Westinghouse Air Brake Technologies Corporation
Q1 2012 Earnings Call Transcript

Published: 24 Apr 2012

[Operator:]

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

[Timothy R. Wesley:]

Thanks, Amy. Good morning, everybody. Welcome to Wabtec's earnings call for the first quarter of 2012. Let me introduce the other people we have here in the room

[Albert J. Neupaver:]

Thanks, Tim. Good morning. We had a strong operating performance in the first quarter, with record sales of $583 million and record earnings per diluted share of $1.22. The company really hit on all cylinders during the quarter, which led us to preannounce the results and increase our guidance for the year. As we'll discuss, our performance was driven by strong growth in our Freight Group. Our overall business is performing very well, thanks to our diversified business model, our strategic growth initiatives and the power of our Wabtec Performance System, which I'll talk a little bit about today. We are in compelling growth markets around the world, and we remain excited about our future opportunities. As I mentioned, a couple of weeks ago we increased our guidance for the year, and today we affirm that. Based on our first quarter results and current outlook, we expect our full year earnings per diluted share to be about $4.80, with sales growth now expected to be about 15% for the year. This EPS guidance is about 35% higher than our GAAP EPS last year, and 12% higher than the guidance we announced earlier in the year. Our guidance has some assumptions. Our assumptions are

[Alvaro Garcia-Tunon:]

Great. Thanks, Al, and good morning, everyone. We're proud of the results for this quarter, and I'm pleased to be able to review them with you today. Our sales for the first quarter were a record $583 million, 28% higher than last year. Of this increase, about 70% was from organic growth. Freight Group sales were up about 50%, with most of that coming from internal growth initiatives, as well as rebounding markets, primarily here in the States and in North America. Aftermarket growth was mainly from expanding our PTC revenues and our service revenues as well. But however, OEM sales were up 60% as well from increasing demand for components for new locomotives and freight cars, locomotives sales in Australia and the acquisition of Bearward that Al mentioned as well. Transit Group sales for the most part were pretty stable, as acquisitions and higher aftermarket revenues mostly offset higher -- I'm sorry, mostly offset slightly lower OE sales. Our OE sales were higher last year because of a large locomotive order, which was in process in Q1. Some of this capacity in our locomotive manufacturing facility was shifted to Freight this year for the orders in Australia, which are classified as Freight. In terms of income from operations, we had a strong performance this quarter, with a record $94 million of profit. This was up 42% compared to last year. Operating margin was 16.1% versus 14.6% last year. Margin performance -- the increasing margin performance was driven by several factors

[Albert J. Neupaver:]

Thanks, Alvaro. Once again, we're off to a strong start for the year, with record sales and earnings, good margin performance and a record backlog. Our 2012 guidance is now, for EPS at $4.80 on revenue growth of about 15%. Longer-term, we couldn't be more pleased with our strategic progress and the growth opportunities we see ahead. We continue to benefit from our diverse business model and the Wabtec Performance System, which provides the tools we need to generate cash and reduce cost. We have an experienced management team that has truly taken advantage of our growth opportunities. With that, we'll be happy to answer your questions.

[Operator:]

[Operator Instructions] Our first question comes from Art Hatfield at Raymond James.

[Arthur W. Hatfield:]

Al, you had mentioned, walked through your guidance for the year, and you had earlier commented on that industry analysts are projecting roughly 55,000 deliveries of freight cars for the full year 2012. Is it safe to assume that your guidance includes that number and that if we get something meaningfully higher than that at the end of the year that, that could have a positive impact on your results?

[Albert J. Neupaver:]

That's the number that we have. That's the assumption that we've made for our guidance. That's correct, Art.

[Arthur W. Hatfield:]

Okay. That's helpful. Just a couple other ones. I'm sure you saw the industry data that came out yesterday. The market reacted somewhat negatively to the fact that, that backlog was down in Q1 relative to where it was at Q4, kind of meaningfully. Can you kind of walk how you think about that? And I guess, the assumption that the market takes from that data is that the market's cooling off and that demand for freight cars is starting to roll over and we've reached the peak of the cycle, in essence. Can you talk a little bit about that, how we can think about that maybe in a more positive light?

[Albert J. Neupaver:]

Yes, I think -- I chose the word when, in my prepared remarks carefully, and that is "stabilized." I think that the market is stabilizing. When you look at first quarter to first quarter, last year there was an anomaly in that 36,000 were ordered. This year, it's around 12,000. Last quarter it was 16,000. So the backlog, with deliveries around 17,000, it did drop by about a little over 4,000 cars. From my standpoint and what we know, we think it's basically stabilized. And if you look at the rate of deliveries, that would -- I'm sure that's the reason why you asked the first question. If you analyzed the 17,000, you'd get a lot more than the 15,000 we're talking about. So I think the market's stabilized. I don't think it's anything more than that.

[Arthur W. Hatfield:]

Okay. Final question. And you had addressed a little bit what you did with your operating margins in the quarter. Can we think about your business -- has anything changed meaningfully due to what you've done through the Wabtec Performance System or with the acquisitions that you made, that maybe, how we should be thinking about the margin capability of this business? Is there anything that's caused it to really change the range that this business should operate at?

[Albert J. Neupaver:]

Yes, we've continually talked about continuous improvement, and that's how we view our approach to margins. Just to refresh everyone's memory, when we go into our budgeting session, we ask every division to do 2 things. One, they're asked to take a look at their current margin and develop a plan that would allow for margin expansion. The typical goal would be about 2%. We realize that the whole 2% is never going to flow to the bottom line, if we get maybe 0.5% of it, because you've got inflation, you've got wage increases, you've got other issues that all impact that. But if we could get a small increase in margin from each of the 45 reporting divisions, then you add it up and the end result is that we continuously improve. If you'd take a look back to 2005, 2006, the operating margin, which we like to focus on, was in the, maybe the 10%, 11% range, and now we've broken the 16% operating margin range. And we hope that we could continue to improve that. That's why I really focused on the Wabtec Performance System today a little bit because that's the result of it. So a lot of little things. There's no one drastic change, there's no one fundamental change in our business structure. It's just trying to continuously to do, get rid of waste and the things I've talked about.

[Arthur W. Hatfield:]

Great. And I apologize, but I've got one last one. Alvaro, did you mention what your CapEx budget for 2012 is?

[Alvaro Garcia-Tunon:]

Yes, I think that I mentioned that we expect about $44 million this year versus about -- let me check just to make sure. But I think...

[Albert J. Neupaver:]

$38 million.

[Alvaro Garcia-Tunon:]

$44 million versus $38 million, yes.

[Operator:]

The next question comes from Kristine Kubacki at Avondale Partners.

[Kristine Kubacki:]

Just a quick question on the sales guidance, up 15%, which is very robust. But given that what you did in the first quarter, and if I kind of look out over the next 3 quarters, it looks relatively flat to down. Can you tell us how much this is due to a conservative view, maybe on the economy? Or is there something unique about the first quarter, why it surged ahead?

[Albert J. Neupaver:]

Yes, it has to do with conservatism. I don't know if it's conservatism about the economy. I think it's more about our conservatism. And when you look at the performance in the first quarter, we did hit on all cylinders, as we said. And it is the first quarter, and we just don't want to get ahead of ourselves.

[Kristine Kubacki:]

Nothing wrong with that. Can you give us a little -- I would have thought that maybe the aftermarket, in terms of freight aftermarket -- I know you ran through the aftermarket numbers, but given that coal traffic was down so significantly in the quarter, did that impact the freight aftermarket in any way? Or was it just purely offset by the rest of the rail traffic out there? I would have thought that maybe heavier car loads and slower car loads, like coal traffic, would have been a higher user aftermarket?

[Albert J. Neupaver:]

We did see the impact because of the warm winter. And if you look at first quarter 2012 aftermarket for Freight, it was about 52% of our sales. This year, it was 47%. But some of that because we had so much growth in some of the OE markets. But we did see an impact. That's normally our best quarter of the year for our Global Services group, and we saw the impact that there just wasn't as much traffic related to coal in the warm weather. When it's colder, there's a lot more damage and repair that is necessary.

[Kristine Kubacki:]

Okay. That's helpful. And then you brought up Europe, and that spending there is stable. I was hoping you could give us a little more color about what is going on in Europe and how -- specifically how your penetration into that market, if there have been any breakthroughs on any significant contracts over there.

[Albert J. Neupaver:]

We continue to make progress. We -- I think, last time we talked about some of the orders that we landed. We have a small order that we received. It's going to go on the transit system in Warsaw. It's a Siemens project. We've been actively quoting on some of the new platforms. We've got continued component sales. We're pleased that we're making progress. We'd like to make a little more progress faster, but I think it's going to take time, as we've always said, in order to penetrate that market. And we're pretty happy with where we're at today.

[Operator:]

The next question comes from Steve Barger at KeyBanc Capital Markets.

[Steve Barger:]

I heard you say that PTC is going to run around $200 million this year, but did you say what it was in the quarter?

[Albert J. Neupaver:]

In the quarter, it was $50 million.

[Steve Barger:]

Okay. And you did $125 million last year. $200 million this year is your guidance. That suggests there are only going to be -- there's only about $175 million left for 2013, '14 and '15. Is that right or is there any update to your guidance? How should we think about that?

[Albert J. Neupaver:]

Well, as far as -- what do you mean by guidance?

[Steve Barger:]

You said $250 million to $500 million.

[Albert J. Neupaver:]

Yes, and keep in mind that the $250 million to $500 million was related to onboard equipment only. We talk about 3 different areas of PTC revenue. One is from the onboard computer, and that's really where we got the $250 million to $500 million. And last time, we actually went through this on the call, but I'll try to do it again for you if I could find my PTC files. Basically, the 3 component market segments we talked about was the U.S. freight railroad opportunity, $250 million to $500 million. The second was the U.S. freight opportunity from transit agencies. And keep in mind that we've already announced that we have 2 major contracts, one for -- I think it's $63 million at Denver, and Metrolink Los Angeles, $27 million. A third component of that number is the PTC market internationally, and we had inked the contract for the MRS railroad in Brazil for $165 million. And we've been actually getting revenues from that. I think of the $50 million, $15 million of that was related -- in the first quarter, related to the PTC sales. So when we talk about $250 million to $500 million, I just want to remind everyone that, that wasn't the total, using your term, guidance, or opportunity. The opportunity was larger than that. It's just separated into those 3 segments.

[Steve Barger:]

Of the -- $15 million, that was international, so the remaining $35 million, was that more U.S. Freight or is that coming through on the Transit side? And I guess I'm trying to understand how the Class 1s are structuring the cadence of that revenue spend.

[Albert J. Neupaver:]

It was through both. And what was the second question, Steve?

[Steve Barger:]

I was just trying to get a better sense for how the Class 1s are thinking about their revenue spend over in 2012 and in '13 and '14 for the big PTC project that we typically talk about in the U.S. Freight.

[Albert J. Neupaver:]

I think that the railroads have put out numbers relative to PTC. And I can't remember the exact numbers on each of them, But they don't expect the number to be that much greater this year than it was last year, and it would go up in '13 and '14.

[Steve Barger:]

Okay. So for that project, it's -- the bulk of it is yet to come?

[Albert J. Neupaver:]

That's correct.

[Steve Barger:]

Got it. Okay. And thinking about the Freight segment, specifically, are there any big puts and takes that will cause a sequential drop in revenue in 2Q? Or should we be thinking that this run rate of around $400 million is the right ballpark relative to volume, price, mix, PTC, acquisition benefit? Is that where you're going to come in, plus or minus, you think?

[Alvaro Garcia-Tunon:]

Yes, I think relatively speaking, Steve, Q2 will be relatively flat, relatively stable, in comparison to Q1 in terms of freight production. Like Al mentioned, and you know you've mentioned as well, the freight market is stabilizing, which actually, we think is a positive because it was -- they were basically ordering at an unsustainable rate before, and it's nice to see them go down to a nice level ordering pattern. So we actually view that as a positive, and we see relatively stable revenues Q2 to Q1.

[Steve Barger:]

Okay. And so just thinking about your guidance, broadly speaking, do you think that EPS is basically level-loaded across the quarters? Do you think it's going to look basically like 1Q?

[Albert J. Neupaver:]

The only thing we see is quarter 3 is normally our weakest quarter. Other than that, that's the only seasonality that we would expect.

[Steve Barger:]

Okay. But still you must be thinking about some margin expansion in the back half. If your guidance is predicated on 55,000 deliveries, that's a pretty nice drop off in the back half. So you should be thinking margins go up?

[Albert J. Neupaver:]

You could make up your own model. We have ours.

[Steve Barger:]

Okay. And one more, and I'll just get back in line. Did you give the mix of international sales in the quarter? And can you tell us what the growth rate for international is right now?

[Alvaro Garcia-Tunon:]

Yes, international was about 50% for Q1 of '12, and that's pretty stable, again. In the fourth quarter of '11, it was about 47%. Last year, it was about 51% in the first quarter. So it's hovering right around that 50% level.

[Steve Barger:]

Okay. Any change in growth rates or is that relatively stable, too?

[Alvaro Garcia-Tunon:]

That's relatively stable, as well.

[Operator:]

The next question comes from Allison Poliniak at Wells Fargo.

[Allison Poliniak-Cusic:]

I was surprised to see, I guess, Transit backlog growing so nicely sequentially. Can you kind of talk about what drove that this quarter?

[Albert J. Neupaver:]

Some of the things that we were able to book were related primarily to locomotives in the Transit area, and that's what's driving that backlog.

[Allison Poliniak-Cusic:]

Great. And then Alvaro, you had just touched on some programs to work on working capital. Is there anything that can you can elaborate on with those?

[Alvaro Garcia-Tunon:]

Sure. Actually, I can give you a lot of details, I think. And we're doing a lot of work, and somehow it ended up on my plate. But basically, what we're trying to do is do a micro-level effort on a unit-by-unit basis and trying to determine why working capital may increase or why working capital is not at an optimum level and what we can do to get it there. And what we're trying to do, again, it's a very detailed answer, but this is what we're trying to do. What we're trying to do on a unit-by-unit basis is determine what their optimal working capital balances should be. And obviously, with the number of operating units that we have and the variety of markets we serve, each one's going to be different. But each one should have an optimal working capital level, and then we're going to try to drive each unit to that working capital level. And it's going to take some time. It's not going to be an overnight success. But we believe over time it should reduce working capital balances and strengthen our cash flow, which obviously is a key component of our success.

[Operator:]

The next question comes from Scott Group at Wolfe Trahan.

[Scott H. Group:]

Just as a follow-up on that last question on the Transit backlog. Should we expect that the Transit revenue to start improving right away in the second quarter with the improved backlog? And then just maybe a little bit of color. Within the 15% total revenue growth for the year, how are you thinking about that in terms of Freight versus Transit?

[Albert J. Neupaver:]

Okay. We don't expect the Transit to pick up until the second half. Most of that backlog will start flowing out in the third, with the fourth quarter being the strongest. When you look at the growth, we still think we're going to get growth in both segments. The Freight segment will be much -- we'll get more growth from the Freight segment than we will from Transit. But Transit will grow during 2012.

[Scott H. Group:]

Okay. That's helpful. In terms of PTC, I understand that the rail spending should accelerate in '13 and '14, assuming that we don't get a delay in PTC spend. Do you think that your PTC revenue will track, that the rails -- and that '13 is a higher year than what you're going to see in '12?

[Albert J. Neupaver:]

I think for that segment of our PTC revenues, you're exactly right. What we've seen so far is that there's been some ordering for the onboard equipment, but they've got a long way to go to outfit the 18,000 to 20,000 locomotives. I would think right now that probably no more than maybe 3,000 or 4,000 cars have been equipped or locomotives have been equipped.

[Scott H. Group:]

Okay. That's helpful. And are you hearing anything new or different out of D.C. with respect to possible delays in PTC? Are you -- is it your sense that if this thing gets addressed, it's whenever they do a longer term Highway Bill, and probably not for '13?

[Albert J. Neupaver:]

I think it's going to tied to the Highway Bill, if anything. I think there's still a lot of fact-finding going on right now because of the statements that were made, and they're trying to determine exactly where -- how much progress has been made and how far along we are. There's a lot of work being done to get this done by the deadline. No one has quit their effort to try to do that. And I think any kind of delay is going to be more of a political type of decision if this Transportation Bill ever gets passed.

[Scott H. Group:]

That makes sense. And then, just last thing. So you guys have had great success on the acquisition front, I think averaging, give or take, 5 per year for the past couple of years. What's your level of conviction that we'll see a couple come in at some point over the course of this year?

[Albert J. Neupaver:]

Yes, we stay still very focused on acquiring companies. We're definitely going to continue to be very particular about the companies we acquire, and we're going to be opportunistic and make sure it's a good strategic fit for us. And I'm sure you will see additional acquisitions into the future.

[Operator:]

The next question comes from Liam Burke at Janney Capital Markets.

[Liam D. Burke:]

Al, you mentioned China in both Transit and Freight. Obviously, there have been several revisions, I think, on the prospects of the Chinese economy. How is that translating into how you're seeing the business in 2012?

[Albert J. Neupaver:]

For China specifically?

[Liam D. Burke:]

Yes.

[Albert J. Neupaver:]

Yes, what we've seen in China is that -- well, let me give you a little bit of data that maybe this will help shed some light on it. But if you look at what they spent in railway infrastructure construction, railway area, in 2010. In 2011, they cut that back by 42%. When you go from '11 to '12, they're going to cut it back another 15%. But that number is still $63 billion equivalent, okay. The U.S., if we're lucky, out of the spend, it's around $10 billion for the U.S. transit market. So you could see that their investment is still huge and there's a good opportunity there. Now their investment is down in that area. They also have lowered the speed of the trains that they were running at, I think it was 300 kilometers per hour, they've lowered that down closer to the 200 kilometers per hour. The impact that's had on us is that we sell a lot of friction products in that market. So if they run the trains slow, we see less usage of the friction products. The expenditures in the Transit area as well as the Freight area continued to go at a pretty high pace, and we still see opportunities for growth in that market. As the corruption problem and the issues they have, have an impact and made them reset some of their goals and objectives, yes, as I tried to explain in the investment area. But it's still a massive market with a great opportunity, and we're in a position to hopefully continue to take advantage of that opportunity.

[Liam D. Burke:]

Great. And on one of your focuses, on continuous improvement initiatives have been to move the price needle upward where you can see that. In general, how has the pricing been in the market?

[Albert J. Neupaver:]

It's been tough. You have to really be selective and it's in areas where you really are offering a product and a benefit that the customer sees the value in that. But the market has been tough to get those price increases. That's why we need to be so disciplined on the cost side, especially when you look at the commodity inflation changes in some of the cases we've seen in the last year or 2 years.

[Operator:]

The next question comes from Tom Albrecht at BB&T.

[Thomas S. Albrecht:]

A couple of housekeeping items, and then I want to go back to the revenue discussion. First of all, Alvaro, did you give the shareholders' equity? And then Al, I heard you give a 2011 ridership, but I couldn't tell if there was Q1 ridership figure, and then your latest loco forecast for '12?

[Alvaro Garcia-Tunon:]

Okay. In terms of shareholders' equity, I'll take the easy one and leave the other ones for Al. It was about $1.24 billion. Obviously, that may be subject to some minor adjustments when we release the Q, but right now, that's the preliminary number.

[Albert J. Neupaver:]

Yes. We don't have any 2012 ridership numbers. The numbers I gave are all 2011. [indiscernible] And the locomotive build is 1,200 units this year compared to 1,100 in 2011.

[Thomas S. Albrecht:]

Okay, great. And then let me explore that 15% growth rate for revenues. What sort of an organic kind of growth rate are you thinking about in that number? Last year, your organic revenues grew a little over 22%. So just trying to understand how much of that. I think you gave a number, Alvaro, I wasn't sure if it was Freight or total, that 70% of the...

[Alvaro Garcia-Tunon:]

I was comparing it to last year, Tom. This is obviously...

[Albert J. Neupaver:]

Quarter-on-quarter, we had -- 28% of our growth was related to acquisitions, okay. That's first quarter '11 to first quarter '12. We only had -- if you look at our acquisitions that we had, last year, there was one in the first quarter that would not be included at all in the 15% basically. We had 2 smaller ones that were maybe $15 million apiece. The only one that would contribute much to the 15% growth is the Bearward, which was maybe $70 million, and we closed that in the fourth quarter. So some of that is in that 15% growth. Obviously, there's no new acquisitions in that number. So really, the only -- I would think that we're going to be seeing mostly internal growth, will be very similar as we look quarter-to-quarter as we go forward.

[Alvaro Garcia-Tunon:]

Let me put a slightly different slant on it, Tom. If you compare the first quarter of '12 to Q4 of '11, we only had about $11 million of incremental revenues from acquisitions. So what happens if you make one midway through the prior year and as you go through the succeeding year, the incremental difference, obviously, decreases. So I think you're going to see that most from that 15% is organic. So again, just from the Q4 last year to Q1 this year, we only had about $11 million of acquisitions -- I'm sorry revenue from acquisitions.

[Thomas S. Albrecht:]

Right. That's helpful. And then over the years, it's always been a little bit tricky to figure out Transit in the June quarter. I know you spoke about the second half resuming growth, particularly by Q4. But last year's Transit revenues did rise in the June quarter from the March quarter. I can't tell how much of that was maybe weather-impacted systems that carried on, how much of that was ridership, et cetera.

[Albert J. Neupaver:]

I think one thing that you've got to be careful in Transit, we have a lot of big contracts and we get some locomotive orders that will come through in a particular quarter. And that's some of the things that will drive some of the revenue that we'll see in the third and fourth quarters.

[Alvaro Garcia-Tunon:]

Yes, and that's what I alluded to in my comments, Thomas, as well, because we have a certain capacity to build locomotives. Sometimes that can be Freight, as it was in this quarter when we delivered freight locomotives to Australia. And in other times, that can be Transit when we deliver locomotives for transit agencies. So you can see a switch back and forth, and it's not really that the business is increasing or decreasing. It's just that you're having a slight switch in some of these from Transit to Freight and vice versa.

[Albert J. Neupaver:]

If you look at our Transit revenue over the last couple of years, it really has been pretty stable, within a 10% range or so.

[Thomas S. Albrecht:]

So in your comment about the third quarter has always been your seasonally weakest, that applies, from your comments, to both Freight and Transit. It's correct?

[Alvaro Garcia-Tunon:]

Yes, it's correct.

[Operator:]

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

[Gregory W. Halter:]

I wonder if you could provide where you think the amortization expense will go for the next couple of quarters. It's been sometimes $4 million, sometimes $3 million. I just wanted to get a handle on why...

[Alvaro Garcia-Tunon:]

Basically, what happens with amortization is as you have acquisitions, you basically have to write up intangibles in connection with those acquisitions. So it's hard to give a number without being able to forecast acquisitions, obviously. But given where we are right now, you should see -- it should be relatively stable to a gradual decrease as some of these assets are fully amortized and taken off the books. But for modeling purposes, I think you can assume the current number with maybe a slight decrease, 5% to 10% maybe, or something like that, not a whole lot. And then you might have to recalculate when we do the next acquisition, assuming it's a substantial size.

[Gregory W. Halter:]

Okay, great. And I wonder if you could provide some comments on the non-rail products and how those are performing.

[Albert J. Neupaver:]

Yes, non-rail makes up about 15% of our revenues. They're performing quite well. There's been a lot of activity and growth. As you know, the Bearward acquisition was part of that non-rail group. They produce heat exchangers that are sold in the power generation area and that has been -- we've seen some nice growth in that particular area. We've seen growth in some of our friction applications outside of rail as well, so it is contributing to our growth and success.

[Gregory W. Halter:]

Okay. And any comments that you may have on the ECP initiative?

[Albert J. Neupaver:]

ECP continues to be making tremendous progress in Australia and is under test in the Brazilian market, as well. I think on the U.S., with all the investments that's being required by PTC in other areas, there has been -- although they still run the pilot trains, there's not been a lot of enthusiasm to go beyond that.

[Gregory W. Halter:]

Okay. And one last one. On the PTC side, there is some sort of residual, either software upgrades or service, et cetera, that would be related to that which would carry on for years, I would presume, correct?

[Albert J. Neupaver:]

Yes, any time you have an installed base of whether it's electromechanical device, electronic device or mechanical device, there's going to be a certain amount of follow-through in service and aftermarket opportunity. And a lot of electronic aftermarket, if you use a thumb rule [ph], it usually is a higher percentage of the installed base. So this particular installed base that we'll have at the end of this program should be able to generate revenue for years to come.

[Gregory W. Halter:]

And I presume at nice margins, as well.

[Albert J. Neupaver:]

I would sure hope so.

[Operator:]

The next question comes from Tom Albrecht at BB&T.

[Thomas S. Albrecht:]

I just had a follow-up there. I think one of the questions that people are thinking about, even though it hasn't been asked, is, so you raised your revenue guidance from 12% to 15% but didn't have an increase in the earnings. I know you're trying to be conservative, but was there anything more to raising your revenues but not raising your earnings beyond being conservative?

[Albert J. Neupaver:]

When we put out the pre-announcement, we had not received all the forecasts from various divisions. And once we got everything in and took a strong look at it, with the given earnings increase that we had a better view of, we thought it was prudent to increase the revenues proportionally. And I think that has a lot to do with what you would expect in the future quarters relative to margin and growth. And there is some conservatism that's built into those numbers.

[Operator:]

Our next question comes from Thomas Wilkins at Joseph Jekyll Advisers.

[Thomas Wilkins:]

This is Thomas Wilkins of Joseph Jekyll Advisers, and I'd like to ask, what is the correlation between what's happening in the gasoline prices and the company's business?

[Albert J. Neupaver:]

Yes, the one correlation is that we are in the transit markets. And when you look at mass transit and ridership, there is a direct correlation between the price of gasoline and the number of people that choose to use mass transit versus utilizing their own vehicle to get to their place of work or even to any kind of trip they're making. So that's the correlation there. The other correlation to the price of gas would be the price of oil, and locomotives are big users of oil, diesel fuel, but trucks are a lot less efficient than a railroad. So you also see some of the freight being transferred from trucks because of the high price of diesel fuel to the railroad. So there is a correlation between the 2, sir. Any other questions, Thomas? Okay.

[Operator:]

This concludes our question-and-answer session. I would like to turn the call back over to Al for any closing remarks.

[Albert J. Neupaver:]

Okay. Well, we thank you very much for the participation and look forward to talking to you in a few months.

[Alvaro Garcia-Tunon:]

Thanks, everyone.

[Albert J. Neupaver:]

Thanks.

[Operator:]

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