Albert J. Neupaver

Yes, Art, I think as we have tried to get everyone to take a look at the operating profit line, and the reason for that is we have -- because of the large project nature of some of our business, we have a lot of costs that go back and forth between cost of sales and the SG&A expense lines and engineering line. And what we've really done internally is we really stayed focused on the operating line, not that gross margins and gross profit isn't important, and we do look at the metric, but what we do find is a lot of expenses flow between those 2 lines. And we'd like to get people really focused on that operating margin, which if you go back over the last 5 years, it's done nothing but incrementally improve, which is really our goal to continuously improve on that margin line.

Alvaro Garcia-Tunon

And in terms of SG&A, Art, it's actually been pretty stable. And that really helps us on the operating margin line, obviously, as we expand the sales. If you take out the legal settlement, which we accrued last year and adjust for acquisitions, we're roughly at about the same run rate that we were this quarter and last quarter, which is somewhere between 60 and 62. So I think going forward, you can model the SG&A somewhere between 60 and 62, and it will fluctuate between those amounts. Obviously, we make acquisitions, that will change, but that's the best number we have going forward.

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

No, that's helpful. And we are as well focused on the operating margin, but just understanding what's going on with expenses is always helpful.

Alvaro Garcia-Tunon

Yes. No mix can -- like Al said, mix can really affect gross profit and the classification of expenses sometimes can affect that as well, given the -- sometimes the percentage of completion accounting can affect that and that's why we focus so much on the operating margin line rather than the gross.

Operator

Your next question comes from Scott Group from Wolfe Trahan.

Scott H. Group - Wolfe Trahan & Co.

Alvaro, you mentioned increasing components as part of OEM sales as one of the drivers in the quarter. Can you give a little bit more color there? Is that a new trend? Is that something that you think is a secular opportunity for you guys? And how should we think about kind of the margin impact on that when you get more components per OEM sale?

Alvaro Garcia-Tunon

Sure, no. I mean I think the main components of the increase in sales was really the rebounding freight car market, which obviously are freight car components. And I think that the margins there are probably around the company average, give or take, and then strong PTC sales as well, which have higher margins than the company average. I think those were the 2 really driving forces in the component sales.

Scott H. Group - Wolfe Trahan & Co.

Okay, that makes sense. So when we think about margins, I know you guys don't give guidance, but on one hand, you've got the Wabtec Performance System, which clearly seems to be paying some tremendous dividends. And then you have this kind of mix benefit of freight being a lot stronger than transit. As you look at a couple of years and maybe that mix, maybe transit starts to grow a little bit faster, is the goal to still improve margins beyond this 16%, 16.5% range? Or at this point, would it be to maintain margins if you look out a couple of years?

Albert J. Neupaver

Our goal would be to continuously improve on that margin. And I think if you take a look at even what happened during the recession in 2008, 2009 time frame, even with transit taking a larger portion of the total revenue, with $150 million drop in revenue, we were able to maintain the margin within 1%. So when you take the Wabtec Performance System, we apply that across all aspects of the business. And in those divisions that have lower margins, we expect a larger incremental improvement. So, and it's not just looking at Kaizen, but as we talked before, we look at taking advantage of global sourcing. We take a look at taking advantage of pricing. And yes, there will be mix changes over time, but our goal is to really continuously improve on that operating margin level.

Scott H. Group - Wolfe Trahan & Co.

Okay. That makes sense. Maybe now turning to the Highway Bill for a second. Maybe talk about how quickly you think you'll start to see some of the project work pickup now that we have a bill. And then on the positive train control side, I know they ended up pulling the language in there that would have delayed PTC. Do you think at this point that a delay in positive train control, do you feel comfortable is not going to happen? Or do you think there's still a chance for that at some point in some other form of legislation the next couple of years?

Albert J. Neupaver

Okay. Yes. On the Transportation Bill, I think the fact that you're taking away some of the uncertainty of the funding really are out year type of positive impact. We're seeing the impact right now of spending that -- or funding that was put forth a few years ago. So I don't see it an immediate impact in the transit area from the Highway Bill. It's those long-term projects that we really want to see. And you are correct. The bill, there was a lot of pressure, lobby pressure, to put some type of delay for PTC into the Transportation Bill that never made it. I think there will be continued pressures as we would go forward to have some type of delay. As far as do I feel that there will be a delay or not, I really can't -- I really don't know. I wouldn't say with certainty that there isn't one. But what I can tell you with certainty is that I don't think it would have a major impact on how we see things that will occur over the next few years. There's still a lot of work to be done. Right now, the progress is very positive. We're going to go from lab testing to field testing on the vital PTC system probably late this year into next year. We already got a product safety plan on a nonvital system that has been submitted with BNSF. They've been operating our system for 5 years. You'll see that we're going to be pushing to have the Metrolink system up and running on a BNSF-type system sometime in 2013. In 2013, we will have completed the MRS Brazilian signaling project. One thing for sure, we're not going to be a reason for any type of delay and that is Wabtec. Now I can't comment on the railroads and the other participants in the area, but I'm sure -- I assure you that they're working hard to try to meet the deadline and we'll see how it goes. I think the most complex thing that's left is the fact that we have to have a system that inter operates. That means that every one of the railroads could communicate with each other, as well as the transit authorities and that's where a lot of the testing has been focused on in the last few months.

Scott H. Group - Wolfe Trahan & Co.

That's great color. And just last question, when we think about the acquisition environment, I know you said it still feels very active. How many potential -- what's the universe of potential acquisitions out there? I'm not saying what you're looking at right now, but when you think about long-term. Are we thinking about are there hundreds of companies, thousands of potential companies that could fit? I'm just trying to get a sense on the potential universe. And then on...

Albert J. Neupaver

Yes. I think the universe, and it's one of the things we try to do strategically is we always try to keep that, we call it making the pond bigger. Okay. And how do you make the pond bigger? First of all, you look at the markets that you're in and I think that I've been very pleased with the amount of opportunities we've seen in the rail industry, both transit and freight, aftermarket, OEM, wayside versus rolling stock. I think there's a lot of opportunities there. We also, as you know, we have about 15% of our business outside of the rail area. And these are technologies that we know. They're core competencies of ours and that expands that pond of acquisition opportunities that we could look at. What we don't want to do is get into areas that we don't have competencies in and it would distract our management team from doing what we're doing and that is focusing on a very compelling industry and that's the transit and freight rail industries. So I can't quantify it for you, but I can tell you that we have been very pleased with the number of opportunities we get to look at. It's not like you got to go find one and you're desperate to close it. I mean, that's not how we approach it. We have ample opportunities and we're very selective in what we go after.

Operator

And next question comes from Matt Brooklier from Longbow Research.

Matthew S. Brooklier - Longbow Research LLC

I jumped on slightly late but was curious to hear if you provided how much PTC revenue was booked in the quarter?

Albert J. Neupaver

We expect -- we had revenues about $50 million in the quarter and that's on track. We expect to have about $200 million of revenues in 2012.

Matthew S. Brooklier - Longbow Research LLC

Okay. And that $200 million number, I think in the release or maybe I heard somewhere on the call, the number is now slightly above $200 million. Has that changed? Or is that similar kind of expectations to where we were previously?

Albert J. Neupaver

It's pretty similar to where we were. That's kind of -- I think it will be right around the $200 million, probably slightly higher.

Matthew S. Brooklier - Longbow Research LLC

Okay. And getting back to the Highway Bill and the bill excluding any language to potentially push out the mandate for PTC implementation, just curious to see if any of your customers were maybe waiting for that bill and waiting for the outcome of that bill with respect to the timing of their PTC kind of product adaptation. Has there been a change in mindset post the Highway Bill getting passed with now no delay language in it?

Albert J. Neupaver

We didn't see a lot of delays because of that. I mean, I think everyone is feverishly working to get there. And I don't think many of the people are holding back. Now maybe -- I think the only area would be the onboard computer. There's a question on how fast you want to do that and I think that if there's any one area they may have held back that would be equipping, not new locomotives, but more of the older locomotives. Until you get into field testing, you wouldn't need them anyway. So I don't think we saw any delay because of it.

Operator

And the next question comes from Kristine Kubacki from Avondale Partners.

Kristine Kubacki - Avondale Partners, LLC, Research Division

Can you give us an idea of how much of the PTC this year you expect is outside North America?

Albert J. Neupaver

Yes. I think this year we have probably, I would say, 30% outside of the U.S. And transit would be about 20% and 50% would be freight, U.S.

Kristine Kubacki - Avondale Partners, LLC, Research Division

Okay, that's helpful. I guess my question is given that Brazil was a pretty big chunk and you talked about that it's going to be mostly finished this year, I was wondering as we think about the transition for next year, and obviously we didn't get the delay and we're going to more North American-led PTC spending next year. Do you think you can outgrow that $200 million in next year given that there is no delay and the railroads have a lot of spending left to do before the 2015 deadline?

Albert J. Neupaver

Okay. First, I will address the MRS. There's a big chunk left next year, and not only that, we're on Phase 1 of a 3-phase potential, 4-phase potential. And although the other phases are not a guarantee at this point, I think that if the system is up and running, there's other sections of the railroad where there -- you would expect them to apply this. There's other international projects as well that we are taking a look at. So I think that first of all, our international PTC, we hope will continue into the future and grow. As far as the U.S. spending, as we've said in the past, I think '12 is kind of a little bit of a stepping stone into '13 and '14. I would imagine most of the onboard work would happen in those 2 years, maybe towards the second half of '13, all the way through '14. And that's obviously a big chunk. The other thing is what we haven't quantified and is still out there is there's 21 transit agencies that are going to need to have some form of train control that's going to have to inter-operate with the Class Is. Although those projects, some are small some are large, I think we've only announced signing contracts with 2 of them right now, and that's Metrolink that we'll have something operating next year and the other one's in Denver. And the Denver project, we have about $63 million in setting up the system, but we also have components that add to that. And that project will run all the way out to late 2014 into 2015 since it's a new railroad. So I guess what we're saying is that we expect it to grow.

Kristine Kubacki - Avondale Partners, LLC, Research Division

That's great. That helps out a lot. I guess, maybe you're answering my question -- my next question is, in the past you talked a little bit about competition on the PTC side, whether it was through licensing but not as much lately. Do you think that there is competitive pressure still out there that you have to do something? Or because of the speed of most of these projects that, that prohibits that at this point?

Albert J. Neupaver

I think there's always competition and that's why -- and I think other people are involved in the whole PTC implementation. I mean, we're working very closely with a lot of our customers, competitors. It's a total system. I mean, what we're supplying is only part of that system. We have the ability to put a turnkey installation in with our engineering and design capabilities, but we still have to rely on a lot other people to interface with us. So that interface will continue, and whether we'll see some competition at some point on the specific products that we offer, that's always a possibility. Never underestimate your competition.

Operator

The next question comes from Greg Halter from Great Lakes Review.

Gregory W. Halter - LJR Great Lakes Review

I know you've got a chunk of debt. I think it's at 6 7/8...

Albert J. Neupaver

Yes, you don't need to bring that up. Okay?

Gregory W. Halter - LJR Great Lakes Review

It's kind of high, that's why I'm bringing it up. Just wondering what's going to happen with that...

Albert J. Neupaver

The -- that -- Alvaro can explain it better than me, so I'll let him explain, but I don't think it's callable.

Alvaro Garcia-Tunon

I'm not sure what the question is, Greg.

Gregory W. Halter - LJR Great Lakes Review

Well, it's obviously coming due in 2013, and I'm just wondering which part of the year it's due. I don't know exactly when and what you plan to do with that?

Alvaro Garcia-Tunon

Yes. It's due in July. And we have enough room right now in the revolver to be able to basically redeem those bonds and we expect to maintain that amount. If for some reason we did something, say a large acquisition, for example, that caused that amount to not be enough to decrease, we would actually increase the facility. But we are planning for that so that we basically we don't -- like you all do, we don't want that liability turning current. And as long as we maintain the ability to redeem those bonds under the revolver, we're okay. So we got that covered. And the question is what we do then and it's still -- obviously, we're in a very, very favorable environment and there are a number of options open to us, and as we get closer to the redemption date, then we'll evaluate those options and go from there.

Gregory W. Halter - LJR Great Lakes Review

Okay. And you mentioned the cash amount, $234 million. Where is that located geographically? And if it's outside the U.S., any plans to repatriate any of that?

Alvaro Garcia-Tunon

See the benefit of that cash, it's mostly outside of the U.S. We have some here in the U.S. and will apply that against the revolver in the normal course of events. But the large majority of that is outside the U.S. And one of the benefits of these foreign acquisitions like the Bearward, the Bearward utilized a lot of our euro cash balances, and Mors Smitt utilized the remaining portion for the most part of our euro cash balances. But we can take some others from other countries and apply it there, it just takes some time to transfer it tax efficiently. But over time, we should be able to take some of that cash and use it for foreign acquisitions.

Albert J. Neupaver

And that's why we keep it over there is for our growth opportunities.

Gregory W. Halter - LJR Great Lakes Review

Okay. Great. And one last one. There's obviously been a lot of discussion on PTC, but I think what could be bigger over the long, long term is the ECP. Just wondering if you could make any comments on your latest contract there and what you see going forward.

Albert J. Neupaver

Yes, we're really excited about that technology and I think that if you add the 2 contracts together that we got down in Rio Tinto in Australia, you're looking at $21 million and $29 million. So you have $50 million being invested by just one railroad in Australia, and they're definitely seeing the benefits. I think the benefits are very clear. I think that this technology will eventually be adopted globally. It's just going to take time. It is a very expensive investment for the railroads and you've got to get a return on your investment. I think the biggest problem that we have in the U.S. is the way we run our railroads where you take railcars from 1 -- Class 1 and you carry it so far then you give it to another and you have -- a lot of the product is leased. So, the person that's buying the car is not the one getting the benefit from it. The only kind of no-brainer application for these -- for this technology right now is unit trains. And these are trains that would run back and forth and be owned by the operator. And we've seen pilots and some growth in that area. We're running tests now in South America on large freight trains. We've had -- the product has been adopted in South Africa and Australia. So yes, I think it's going to be a bigger opportunity over time. I just think it's going to take a long time, and I'm talking multiple years out before this technology is adopted.

Operator

And the next question comes from Steve Barger from KeyBanc Capital Markets.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Do you -- you talked about the transit growth rate being better in the back half and getting some contribution from locomotive. Can you quantify what you expect those growth rates to be and maybe tell us how big the contribution will be from locomotive?

Albert J. Neupaver

Yes, what we're going to see -- I can't quantify it for you, Steve, but what I will tell you, if you look at a 60,000 railcar build then we've seen 35,000 already delivered, our forecast would indicate there'd be less rail cars build if you believe the 60,000, which some people are putting out. On the positive side, we've got the contribution of acquisitions, which you could quantify and then we have contribution that is favorable from our locomotive contracts, some of which is going to flow out in the second half. So you could get pretty close to figuring that out. Okay?

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Okay. And just in terms of the locomotive contribution, can you tell us how that margin compares to the rest of transit or just help us think about what the margin on that could be?

Albert J. Neupaver

That margin would be less than the company average.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

But more than the rest of transit?

Albert J. Neupaver

Could be about the same.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Okay, that's great. And since you brought up rail cars, shale plays have obviously been a huge catalyst for this railcar cycle. Tank orders are now 70% of backlog. I'm just curious, is the backlog ever been this concentrated towards one car type and does that matter to you?

Albert J. Neupaver

Well, the only reason why it matters is the message that you read into it. They're the type of car, really, where agnostic it doesn't matter. But when you see that concentration, I think you're talking about, correct me if I'm wrong, but 83% of the orders were in tank cars, I think.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

I think that's right.

Albert J. Neupaver

Yes, and if you look at the other categories, if you were an optimist, how you would view that is there was such a concentration in tank cars, the other ones will catch up. If you're a pessimist, you'll say, "Well, the tank car can't carry the load forever." And one thing for sure, we're not going to see a lot of coal cars going forward. And the covered hopper I think got ahead of itself, and probably, tank cars is getting ahead of itself. But you still have to support the intermodal. And there wasn't a lot of intermodal activity on orders or deliveries.

Alvaro Garcia-Tunon

See, I don't think we've ever done a statistical summary of like how much in any one period is one particular type of car. But I know just from having been around a little bit, I mean, I remember when coal cars were real hot because you have the aluminum coal cars planning -- which are much lighter and much more efficient planning the older cars, then intermodal was real hot. And so you do go through periods in a market where a certain type of car will predominate over others. And you have just a wide variety of cars that over the long term they can average out.

Albert J. Neupaver

I think the only one that's ever been consistent is tank cars during my 5 or 6 years -- 6, 7 years here. Tank cars have seen -- they've always been the more consistent one. But intermodal with traffic up 5, over 5% at some point...

Alvaro Garcia-Tunon

Changing the life over certain periods and...

Albert J. Neupaver

And covered hoppers have come back. It depends on the harvest and not just on frac-ing.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Right. And as you guys are well aware, there's 4 manufacturers of tank cars, one of which is private. Do you have an opinion on industry capacity per quarter or per year for tank cars?

Albert J. Neupaver

We should know, I should know better but I don't know it off the top of my head. I've seen statistics of what the capacity was, but I'd be guessing if I gave it to you so I...

Alvaro Garcia-Tunon

Our preference is they don't expand capacity build them all and then a little bit of a slump and have to shut down. We actually prefer a smoothing of that curve a little bit. And they seem to be able to be handling it right now. We're not hearing that anybody's backed up that can't meet delivery dates, I'll put it to you that way.

Operator

And the next question comes from Samuel Eisner from William Blair.

Samuel H. Eisner - William Blair & Company L.L.C., Research Division

Just had a couple of quick questions here. Maybe if we look at the margins, obviously, you had pretty substantial year-on-year margin expansion here. Is there a way to kind of parse out what buckets you really gained in that margin expansion? Is it primarily leverage? Is it pricing? Is there a way to kind of drill down and see where you guys really gained the leverage on the margin?

Albert J. Neupaver

Yes, we do drill down, Sam, and there's no question, contribution margin when you're at I think 22% when compared to last year's quarter, that is pretty good for us. I think volume is obviously a large factor, but it's not the only factor. When we get into our budgeting cycle, we look for every division to come in with some type of improvement on through our Wabtec Performance System, through sourcing and pricing, and we track that every month. And that we -- it's called priority deployment. Every division has goals and objectives for those and we plot it. So we could break it down individually on how much each of those contribute to that margin improvement on a divisional basis, and if you roll it up, you'll see the volume impact. But volume helps. Volume helps you cover mistakes. There's no question about it. But the other areas are contributing and they're significant.

Samuel H. Eisner - William Blair & Company L.L.C., Research Division

From a pricing standpoint, I mean, how has the pricing in the second quarter relate to the first quarter and maybe against last year?

Albert J. Neupaver

I don't have that information that I could give you off the top of my head. I could tell you that pricing has improved quarter-on-quarter. It's a small amount. There's -- but it has improved. I think on an annual basis, if we were able to get 0.5% out of pricing, we'd be very happy.

Alvaro Garcia-Tunon

And one of the benefits of the environment is you don't -- this is kind of addition by subtraction, I guess. But you're not expected to cut your prices as you would if things slowed down. So actually that helps pricing as well, that you're actually getting your price. You're not getting that large and increase but you're not subject as much to discount as well.

Samuel H. Eisner - William Blair & Company L.L.C., Research Division

; Understood. And then you mentioned on the MRS contract that this is really only Phase 1 of the -- the Phase 1, I guess, equates to about $162 million of revenue for you guys. I mean would Phases 2, 3 and 4 be of similar size? What is the...

Albert J. Neupaver

It's a fraction of that. It's probably -- if everything went, it would be probably less than half.

Samuel H. Eisner - William Blair & Company L.L.C., Research Division

So Phases 2, 3 and 4 would be less than half of Phase 1?

Albert J. Neupaver

Wait, Pat's corrected me. Hold on. What do you think it is, Pat?

Patrick D. Dugan

It's about equal if all those phases...

Albert J. Neupaver

If all 4 phases...

Patrick D. Dugan

Yes. I think that's probably closer, yes.

Samuel H. Eisner - William Blair & Company L.L.C., Research Division

Okay. And then in terms of timing of how those projects are being bid on, I mean, are those currently being looked at? I mean, what do you think...

Albert J. Neupaver

There's no discussion. We've got to get this operating before it's even discussed and that's probably why it's on the tip of my tongue here.

Alvaro Garcia-Tunon

We don't want to get ahead of ourselves. We want to go ahead and finish the contract, make sure we're operating properly, then we'll do the other ones.

Operator

And the next question is from Liam Burke from Janney Capital Markets.

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

Al, you have 2 major transit competitors in the international markets. Part of the discussion has been, "Look, we are a viable #3 and we can take share." How are you making -- are you making progress in that area?

Albert J. Neupaver

Yes, we're making good progress. We've got components that are being qualified and tested and certified. We've got some systems that we're selling, and they're small platforms, but they'll grow over time. So we're making good progress.

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

Great. And Alvaro, $44 million is what you expect to come in on the CapEx side this year?

Alvaro Garcia-Tunon

Yes, somewhere around there.

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

Are there any outstanding projects in there, or is that just maintenance to support your expected growth?

Alvaro Garcia-Tunon

I'm sorry, I didn't catch what you said, Liam. Are there any, what kind of projects...

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

Do you have any onetime projects in that number or is it just supporting your normal growth?

Alvaro Garcia-Tunon

It's -- I'd say most of it is supporting the normal growth, a little bit of replacement. We legally try to do what other people do, which is make it last one more year, but there's always a normal replacement cycle, but it's more growth and expansion and trying to fulfill strategy than anything else.

Operator

[Operator Instructions] Okay. And there are no more questions...

Albert J. Neupaver

Thank you very much.

Alvaro Garcia-Tunon

Thanks, everybody. See you in a few months.

Operator

Thank you. That concludes today's teleconference. You may now disconnect your phone lines. Thank you for participating, and have a nice day.

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