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Wabtec Corporation (NYSE:WAB)

Q1 2008 Earnings Call

April 24, 2008 10:00 am ET

Executives

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

Albert J. Neupaver – President, Chief Executive Officer

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

Analysts

Jim Lucas - Janney Montgomery Scott

Wendy Caplan - Wachovia

Art Hatfield - Morgan Keegan

John Barnes - BB&T Capital Markets

Scott Blumenthal - Emerald Advisors

Paul Bodnar - Longbow Research

Joe Box - KeyBanc Capital Markets

Operator

Welcome to the Wabtec first quarter 2008 earnings release conference call. (Operator Instructions) I’d like to turn the conference over to Tim Wesley.

Timothy R. Wesley

Welcome to our first quarter call. I’d like to introduce the rest of the Wabtec team who are here. We have our President and CEO, Al Neupaver; our CFO, Alvaro Garcia-Tunon; and our Corporate Controller, Pat Dugan.

As usual, we will make some prepared remarks first. And then we’ll be happy to take your questions. We will make some forward-looking statements during the call, so please review the disclaimers from today’s press release. With that, I’ll turn the call over to Al Neupaver, our President and CEO.

Albert Neupaver

What I’d like to do is cover our first quarter results with a strategic update, and then take a look at our current market conditions and the outlook for the rest of the year. We will have Alvaro cover the financials in more detail. We had a record first quarter, with many things going right for us. This gives us a good start for 2008.

In the quarter strong sales increase of 22% to a record $383 million, we had record earnings per share of $0.66, that’s 27% higher than a year ago. Our backlog is at $1.1 billion, that’s up 11% from year-end, that’s a strong performance given our record sales in the quarter.

These numbers demonstrate our good progress on our strategic growth initiatives, those being global and market expansion, new product development, aftermarket expansion and acquisitions. Let’s talk a little bit about those strategic initiatives. From the global and market expansion aspect, in the first quarter we posted record high 44% of our sales were from outside of the U.S.

We view the global expansion is a good growth opportunity for us from two standpoints. Firstly, they are very large markets and we have a small market share as of today. Secondly, there is a number of these emerging markets are growing nicely, especially being driven by the Asian expansion and mining countries like Australia, South Africa and South America.

From a new product standpoint, we continue our work on Vital ETMS development, and we’re supporting a number of existing pilot programs. We now have an ECP, that’s an electronic controlled pneumatic train in service on the southern company cars running between the Powder River Basin and Alabama. We also have a lot of activity with other railroads on the ECP programs. From an acquisition standpoint, we’ve had significant activity in corporate development area with potential acquisitions and JVs some of which we hope to report on soon.

Based on our performance in the first quarter and the outlook for rest of the year, we are increasing our 2008 guidance. With sales growth estimated to be in the high-single digit and earnings per share of about $2.55. Our last guidance was at $2.50.

Our freight business is holding at a high level, and we continue to see growth in transit and our international markets. Keep in mind, this is the second year in the row that our sales and earnings are forecasted to increase significantly even if the U.S. freight market is down.

This shows the strength of our diversified business model, our strategic initiatives are paying off. We are driving margins higher with our Wabtec Performance System. All that being said, we do believe it’s prudent to be cautiously optimistic about the rest of 2008, due to the uncertainty about the economies in the U.S. and abroad.

Let’s now talk a bit more about our current market conditions. Rail traffic, so far this year ton-miles are up 2.2%. This is being driven by the economy, so we will watch this very closely. As expected, rail car deliveries will be down this year, but still at a good level. Most industry analysts expect the deliveries to be between 50,000 and 55,000 cars. The official first quarter numbers have not been released. We expect the deliveries will be near that of what we saw in the fourth quarter and that orders will be down significantly because there was this one large order in the fourth quarter that really drove the orders up to around 23,000, I believe, so we expect that to come back down.

All that said, we think there will be some erosion in the backlog. Key point is, in the first quarter our freight group sales were up 4% versus expected car deliveries being down possibly as much as 10%. Once again this demonstrates the diversified business model we talk about, with only 20% of our sales directly related to new freight cars. The locomotive market is strong right now. OEM builds are expected to be up in 2008.

As we look at the transit market, which is driving quite a bit of our growth. If you look from fourth quarter to first quarter, we had growth of around 5%. There was 7% growth in transit, and about 3% growth in freight. In transit, the strong market drivers are federal funding and passenger ridership. Federal spending is up 6% this year.

Ridership continues to increase across the U.S. The American Public Transportation Association has reported a ridership hit a record $10.3 billion in 2007 up 2.1% from 2006. What’s driving this is the high fuel costs and environmental concerns about emissions.

Alvaro will now drill down into the financial results for you.

Alvaro Garcia-Tunon

We had another record quarter, which we’re very pleased with. A few highlights of the quarter would include continued sales in earnings growth, a growth in the top line is very important to us. A good operating margin improvement, we’ll talk about that a little bit more. But that’s something that we’ve been targeting, our growing backlog signifying the stability of the company, and good progress as I mentioned in executing our growth strategy.

To hit a few of the specific numbers, sales were about 22% higher than the prior year quarter and hit a record $383 million for the first quarter of ‘07. One particular number that we’re proud of it is about three quarters of the sales increase over the prior year was organic. The only acquisition that we added from the first quarter of last year was Ricon, and that added about $18 million worth of sales, quarter-to-quarter.

The transit group led the way with a strong increase due mainly to higher sales from car refurbishment projects in the U.K., commuter locomotives in North America, and the Ricon acquisition, which I briefly mentioned a second ago.

The freight group sales, as Al again pointed out, also were higher than the year ago quarter, in spite of lower car deliveries, and this is in line with our expectations. This was good performance as we have been able to offset lower demand for OE freight car components with growth in other areas with growth in other areas such as electronics, which we’ve been targeting and the aftermarket.

We’re really focused on driving margins higher, with particular attention on the operating margin. With expansion in transit, we expect gross margins to basically remain flat, maybe decrease a little bit, but we think we can use our operating leverage and our Lean techniques to increase operating margins.

For the quarter, operating up margins were 14.1% versus 13.4% last year. Again this is mostly due to the sales growth in transit, and the Ricon acquisition. Improvement, as I mentioned earlier, is really due to our Lean manufacturing efforts and the increased volume.

Not get to the balance sheet and some of our working capital numbers. Working capital as a percentage of sales was pretty stable with the fourth quarter of last year if you do the ratios, you’ll see that they are very similar because sales has increased quite a bit.

Receivables increased by about $64 million from the fourth quarter of ‘08, because really for a variety of reasons, one was higher sales. Sales were particularly strong in March as compared to December last year, and what happens is the March receivables won’t get paid until the next quarter. December is typically slow month, because of Christmas and the holidays.

We also had higher international sales and they get paid slower, as well as because of our 52, 53-week year, we cut-off on 28 of the month, and you get a lot of checks, believe it or not, arriving at the 31 as people pay in their normal course. So all those factors led to the increase in receivables.

Inventories were about $10 million higher than the prior quarter, than the fourth quarter and payables decreased by about $7 million. We’re not happy with this working capital performance; we think we can do better. It’s largely driven by volume, but as a Lean company we think we can offset some of the impact of increased volume and we think we can do better on working capital,

Cash balances, we spent about $24 million during the quarter to buy back our own stock and this combined with the higher working capital resulted in a net use of cash, the way we measure, which is just cash on the balance sheet compared to the prior quarter of about $60 million. Cash generation is one thing that you all know, we proud ourselves on, so this is an area where I think we can make continue some improvement. And then hopefully, we’ll be able to show that improvement as we continue through the year.

A few of the basic statistics that we always include as part of this phone call, depreciation for this quarter was $6.4 million versus $6.1 million last year, amortization was $903,000 this quarter versus $541,000 last year. The increase in amortization is basically due to the higher intangibles of our two of our most recent acquisitions, Becorit and Ricon.

Our CapEx is very stable, $3.9 million this quarter versus $3.4 million last year. Backlog, another number that I know you all like to keep current with, for us this is another positive indicator for the future. Total or multi-year backlog is up 11% even with the record sales this quarter at just over $1.1 billion. The rolling 12-month backlog, this is the backlog that we expect to execute during the next 12 months. Right now, that number is $582 million. At 12/31/07 it was $532 million.

Freight, you can break that down between freight and transit. Freight is $180 million in the 12-month backlog versus the $154 million at 12/31/07, and transit is $402 million versus $379 million at 12/31/07, so both of those segments improved.

The multi-year backlog, which again includes the 12-month numbers, but also includes the backlog we would expect to execute after the 12-month period, was $1.1 billion versus $1.02 billion last quarter. Freight was $228 million versus $225 million last quarter, so basically stable. Transit $902 million versus $796 million last quarter.

And with that, I will turn it over back to Al for a quick summary and then we will do Q&A.

Albert Neupaver

Once again, we had a strong performance with a record $0.66 quarter, record sales and a growing backlog. The momentum is building with the growth of this business. Most of our end markets continue to be positive, which gives us confidence to increase our sales and earnings guidance, although we are keeping an eye on the U.S. and global economy.

The diversity of our business model, freight and transit, aftermarket and OEM, NAFTA and international is serving the company well. The Wabtec Performance System provides the established culture of Lean manufacturing and we have an experienced and a dedicated management team.

With that, we’re all happy to answer some questions for you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Lucas - Janney Montgomery Scott.

Jim Lucas - Janney Montgomery Scott

Alvaro, on the working capital, receivables and inventory in particular what impact did FX have on the increase?

Alvaro Garcia-Tunon

FX, we normally would compare it quarter-to-quarter, in other words, if you compare it to 12/31/07 versus right now. It’s basically had a very small increase, I think it was $1 million, one way or the other, I think, it was $1 million actual decrease.

From 12/31/07 till 03/31/08 and you do the balance sheet on a stock basis, when you translate, exchange rates were relatively stable, so there wasn’t a real big effect. From the first quarter of ‘07 to now, there was more significant impact because obviously those dollars weakened more between that period of time and that was more like $8 or $9 million or something like that. But quarter-to-quarter it hasn’t been that much.

Jim Lucas - Janney Montgomery Scott

Al, when we take a look on the transit side, it seems as if from a macro standpoint, funding in a good position through next year. But if we look longer term, clearly the economic impact is a lot easier to delineate what it means to the freight side of the business. But with regards to transit funding, can you give us a little sense of what you are hearing from your customers there?

Albert Neupaver

I think if you look at North America first of all, Jim, what you find is that this increased spending in the spending bill has been approved through September 2009. Now what that means is that the funding bill stops, but the programs don’t. And these programs that we’re working on right now that have funding should run well into 2010 and actually some of them could go into 2011.

And if you look at the last time this bill was approved, there was a while before they actually approved the next spending bill. I think it was almost an 18-month period. But in this case, there is a tremendous amount of activity being driven by the ridership, that I think what we’re seeing is, we’re already working on next bids for New York City, the design is already being developed, so I think that activity is very good.

The second part of the transit is the expansion globally. And we are really seeing nice growth at our U.K. business in the transit area, where we do repair of transit cars as well as locomotives now. And that business is growing very nicely. As a matter of fact, we’re hosting next week an Investor conference that if anyone is interested, more than welcome to visit to see that operation.

And we are also in the Asian arena, there is a tremendous amount of activity in the transit area. And as I stated earlier, these are very large markets that we have a very small percentage in. So we think that we’re pretty happy with obviously where we’re at. The backlog is very good, and that backlog runs out almost five years, where we have the business. And there is a couple of contracts that extends out to 10 years.

Jim Lucas - Janney Montgomery Scott

On the freight side of the business, the result you’ve been able to put up definitely a stand out. When you take a look at clearly all the mixed signals out there, could you talk a little bit about how you’ve able to drive that above market growth share versus new markets for instance, and just any other color you can provide on the overall outlook for the freight market?

Albert Neupaver

In the freight market, we are able to calculate the impact of every thousand car dropped in delivery, and we know what that number is and we are very focused in all those areas that aren’t tied to railcar build to have growth strategies in place. As we look forward to the railcar build, it is a little bit fussy and one of the reason why we want to be cautiously optimistic.

If you look at the divisions and the products that are tied to the railcar build, our estimate of the impact is right on. So we know what that impact is, we build models around that and try to plan growth strategies to offset that.

The other thing we’ve done in the freight area is again there is a lot of activity offsetting that railcar build on an international basis. Mining countries that I mentioned, Australia, we have a great position in the Australian market. We established our platform there early along when we acquired a friction company. But since then we’ve grown a business that supports our freight market down there that’s actually larger than the friction business. So we have two separate divisions there.

We’re also seeing a lot of activity, not just in Australia but South America. South Africa, we are working on signing a joint venture to supply product. We already have a project down there with our electronic controlled pneumatic braking system on the Spoornet line. So we’re seeing quite a bit of activity here.

The other thing about the freight car is our diversity. When you look at what we do from a service standpoint, we have a stated strategy to grow our aftermarket. And our aftermarket sales have maintained 50% of our total sales again this quarter, which means as we continue to grow we’re continuing to grow our aftermarket at the same pace. And that’s really an important aspect of ours.

And not only diversity from a aftermarket standpoint, but think of some other products where we’re on leading-edge technology in our electronic areas, we’re really putting a lot of development timing, getting their return for some of that now that we’ve got our electronic controlled pneumatic braking programs out there on pilot as well as the electronic train management systems.

So it really takes a lot of effort to look at every different division we have and maximize the growth potentials that we know we’re going to be offset. We accept the brutal fact that 20% of our business is directly tied to railcar. When you look at a share type of thing, most of the types of businesses we are in, we’re in a duopoly, so share goes back a little one way or the other. But it’s normally not those big swings that you would see.

Operator

Your next question comes from Wendy Caplan - Wachovia.

Wendy Caplan - Wachovia

I know you don’t give segment margin detail until the Q is filed. But is it fair for us to assume that the transit margin was close to or better than last year’s peak of 10.9% in the offset?

Albert Neupaver

It’s obvious that we have to be improving the transit margin in order to get our results. And we have done I think that you’ll see when you look at the Q and if you look at back over the last couple of quarters, you will see that improvement. There may be a quarter where it fluctuates a little bit but if you look at the trend, what you’re going to see is good improvement on the transit margins.

And what we are doing there, we are extremely focused on this, because we knew the mix was common, it became very important for us to address this. And what we continue to do is look at Lean manufacturing opportunities, sourcing opportunities, outsourcing some of the vertically integrated processes, we have moved some of the business to lower cost platforms. So we’ve really had a lot of focus in, yes you’re correct in assuming that you are going to see a good trend. And we are going to stay focus on continuing that trend.

Wendy Caplan - Wachovia

Al, can you talk about pricing margin, some detail on the backlog profitability relative to what you’re shipping at this point?

Albert Neupaver

I think that what we’ve tried to do going forward on a continuous improvement type of aspect, we want to try to continue our margins. We are getting some pricing on those products where we have the level of differentiation from the competition. On those products we don’t have it, we’re really focused on cost reduction, so that we continue to add value to our customers. So I think that what you’d see is that it should be equal or if not better as we go forward, and I’m pretty sure that would be the case.

Wendy Caplan - Wachovia

Thinking strategically about your share repurchase that you did in the quarter. despite your prepared remarks about your positive view of the acquisition environment, I’m trying to understand whether you’re saying something bearish about it, and with the stock near record highs, what it says about your confidence in the shares of Wabtec.

Alvaro Garcia-Tunon

We’ve got tremendous confidence in the shares of Wabtec, and we think that the company is still a good value, a very good value. And we’re going to be opportunistic from the standpoint of share repurchases.

And I’ve said before, if we have our way we would prefer to invest in internal development, internal growth first; second, acquisition; and third, we are very open to stock repurchases. And in each Board meeting we spend a lot of time talking about dividends and special dividend type expenditures as well, so we’re very focused on them. We really feel that Wabtec is a good value at this point.

Wendy Caplan - Wachovia

Did that say anything? It seems like you are saying two different things. You are positive on the acquisition environment, but no it’s not, your number one focus in terms of cash deployment. Can you help us understand why you are optimistic relative to acquisitions?

Albert Neupaver

The reason we’re optimistic is that we continue to see opportunities. And we’ve been working on I think, if you go back to the last conference call I talked about some of the activities we’re working on is really trying to expand globally. And in some of those cases it takes an extreme amount of time and effort to do that.

So we are optimistic that we’re seeing the things, but we’re going to continue to be selective. And we are going continue to make sure we do the right things going forward. I don’t think that it means that we’re any less focused on that at all.

Operator

Your next question comes from Art Hatfield - Morgan Keegan.

Art Hatfield - Morgan Keegan

On your guidance for the year, it does not include any anticipated acquisitions or any of these potential JVs that you talked about?

Albert Neupaver

That’s correct.

Art Hatfield - Morgan Keegan

As I think about the acquisition front, relative to what you’ve been saying over the last couple of quarters, is the progress eased up a little bit? And if so, is that a function of you’re seeing better asking prices for companies currently?

Albert Neupaver

We haven’t seen much relief in that area. I think that what you find especially as you look at the credit markets, and I think it’s out there. But we haven’t witnessed any of that where they’ve eased off at all, so I still think we are finding the environment very competitive.

Alvaro Garcia-Tunon

Art, you got to remember we’re not looking at the multi-billion dollar companies. We’re not looking at the billion dollar LBOs that are highly dependent on financing. The companies that are in our sweet spot are still finance-able. And so some of the market was ridiculous and some of the ridiculousness, if I could say that, has decreased. But you’re still seeing a pretty competitive market out there.

Art Hatfield - Morgan Keegan

And I’ve never been worried about your ability to finance the type of deals you want to do, so that’s not been a concern of mine. You had mentioned something about possible joint ventures. If you’ve mentioned that it just slipped my mind, but I don’t recall you ever talking about that before. And if I’m correct in that, what has spawned your thinking in that regard and without being specific, what opportunities have you looked at?

Albert Neupaver

I do talk about in strategy as we try to globalize the businesses is that no matter where you go in the world there is a different strategy. As you get into South Africa, for example, if you want to have preferential ability to sell the product you have to have a minority partner.

Minority partner depending on the percentage and the rating they get that depends on how much money you could sell to the government that runs the railroad. So that’s the type of JV that I’m talking about. If you look at China, if you are going to sell to the Ministry of the Railroad which is the government the best you could do is a 50:50 JV, so if there is a direct sale there that’s considered a strategic industry in China. So if you were to try to develop a partner, you would have to do it from a joint venture standpoint.

Art Hatfield - Morgan Keegan

Say for instance in China, you mentioned selling to the Ministry of Railway. Are they pretty much the only customer that you’d be seeing in that country?

Alvaro Garcia-Tunon

If you’re talking about freight, the answer is probably, yes. If you get into the transit markets and some of which they would consider short-line railroads, there are some public railroads that you could sell to. But the main market is driven by the Ministry of the Railroad.

Art Hatfield - Morgan Keegan

And I did hear you allude to ECP, earlier in the call. And I don’t know if you alluded to ETMS. But did you generate revenue in the quarter in either one of those products?

Albert Neupaver

Yes.

Art Hatfield - Morgan Keegan

Do you care to tell us how much?

Albert Neupaver

I probably don’t have that at my fingertip, I think if you follow-up with Tim later, we could.

Alvaro Garcia-Tunon

We could say, but in general, it was meaningful to us in the sense that it showed the project was gotten underway. But it wouldn’t be what I would call say material to our financial position. I am just going to give you a wild SWAG, so if everybody hears the same number. But it’s under $15 million for both.

Art Hatfield - Morgan Keegan

And I didn’t expect it to be a big number, but something for us to watch going forward. And Alvaro, on the backlog, you recently, I think it was earlier this week, announced an order from the State of Maryland. Is that correct?

Alvaro Garcia-Tunon

Right, for commuter locomotives [inaudible].

Art Hatfield - Morgan Keegan

Yes. Was that in the quarter ending backlog numbers you gave us?

Alvaro Garcia-Tunon

Yes, that is in there, Art. I think what happened probably, Art, we got the order beforehand but a lot is going on. What you have to do with the announcement especially when you are doing with the state, is you have to run it by the state and you can imagine the channels that you have to run it by the state. So there is typically a pretty long time lag in announcing a municipal contract.

Art Hatfield - Morgan Keegan

No, I understand that. But it was three weeks, so I didn’t know if you were able after the quarter or not, I just wanted to clarify that. And then, what was your share count at the end of the quarter?

Alvaro Garcia-Tunon

I’m looking at our release and our release shows the weighted average shares diluted to be 49,037. That’s the weighted average. I think the number is 48,306,864. That’s issued and outstanding.

Operator

Your next question comes from John Barnes - BB&T Capital Markets.

John Barnes - BB&T Capital Markets

In terms of your comments on the pneumatic brakes, $15 million on the revenue line in the quarter.

Alvaro Garcia-Tunon

I said under, under. I’m giving myself some room there. Give me some room.

Albert Neupaver

And that was both electronic controlled pneumatics and ETMS.

John Barnes - BB&T Capital Markets

That’s combined.

Albert Neupaver

Yes.

John Barnes - BB&T Capital Markets

Are you positive margin on that business?

Albert Neupaver

We’re covering our cost. And that’s the significance of it, because if you go back a couple of years that was not the case. In development of these products with our stress to try to be in the front of technology as far as you go with efficiency, productivity, and safety of the railroad, we spent a lot of money over a number of years. And we are now at a point where we are covering our costs in both of those products.

John Barnes - BB&T Capital Markets

In terms of orders for the brakes and we are starting to see some uptick in strength in certain commodity types for the rails. I know their total volume is still under lot of pressure, but some of the coal demand and listening to them talk about investment in coal infrastructure to support the export markets.

And Norfolk Southern was talking yesterday about the multi-year demand cycle for export coal in the number of European coal fired utilities and things like that. Are you beginning to see an uptick or any strength at all on the freight side of your business and especially as it relates to the pneumatic brakes on the freight side of your business?

Albert Neupaver

Yes, where we are seeing a lot of interest or I think the uptick not interest, is the uptick is if you look at ton-miles, ton-miles being up year-on-year of 2.2%. What that drives for us is one, the aftermarket business, because that’s a direct relationship to ton-miles, I think that’s a very positive thing.

Now, when you look at the railcar build, what we very easily are seeing is a correction related to the high backlog and the rapid build over the last couple of years and still a lot of that backlog being related to products that is tied to ethanol.

And the one area in the railcar build that we are seeing a drop off is intermodal and that’s really economy-driven that we’re bringing in less imports now because as we all know we’re in what seems to be much more of a consumer type of recession than a manufacturing recession. So it’s kind of mixed signal on the freight side, John.

As far as ECP is concerned, Yes, it’s growing momentum. First, you saw Norfolk Southern do a test and then BNSF is doing the test with us on Southern Company. And I think you’re going to see and we’re seeing interest by other railroads to follow suit. So I think you’re going to see most of the railroads are going to be testing this technology and verifying the benefits of it.

John Barnes - BB&T Capital Markets

Your backlog is very robust and you’ve gotten a couple of nice orders here recently. With the momentum building and that backlog is among the best in the industry, you put up a great margin this quarter. What concerns you the most that leads you to temper your enthusiasm? And yes, $2.55 is a solid number, but with the backlog the way it is and the margin performance, I am just curious what tempers your enthusiasm?

Albert Neupaver

First of all, I think it’s prudent to be conservative and we’re trying to be conservative and we’re also. If you look forward, the uncertainty with the economy is what really dampens that enthusiasm. We are very excited about our opportunities, We think that we are going to be able to perform nicely going forward. But I think when you take a look at the uncertainties of the economy here and globally, we want to be conservative. We want to build credibility and deliver the results. And that’s what we’re focused on.

Operator

Your next question comes from Scott Blumenthal - Emerald Advisors.

Scott Blumenthal - Emerald Advisors

I was of course, we’re all pleasantly surprised to the strength of the performance this quarter. And, last year, in Q1 you delivered I think a 20% revenue growth, and so this is a pretty tough comp. And that maybe the basis of his question as to, why it appears your enthusiasm is tempered because, you’re not coming off single-digit sales increases, you’re coming off 20%, 30% sales increases and you are delivering on them, basically the same type of increases year-over-year.

We’ve moved from single to high-single digits here. But we haven’t seen a quarter over the last five, where you’ve been lower than 20% revenue growth. So can you talk a little bit about maybe the geography, the geographic distribution of the sales, and can you talk about the quarter and where do you think it’s going to play out for the year?

Alvaro Garcia-Tunon

I think this quarter is pretty indicative of what we see in the market right now. We are able to grow outside of the U.S. We think that that market will continue to be strong. You look at the U.S. market, because of the backlog and the spending in the transit area, we think that’s going to support, especially the business we have and I think the uncertainty lies primarily with the North American freight market.

I think that the global freight market should continue to be strong, unless there’s some type of major problem in the expansion in Asia and other emerging parts of the world. We are very excited about the opportunity, as I said. And the enthusiasm not just comes through from me, but the whole team here and I think we’ve got some great opportunities ahead of us and we’re going to get focused on delivering those opportunities. But at the same time, we think it’s really important to be very prudent and conservative as we look forward.

Scott Blumenthal - Emerald Advisors

Alvaro, do you have a breakdown geographically of what the sales mix was for the quarter, and how much ForEx?

Alvaro Garcia-Tunon

Yes. Outside of the U.S. it was 44%, within the U.S. it was 56%. We don’t really break it down much further than that, Scott.

And that was up, I think say for all for the last year, at the same for the same quarter, it was closer to 60/40 split, so it has gone up on an increasing revenue, which shows that our attempts to basically broaden our product distribution are working.

Albert Neupaver

And one thing we have given in the past and we’ll give, we are about 29% outside of NAFTA. And that was a few years ago, that, you were talking probably 20% to 22%.

Scott Blumenthal - Emerald Advisors

And Alvaro, do you have any idea of what ForEx might have contributed to the quarter?

Alvaro Garcia-Tunon

In general, this year, we almost have like a natural hedging strategy. In the past, we had more exposure to the Canadian dollar than we did to other international currency, so we have a cost center and can be cost-centered in Canada and then profit-centered outside. And our exposure in the cost centers outweigh what we are getting from say, Europe and Australia, etc., so we hedged.

This year, we actually found the two tend to offset each other. In other words, our exposure in the cost centers in Canada, the dollar soften tends to be offset by the strength of the operations outside the U.S., so basically, it never is an exact wash, but in terms of a material number, it’s not a material number.

Albert Neupaver

If you look quarter-on-quarter, FX contributed about $5 million on the revenue line and on the EBIT line, it really had no significant impact based on what Alvaro just said, but from the sales standpoint, about $5 million.

Scott Blumenthal - Emerald Advisors

And can you talk about pricing? I understand that in the transit when we’re delivering transit backlog that that’s probably pretty static, but can you talk about the rest of the business and where you see pricing.

Alvaro Garcia-Tunon

Overall, pricing is stable. There are areas where we feel that we have some ability to raise prices that we are very focused on them, a few divisions have done a great job at that. And these are places where we really have a lot of value to add to our customers and those are the ones that we are focused on. And generally, it’s still pretty competitive out there but we feel that the pricing is stable.

Scott Blumenthal - Emerald Advisors

And how about the exposure to raw material pricing, your large steel users?

Alvaro Garcia-Tunon

If you take a look at year-on-year, there has been a jump in some of the commodities especially steel and scrap steel. And we have really been focused, since probably we got burnt, I am sure number of years ago like everyone else, we have escalator surcharges, we have agreements with the people we purchased from, so that we get those escalated cost either in a surcharge or covered by our inventory of purchases.

So we are not 100% covered. As matter of fact, you’re always got to stay on top of it. There was a bit of lull, for a year or two without much activity and we have noticed that some of the commodities have spiked and we’ve responded well to it.

Operator

Your next question comes from Paul Bodnar - Longbow Research.

Paul Bodnar - Longbow Research

Can you just give a little more detail on getting into Europe, penetrating Europe with some of your current products, and just the status of that?

Albert Neupaver

In the European arena, we’ve obviously made great inroads from the friction standpoint based on some of our acquisition activity. In the U.K., which is not part of the continent, they remind us every so often that we’ve done great there with growing that business. As far as developing some other activity we’ve worked internally and have other external activity going on to try to help meet the specifications required in order to do business in that area and we’ve had some good successes so far.

Paul Bodnar - Longbow Research

Could you give me some indication kind of develops periodically over time, you gain your products reducing your given timeframe, would you like to really get in there more?

Albert Neupaver

Yes, it’s going to take a number of years in order to get into that market, there is no question about it. There is barriers of entry very similar to the markets in the U.S., and you have to overcome those, and how you primarily do that is with better technology and that’s what we’re focused on.

Paul Bodnar - Longbow Research

On guidance for the quarter, you are getting towards revenue growth in the upper-end of single-digits. If I just take a look, is there any reason to think that first quarter rate either transit segment or freight group segment revenues are at their peak levels for the year, and that they wouldn’t sequentially increase, maybe with a pause in the third quarter for some seasonality is that?

Alvaro Garcia-Tunon

We would like to see some seasonality and I think again, our conservatism and prudence is really related to if something fell off, which we have no reason to believe it would.

Paul Bodnar - Longbow Research

So it’s almost a worse case economic activity that takes a dive in the freight market?

Albert Neupaver

I wouldn’t use that term.

Operator

Your last question comes from Joe Box - KeyBanc Capital Markets.

Joe Box - KeyBanc Capital Markets

Can you possibly just update us on some of the large public transit bids that you are currently working on and also possibly, comment on your expectations for the timing of the announcements and if possible, maybe revenue potential?

Albert Neupaver

Yes, that would be very difficult to answer. We’re working on some large contracts; I can tell you that our total, let me tell you something I can tell you. If you look at the options on the current projects that we have, there is about $300 million of options, that more than likely will come our away as we go forward. This is what happens as you get the appropriation, they make an initial offer, we have options behind it and that’s about $300 million of business that would be very similar to the businesses that we are running right now.

In addition to that, there is a lot of activity at many of the transit authorities here in North America and worldwide and we have a number of opportunities out there. They fall into, I would expect we’ll be able to announce some more contract awards this year and I think they will extend well into next year as well. But as far as the specifics of those particular orders, I’d rather not give that out.

Joe Box - KeyBanc Capital Markets

You had also talked about a solid international market for freight cars specifically. Are you seeing an increase in freight car exports or is this primarily being served by the local markets?

Albert Neupaver

Generally the freight, the railcars are built overseas and what you will find is that some of them have a tie to their U.S. builders. But in general, you have local railcar builders throughout the world and so we need to work with the local people and that’s why you almost have to have a local presence if you want to do business.

Operator

We do not have any further questions at this time.

Timothy R. Wesley

We look forward to speaking to you in three months and we will see some of you next week in England. Thanks.

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