Westinghouse Air Brake Technologies Corporation
Q4 2017 Earnings Call Transcript

Published: 20 Feb 2018

[Operator:]

Good morning, and welcome to the Wabtech Fourth Quarter 2017 Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tim Wesley, Vice President of Investor Relations. Please go ahead.

[Tim Wesley:]

Thank you, Kate. Good morning everybody. Welcome to our 2017 fourth quarter earnings call. Let me introduce everybody else who is with me in the room; Ray Betler, President and CEO; Pat Dugan, CFO; and John Mastalerz our Corporate Controller. As usual we will make our prepared remarks, and then we'll be happy to take your questions. Before starting the call, we will make some forward-looking statements, so we ask that you please review today’s press release for the appropriate disclaimers. Now, before I hand it off to Ray, I’ll say one more bit of housekeeping. We have specified for our Investor Day going to be May 7, in New York in Midtown, he will provide details shortly, but in the meantime please consider and please safe the date notice and again we’ll let you know of our detail shortly. With that, Ray go ahead.

[Ray Betler:]

Okay. Thanks Tim. Good morning everyone, it’s good to talk to you today. For Wabtec 2017 was a year of transition and positioning the company for the future. We did not meet our expectations for financial operational performance, but we accomplished quite a bit during the year, and we believe that our company today is stronger and better position than it was a year ago. Our 2017 accomplishment includes the following. We made excellent progress on the Faiveley integration including changes in both people and processes. We improved our cash flow generation each quarter during the year, we continue to invest in our worldwide growth strategies. We expect to build on those accomplishment in 2018 based on our record in growing backlog, the improvements we’re seeing in our freight aftermarket. Our Wabtec excellence program which gives us the feel to generate cash an increase margins overtime. I can tell you that as we are all committed to once again demonstrate our ability to deliver profitability consistent growth this year and in years ahead and we’ll explain that to you how we plan to accomplish that throughout this call. So, before I continue, I want to turn it over to Pat and allowing to review the numbers for 2017.

[Pat Dugan:]

Thanks, Ray. Sales for the fourth quarter were $1.08 billion and when you look at our segments the transit segment sales increased about 70%, this increase was due to acquisitions which contributed about $192 million of sales, we had organic growth of about $88 million and a favourable FX impact of about $13 million. This is the second quarterly grow we’ve seen organic sales growth in transit which demonstrates that our record backlog is starting to kick in. Our freights segment sales increased 7%, the first year-on-year increase since the fourth quarter of 2015. The increase is due to sales and acquisitions $27 million, a favourable FX that added about $4 million and that was offset by slightly lower organic sales of about $9 million. Sales of $364 million were the highest level for freight in six quarters and the backlog remains stable. Free aftermarket sales showed year-on-year growth for the second quarter in a row, all leads for positive indicators. Looking at our consolidating operating income, it was about $91 million. As mentioned in our press release this morning and in our preannouncement a few weeks ago, this included contract adjustments of $24 million and restructuring and integration expenses of about $18 million. The restructuring and integration expenses were for ongoing cost cutting actions and were included in both cost to sales and SG&A. The contract adjustments reflect higher than expected cost on certain existing projects and were included in the cost-of-sales line. With these contract adjustments, we've completed the review of our project portfolio and believe our U.S. and this reflects the reality of the current status for these projects. If you exclude the contract adjustments, and restructuring expenses, operating income was $133 million or about 12.4% of sales. That was lower than our target for the quarter and is due mainly to the negative product mix and some higher project costs in the UK. Going forward, our 2018 target is about 13.5% EBIT margin with an improvement expected during the year. SG&A was about $144 million including the restructuring and integration expenses, but going forward, we expect it to be about $135 million to $145 per quarter. Engineering expense and amortization cost were up mainly due to the favourable acquisition. We expect similar quarterly run-rates in 2018. Looking at our operating income per segment. In transit, if you exclude the expenses of $35 million for the contract adjustments, restructuring and integration, our transit adjusted operating income increased 191%, with an adjusted operating margin of about 9.5%. This was lower than expected due to those higher project costs in the UK I mentioned earlier. Freight, if you exclude the expenses of $6 million for the contract adjustments and restructuring and integration. Our freight adjusted operating income increased 11% with an adjusted operating margin of 20.5. In 2018, we are targeting operating margin improvements for both these segments compared to the adjusted margins in the fourth quarter. These improvements will come through better project performance, better mix as we complete our lower margin contracts and the benefits of our restructuring programs and our cost reduction programs. Interest expense for the quarter was about $18 million, and going forward, we expect interest expense to be roughly the same, although we are focused on generating cash to reduce debt and obviously reduce our interest expense. Our effective tax rate for the quarter was about 33.5%, which was affected by the new U.S. tax reform bill that was passed in December of '17. In the quarter, we've recorded following impacts from the bill

[Ray Betler:]

Okay Pat, thank you. Before I go into guidance for 2018, and I want to make couple of comments about our long-term vision. Our long-term vision for this company hasn't changed. We believe that we have a strong growth opportunity over next 5 years to continue to accomplish what we've done in the past and path as we believe that we very much have a roadmap to get there in our 2018 plan is the starting point for that. So, with that, I'd like to go into the guidance. For the year, we expect our revenues to be about $4.1 billion, with adjusted earnings per diluted share of about $3.80, excluding restructuring and integration charges. Compared to 2017, this would represent revenue growth of about 6% and adjusted EPS growth of about 11%. Our adjusted first quarter EPS in 2018 is expected to be similar to our adjusted EPS of fourth quarter 2017. We expect to generate cash from operations in excess of net income. Our key assumptions include the following

[Operator:]

We will now begin the question-and-answer-session. [Operator Instructions]. Our first question comes from Allison Poliniak of Wells Fargo. Please go ahead.

[Allison Poliniak:]

Ray, you've talked about a number of obviously contract wins on transit. I believe the integration coming in a bit ahead. Can you maybe talk about any of those projects that then you want to need at a high level? Was any of that due to the integration of Faiveley with Wabtec and are you noticing an increasing product content in some of these contract wins?

[Ray Betler:]

Yeah so Allison, thanks for the question. We definitely are picking up contracts that leverage the combined capabilities of the two companies, which matter of fact, I would say every project we're bidding on transit has some complement of ex-Wabtec and ex- Faiveley equipment. And so, we're increasing our share, we're increasing our overall revenue content our volume through those and we certainly increased our geographical reach. So, a good example of that is Australia, we won $500 million worth of business over there, on the transit side. New York we're in the hunt for the business up in New York I mentioned that, it's a huge contract up in New York for 1600 vehicles for the first, it's about $4 billion investment by the NTA and the first portion of that is 535 cars. Some of the equipment that we historically would have bit obviously only equipment out of Plattsburgh outdoor and freight systems business. But now, we have a combined portfolio which has enhanced our product offerings. So, we've been able to go off road other components like supplies and things like that. So, there is a lot of leverage we're getting out of that combined portfolio.

[Allison Poliniak:]

That's great. And then I just want to touch on the margin goal that you have last year. I know you talked about negative mix, but at the end of the Q3 call, you were still pretty confident about a 15% exit rate. What changed there, and I guess what part of that is dragging into 2018 that you weren't necessarily anticipating?

[Ray Betler:]

Okay. We were into Q4 thinking that we were on pretty solid ground, we were still going through our project portfolio review process where we were vetting all our projects and a total portfolio from the Wabtec from the Faiveley side and we found projects at a review process that had issues that in one case related to project prolongation i.e. delays. So, lack of performance, timely performance in terms of deliveries and that equated into a review of inventories associated with that project which resulted in us having to take charges associated with reconfiguring, replacing wants to obsolete inventories. So, you had extra engineering cost, you had extra project wins from products, time is money. And the end result is we finished that portfolio thankfully, it was a very difficult process through the entire year last year. We finish it, we believe we have all of our project rebase line on the transit side. Those adjustments where we’ve had to reduce our project margin are going to flow out into 2018. The project that I just mentioned will be finished third quarter 2018 early fourth quarter. So, they’re going to bleed out but we have to absorb them as we’ve revised on in that project portfolio to date. So that was a process that’s included both the [indiscernible] and Wabtec faults [ph] we’ve come through an agreement on new project processes, we’re going to use from forward on how we’re going to uniformly state our projects and how we’re going to manage them.

[Operator:]

The next question is from Jason Rodgers of Great Lakes Review. Please go ahead.

[Jason Rodgers:]

Yes. I wonder if you could talk a little bit more about the puts and takes for the first quarter given your guidance of about flat EPS. It sounds like the freight aftermarket is picking up and you’re getting Faiveley synergies. Just wondering if you could provide more detail there. Thanks.

[Ray Betler:]

Yeah. So, we our freight businesses that’s picking up, we have some really nice aftermarket opportunities that we’re seeing, we had a very good year or month in January and February is continuing as I mentioned and I think the year is going to be good for the aftermarket business. Part of that is for things associated with PTC area we are picking up frankly more contracts than we anticipated, I know but it’s asking why we’re not falling off the cliff with PTC but the reality is we’re still booking business in PTC. We have the aftermarket in the phase, we’re getting business traditional overhaul business now in our service centre with things like compressor valve repair same side get, that get inquiries for low quality locomotive overhauls. We booked long-term aftermarket service agreement for components like hair dryers with one of our major customers and in the card cushioning devices. So, there is things that have rolled in Jason, that some anticipated but, but some our above even our original forecast and plan. So, I think with the bottom is freight aftermarket through both our traditional service business as well as PTC is going to be improved. And we have the record backlog in transit we have to focus on cost. And that's going to help overall with our mix. Pat?

[Pat Dugan:]

I was just going to have that I think to just be a little more kind of focused on numbers is that the flat EPS to the fourth quarter, the first quarter we are definitely impacted by some of the spending trends in the transit area. Clearly, the fourth quarter tends to be strongest in terms of spares and aftermarket parts and the transit authorities are looking at budgets. And we see now for two years in a row with the combined Faiveley Wabtec organization that the fourth quarter can be the strongest business in the transit world. So, you have a little bit of that seasonality or spending trend if you want to call it, that definitely will impact our first quarter and that's why we're showing a kind of a first quarter consistent with the fourth.

[Jason Rodgers:]

Alright, and as a follow up. Wondering what you're seeing on the raw material cost side of things, have you've been implementing any price increases as an offset?

[Ray Betler:]

So, we have surcharge agreements in place for the commodity increases. And where we don't basically where we try to push those through price increases. But that's something we obviously pay very close attention to on a daily basis. And for the most part we're protected with our surcharge agreements.

[Operator:]

The next question is from Justin Long of Stephens. Please go ahead.

[Justin Long:]

Hi. First question I wanted to ask was about the operating margin guidance for 13.5% this year. I wanted to see if we could get some more colour on the assumptions within that number. Would you be able to share what you're assuming for the progression of freight margins and transit margins within that consolidated guidance?

[Pat Dugan:]

No. We're not really prepared to start sort of forecasting any kind of margins at the segment level. That we just started driving more information in this earnings call. But as you know, I expect at both sets, both segments are going to improve kind of sequentially with as we've kind of indicated for the whole business.

[Justin Long:]

Okay that's helpful. Thanks Pat. And secondly on PTC, so I know for the fourth quarter, you said that signalling was $130 million of revenue. But I was wondering if you could provide PTC component within that number. And also, if you could share how you're expecting that PTC component to trend within the guidance?

[Ray Betler:]

So, in 2017, total trains and signalling was about 3.2 of that about 117 was signalling. So about 204 was about train control. And the guidance for 2018 is about 5% growth in the total. Most of that growth we expect to come in the train control PTC portion of that.

[Justin Long:]

Okay. That’s helpful. And Ray, I think you mentioned it earlier but I know you guys have been busy working on new products that could be integrated into this PTC system and there is some opportunity there. Could you just update us on where you stand in that process? And what’s a reasonable timeframe for thinking about when some of these new products or enhancement could actually start contributing to revenue?

[Ray Betler:]

So, we have product roadmaps that includes things as straight forward as upgrading the CPU cards and PTC computer, PTC onboard controller and enhancing our overall operational efficiencies through new functional, functionality in that controller utilizing the data analytics and monitoring equipment that we can continue to quietly grow and acquire, we have new technology business last year, Track IQ which is and acoustic monitoring the device that is kind of our mega sensor. it underlays in the infrastructure and goes for about a $1 million to $2 million. We are delivering equipment to the Australian customers through track IQ we fund the new technology to enhance that it’s a visual data analytics health monitoring system that we can integrate. So, those are the kinds of things that we’re dealing. So, we’re investing in R&D, product development as well as acquisitions. And we’re actually generating incremental revenue now. Long-term, our largest R&D project is in the autonomous operation area that product roadmap is really about the five years to 10-year time period. But the five years would be for the development and 10 years would be for adaptation. So, it’s progressing along pretty well, we’re investing significantly in its technology that has not been inconceivable application as you know from the mass transit side and all the discussions that are going on trucking. I think there is more receptivity actually today by class ones, the government is putting a lot of pressure as you know from the recent congressional hearings on agencies to implement short-term PTC requirements to meet to the mandate, we have incremental to support there. So, overall, we’re putting investments in technology and resources and we’re dividing incremental revenues currently.

[Operator:]

The next question is from Sam Eisner of Goldman Sachs. Please go ahead.

[Sam Eisner:]

Just going back to your guidance comments, I want to better understand. When you’re talking topline you said both segments were going to grow. Is that a total revenue comment? Is that organic comment. Maybe you could parse out the difference between those two segments and those two components of it?

[Ray Betler:]

Yeah. It’s a total revenue comment and they are both anticipated growth we have a record backlog in the transit side and the freight business is picking up basically in all areas. We anticipate the freight car will might be down this year prior to this year, this time a year ago, but it's not, it's going to be flat or up on the OEM side, which is definitely growing, we are picking the business up from some of the aftermarket and PTC on the freight side is going to grow as Tim just mentioned.

[Sam Eisner:]

I see. So maybe jumping into the components of that, you guys historically used to give locomotive and railcar deliveries. I might have missed it before, I am not sure you guys gave that anyway to kind a give us your outlook for the industry and what you think those delivery numbers might be?

[Pat Dugan:]

So, in North America NAFTA for freight cars, last year was around, 2017 was around $45,000. We think it will be flat to slightly up in 2018. The locomotive number I think ended up for 2017 around 400 to 500 again for NAFTA. That's going to be lower probably in the 200 to 300 range.

[Ray Betler:]

Yeah and that's really the only area that's going to reduce this year in the market is the North America is going to be the locomotive. So, everything else is trending on.

[Sam Eisner:]

Got it that's helpful there. And again, just going back to the transit. I mean pretty strong organic performance there. Is there timing of deliveries that are impacting that? I mean obviously now your business is becoming more of a project-based business rather than necessarily a component or aftermarket base business. So, I'm just curious how should we think about timing of various deliveries going forward. Is there a particular big contract that was delivered this quarter and kind of what's really the outlook that we should be thinking about?

[Ray Betler:]

So, we have couple hundred projects in our project portfolio on the transit side. And those get the delivery. The project is normally 3 to 5 years to get delivered over about 2 to 3-year period because of first year is basically engineering, design and development work and the last year is commissioning and warranty. So those are all programmed out and the backlog and yeah, we have very specific project schedules and timelines associated with those. And there are all different phases of completion as we speak. And we think that's going to continue to grow all this so as we continue to book orders our backlog will continue to grow and we'll be able to program those out pretty definitively over future years.

[Sam Eisner:]

And if I can just sneak one more in. The first quarter guidance for EPS. What is the tax rate that you guys are assuming if you did say that is actually that's going to jump around a little bit throughout the course of the year, thanks?

[Ray Betler:]

So, we have 23.5% is the tax rate we assume for each quarter. Which is our full year estimate.

[Operator:]

The next question is from Scott Group of Wolfe Research. Please go ahead.

[Scott Group:]

Hey thanks good morning guys. So, I wanted to just talk on the revenue guidance. So, fourth quarter I think organic sales up like 13%. Looks like you're guiding on a 4 to 5 same store revenue growth for '18. So maybe give us some of the puts and takes on what's driving the deceleration in '18 relative to what you just saw in fourth quarter?

[Pat Dugan:]

Yeah. So, we didn't -- so I'm going to just kind a coming describe it kind of the anecdotally -- bridge from the two quarters, but the two biggest things that really impacts us is as you’re going to have the transit service business which we found is that Q4 tends to be the strongest where we’re delivering spare parts and then other aftermarket types of things to our customer especially in Europe and overseas. And that is definitely our strongest area. And represents kind of a normal process, we used to see it in the Wabtec standalone business it’s just wasn’t material and now we see that definitely that is creates a sales job in the fourth quarter versus the first quarter. We’re also a little bit impact of the electronics areas where we see good sales in the fourth quarter and that tends to slow a little bit in the first. So those are the two big items that really change the sales, timing and mix quarter-to-quarter.

[Scott Group:]

Okay. Helpful. Pat, I think last quarter you’ve guided us to $115 million to $125 million a quarter of SG&A and now it’s up to on a $135 million to $140 million. What’s the delta there?

[Pat Dugan:]

Yeah. That sounds -- I have to go back and check that we talked about, I mean clearly, we’re running a little bit higher on the SG&A, when going into 2018. We’ve done is as we are definitely incurring some extra cost in investments in some of our infrastructure for the functional areas of our business as we combine the Wabtec and Faiveley area, we’re still making investments in systems in business processes to really improve our performance. We have a little bit of related to sort of compensation and incentive compensation last year it was kind of low for us, but we’re kind of getting back to normal in the whole thing. And then lastly, we did the acquisitions in the fourth quarter. And when you add those acquisitions that increases the SG&A on a run-rate.

[Scott Group:]

Okay. Make sense. Just last couple of quick ones. You mentioned a couple of times really good January orders and freight aftermarket. Can you just put a number around that? How much they were up year-over-year or something like that?

[Pat Dugan:]

The whole orders in January?

[Scott Group:]

Well, you made a couple of comment, a couple of references to how good January freight aftermarkets were?

[Ray Betler:]

Maybe rather than give you a next full number, Scott they were up by about 10% on what we have in our plan for January. So, in that plan for new orders, we were about 10% above that.

[Scott Group:]

Okay. And then maybe just my final one, I think you mentioned that you have a something you’re working that’s going to have ability to trains to be sort of autonomous within five years and then take a period of time to get implemented. Can you just add some more colour in terms of what you’re working on?

[Ray Betler:]

Yeah. We’re working on basically a failsafe technology, and failsafe office systems that would allow the trains to communicate, train and train to offset which will eliminate the requirement for where is that equipment in major savings as well as allow you to take people out [indiscernible].

[Operator:]

The next question is from Matt Elkott of Cowen. Please go ahead.

[Matt Elkott:]

Good morning. Thank you for taking my question. I want to ask a broader question about the margin guidance for 2018. So, you guys are calling for roughly 6% revenue growth and meaningful part of that should come from the freight aftermarket business which as you noted earlier is a high margin business. And I understand there is some transitory project cost that are continuing in 2018, but that there should be subsiding towards the back half of the year. So, the margin guidance given where the growth the top line growth is coming from seems to me just a bit light at 40 basis points. How much of that is related to the SG&A cost that you just mentioned in the previous question?

[Ray Betler:]

Yes, I think the impact -- I mean SG&A that's a little bit of it. but you also you have the acquisition contribution margins coming through related to that the incremental SG&A. So, it's not entirely all because of the SG&A going up. And what I think that the more R&D impacts more is these projects that we've taken adjustments on in Q3 to Q4 really are the catch-up kind of cumulative impact on margins. But then you still have a project with a run out rate that's not kind of typical and not in our average for transit and freight projects. And so, we to deal with that a little bit in the margin and in the first half of the year. The average is definitely 13.5, we expect to end higher, we're not ready to kind of give EBIT margin by quarter. but that's what we have for the year.

[Pat Dugan:]

And then one of the -- maybe we have shown to you. It was, this is the first year we have a volumes up fully integrated budget. Last year we closed for sub-December, we would just put businesses together. We kind of lined up two budgets, that I think the budget that we put together is one that, bought into its bottoms up, it's management team's budget and it's a budget we believe we can deliver. So, in a slightly different way I think people feel better about the budget this time than what they did this time last year.

[Matt Elkott:]

Got it, that's very helpful. I think that the freight business the $9 million organic sale decreased in the fourth quarter. When you were thinking about your 2018 guidance, where does this number, this decline to the moderate, does it stay stable or could there be organic growth in 2018?

[Pat Dugan:]

At this stage definitely, organic growth in '18. We have for a couple of reasons. Number one, freight car sales are going to go up, we have international business opportunities, we have the benefit of full year revenues associated with acquisition companies that were in the freight area. A good example of adding ATP where we buy company that does gates and hatches for vehicles. So, we’re not and really get to full year benefit of ATP we will get at the international growth associated with ATP. And then on top of all that is the PTC area which I’ve mentioned before. I know people are frustrated about PTC, because they expect it’s to be gone away and don’t understand why it hasn’t, but it’s actually going to go up for us in 2018.

[Matt Elkott:]

I think there is one railroad that’s already announced that they were not going to be 100% compliant by the current date, we could see that from other railroads. But does that have any impact on the cadence of your PTC revenues if we see more railroads say we need some more time?

[Pat Dugan:]

Well, the only point maybe answers your question by historical. Look, when everything was supposed to be done in 2015 had a benefit the work would be so very increasing our revenue quantitative. So, our goal is to support our customers they have great capable resources and, it’s been also huge programs they’ve committed flat to up CapEx, they’ve injected a lot of CapEx up to now, we’ve tried to work with them side-by-side and we’re looking for every opportunity to support them as we can through what’s going to end up a very difficult call year in the lot of scrutiny and always site always because the unfortunate accident that we recently occurred it’s on transit and see it’s excellent.

[Matt Elkott:]

Got it. Just a one quick follow up on the aftermarket freight. You said that you have a second sequential year-over-year growth. Is there any way you can tell us by magnitude was this quarter growth is higher or lower than last quarter’s growth?

[Pat Dugan:]

I think it was pretty similar. Percentage wise it’s pretty similar.

[Matt Elkott:]

Okay. And just one final question on a different subject where you mentioned the MCA orders in New York. There is also a plan or proposal to build a street car between Brooklyn and Queens, the street car projects going planned or ongoing around the country. Are you guys -- do you have content in these street cars. And if so can you give us an idea how it compares to your content in the subway cars, I would imagine floor?

[Ray Betler:]

Well, it’s still in the volume base only because the street car is expensive than a metro car. But, it bounces out a little bit because your lower volumes and lower volumes and so resulting higher price. So, but our content is about the same per car on a percentage of total wise. We have similar technologies, we can offer, we have breaking systems stapler for, so we have a quite a bit content on our systems around the country. And again, we’re in a 60% to 70% market share position for that particularly market sector also.

[Operator:]

The next question is from Saree Boroditsky of Deutsche Bank. Please go ahead.

[Saree Boroditsky:]

Thank you. So as the transit process lower margins will add in 2018. Do you expect margins to step up more significantly in 2019? I know it's early, but just some general comments will be helpful as it [indiscernible] earnings power of that business.

[Ray Betler:]

Yeah, so we expect our margins to improve year-on-year in every one of our businesses, that's a requirement that we give to our group presidents and operating team. And they achieved that through really multiple ways, one is through growth, one is through cost reductions we do a mandate for 2% improvement year-on-year on the cost side. Part of that is offsetting inflation material cost it was brought up before. But some of that should drop to the bottom line. And then if you look at our five-year strategic plan which I know you can't, but we can, it shows growth year-on-year in every one of our segments.

[Saree Boroditsky:]

I guess rephrasing the question a little bit. How much of a burden do you think some of these lower margin projects are in 2018 on a transit side that goes away if those can roll off?

[Ray Betler:]

Yeah, Saree. It should drive on a business so there is no question about it. There are projects that are breakeven or large projects. And we always seek at that, we don't want to get that level and we don't want to bid at that level. So, once we go out of our total portfolio, project portfolio where the margins still continue to go up.

[Saree Boroditsky:]

Okay that's helpful. And then just a follow up. I appreciate the colour on the locomotive deliveries in 2018. I was wondering if you thought that will be the trough in North America or will it continue to be a challenging market in 2019.

[Ray Betler:]

Yeah, I do think it's going to be the trough. And I guess one of the things we should mention is going into a year where we put our strap plan together midyear last year. we actually thought it was going to be worse than even that sector worse than what it was turning up to, we get -- from each of our customers and midyear last year GE was of the opinion that they may not end up with any new OEM locomotives. And here they are, they come out at a box in January with 200 new locomotives. So, we saw that, and we're on those loco. And so, we saw that as a pretty nice surprise the timing of that order.

[Operator:]

Your next question is from Matt Brooklier of Buckingham Research. Please go ahead.

[Matt Brooklier:]

Yeah thanks good morning. So, I had another PTC question, what for '18, what are you assuming in terms of contribution from PTC aftermarket and services. I think you've had mentioned the number but I just wanted to get a little bit more colour on what that business is potentially yielding for you in '18?

[Ray Betler:]

Yeah. So, Matt I mentioned the $50 million as full year run rate on MSAs that we have already booked. So, there is possibility where throughout the year, they won’t become class 1 any longer, because we have those in our backlog, but we could book more in the commuter side. So, they would be smaller than the class 1, but they are still significant in terms of margins generation. So, $50 million minimum, I would say.

[Matt Brooklier:]

Okay. That’s good to hear, it sounds like that’s the baseline. And then I guess is freight and the agencies as they go live with their systems that would contribute to that number potentially I guess moving upwards as....

[Ray Betler:]

Right.

[Matt Brooklier:]

Okay. And then is the mindset still you still think you can potentially garner like 5% to 10% of the total PTC install base that could result in kind of the baseline of aftermarket revenue on the go forward basis, is that 5% to 10% number is still a good number to use?

[Ray Betler:]

Yes. We believe that we’ll be able to meet or exceed that.

[Matt Brooklier:]

Okay. That’s helpful. And then you mentioned earlier on the call Faiveley, you’re ahead of the synergy expectations. Maybe if you can provide a little bit colour in terms of what resulted in you guys been able to I guess garner incremental synergies ahead of the original $50 million this year. And I guess what’s the potential for there to be -- the potential for upside synergies with Faiveley as we work through the rest of the integration?

[Ray Betler:]

So, I think when we put our plan together we programmed it on a three-year period, we try to be very impressive about how we managed that, we’ve still have [Indiscernible] pushing constantly on a fixed salary cost improvements and integration process. So, you guys probably anticipated, it was conservative the plan we put forward, but it was, until we got into it we really didn’t know how quickly we’d be able to accelerate. We got some quite wins, we got wins where we close service shop in three port the Louisiana very early on, we consolidated to a Salt Lake City. We have an opportunity move some product lines into service shop. So, we’re moving some -- there is some that have a lot of mass that we can do faster and an example of that is down in Greenville, where Faiveley had the largest operation and we have large transit freight business. We’re consolidating those, we’ve mentioned that before and integrating those businesses. So, we’re pushing as fast as we can on all those projects like that, there is just a lot of complexity and mass that will show those will take longer. That one we anticipate will get into this year all the planning done and the initial work is behind us, but the actual implementation come this year. So, once we could get done faster, we pushed on in the other ones, I’d say is pretty much on track, we are looking for more too into your question, we’re looking for more over the next year two years for other opportunities for further consolidation. Now we focused on cost improvement, we want to drive our cost structure improvements family to get the benefit that we would have anticipated because of some of the project performance issues that offset the benefit at the end of the day last year.

[Operator:]

The next question is from Kate Pettem of Rathbone. Please go ahead.

[Kate Pettem:]

Hello, I've got three quick cash flow questions and then couple of extra questions please. How much did you spend in cash terms on restructuring and integration in 2017 and what would you expect for 2018? And then is working capital where you wanted to be or can improvements be made? And then the final one on CapEx. You used to spend about $50 million a year before Faiveley, now you're spending 120 in this coming year. Is that a permanent increase and what do you spending it on?

[Ray Betler:]

Okay. So, starting with CapEx number. I would say that the Wabtec is historically is kind of understanding the CapEx area we would always have a conservative budget, but we tend to in the process of making sure that the projects were providing the payback that we expect we would come in under our budget. I expect that we will have a little bit of that in the 120 but I think it's a good conservative number. There are clearly some cost expenditures rather in that 120 that is related to the ongoing synergy plan and also some of the CapEx plans that came over and executing there. There is strategic plan that is continuing -- where we invest in some plants in Eastern Europe and also in India. So, it's kind a onetime I would expect that number to come down a little bit.

[Kate Pettem:]

Okay.

[Ray Betler:]

Working capital. We need to improve working capital. It's been for us -- it's been throughout the year a slow improvement. I went back and looked, our accounts receivable DSOs did improve in the second half of the year, our inventory DSIs improved in the second half of the year. And other assets here related to contract investments were offset by deposits. But we need to do better and so we didn't do so well at the first half of the year that we will be able to make up the difference. We expect to get back as our goal is always been is that our cash from operations will exceed our net income and that’s what everybody gets measured on around here and we expect to achieve.

[Kate Pettem:]

Is that in 2018?

[Ray Betler:]

Absolutely.

[Kate Pettem:]

Okay, thank you. And then on cash spent on restructuring and integration?

[Ray Betler:]

Okay. Yeah, we're kind a pulling that together. So, we definitely had -- our exit rate now is about $60 million we're spent on restructuring. Some of that on a cash flow basis where cost have been recognized or accrued at the end of '16 and paid in '17. And then you throw in the cost that we would have added back in the 2017 results. So that's about $60 million in total when you have added those two things together.

[Kate Pettem:]

Okay. And then in 2018?

[Ray Betler:]

2018 I think we conservatively have an estimate that we think, and this is not in our guidance, we exclude restructuring in our guidance.

[Kate Pettem:]

This is the cash number on interested in?

[Ray Betler:]

Yeah. So, we would spend about $10 million.

[Kate Pettem:]

Okay. So, the bulk of that spend is now done, is that’s the right way to think about it is?

[Ray Betler:]

I think so that we’re constantly going to be looking at opportunities to generate synergies. So, that’s kind of the...

[Kate Pettem:]

Yeah. Of course. Yeah. Okay. Now, the two other questions, the first one is I got a little bit confused, so in the tax of your initial tax that you’re talk about start-up cost and the project in the UK. And then in India so about what went wrong on guidance in Q4, you talked about some project cost. Are they, is that the same project? Or those are two different projects?

[Ray Betler:]

Yes.

[Kate Pettem:]

Okay. And these are what projects exactly?

[Ray Betler:]

So, Kate, we don’t really talk about specific project and customers, but it’s a large project.

[Kate Pettem:]

Large project, that is in the UK and is it with one of the train operators or is that with TFL?

[Ray Betler:]

No, it’s not with TFL.

[Kate Pettem:]

Okay. All right. And then the last question is, given how bad the industry bodies have been at predicting growth in freight and locomotives, they didn’t see the downturn coming, they were too conservative this year. Is that something that you use religiously when you give us our guidance or make your own budgets. Or are you now sort of questioning that and tweaking things on your own?

[Tim Wesley:]

Yes. Kate this is Tim. That certainly is one thing we look at, but it’s obviously based on a lot of discussions that we have, detail discussions that fall the customers, some at looking at industry information, industry data that’s out there available that probably everybody. And then again detail discussions with customer and we roll that out into our assumptions for the year.

[Kate Pettem:]

Okay. I guess my question just kind of asking to is particularly since the downturn in freight was so sudden and caught us at me over in the UK off guard. How have you changed your predicting? And how -- what information do you look at that you didn’t used to look at before to give you confidence when you make your plans? And this is my last question.

[Ray Betler:]

Yeah. So, Kate, we look at every piece of information we can possibly get, we again talk with our direct customers and then their customers we’re looking at industry trends, we’re looking at traffic, we’re looking at commodity changes, for instance in the oil and gas industry with [stage more, rates are being throughout mile as a result there is more white sand fracking has been a lot of sand] [ph]. So, we are constantly monitoring the trends in the market to our marketing people, our customers and our service folks.

[Kate Pettem:]

Okay. All right. Thank you very much.

[Ray Betler:]

And I should say also budget we’re reviewing the budgets of our end users constantly too.

[Operator:]

The next question is a follow up from Justin Long from Stephens. Please go ahead.

[Justin Long:]

Thanks for the taking a follow up, I know it’s been a long call, but Pat I did want to just check on a couple of items on the guidance really quick. First, you mentioned $15 million of synergies, I just wanted to clarify is that a net synergy number. And then second could you talk about the impacts from FX that you’re assuming for both the topline and bottom line in 2018?

[Pat Dugan:]

Okay in terms of FX, we're using as current rate as we can. I mean that's unless what you mean in terms of guidance. I don't think it's, clearly, there is a little bit of improvement that we have from last year, but I don't think that going forward it's going to change that much. In the fourth quarter, we did talk about the impact of FX and it was about $17 million on sales. But it wasn't material to the bottom line.

[Justin Long:]

Okay, stable rates from today?

[Pat Dugan:]

Yeah exactly. I think that's we tend to have a kind of a natural hedge in terms of all our currencies. I mean we've got pound euro exposure, Australian dollar and some of our cost and some of our Canadian are our cost only. So all-in-all I think it's pretty stable.

[Justin Long:]

Okay. Great. And then the synergy number, the $15 million was that a net number or a gross synergy number.

[Ray Betler:]

Are you asking a net of cost incurred or it was just net synergies? Because in my mind it's just synergies we're going to achieve. We don't include the cost to achieve those synergies in that number.

[Operator:]

[Operator Instructions]. There are no questions at this time. This concludes our question-and-answer-session. I would like to turn the conference back over to Tim Wesley for closing remarks.

[Tim Wesley:]

Okay thanks again everybody for being on the call. So, we'll talk to you again in a couple of months with the first quarter results. And then again mark your calendars for May 7 our Investor Day in New York City and watch for more details. Thanks, have a good day.

[Ray Betler:]

Thank you.

[Operator:]

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