美國西屋制動公司 (WAB) 2015 Q4 法說會逐字稿

Good day and welcome to the Wabtec fourth-quarter 2015 earnings release 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. Please go ahead.

Thank you, Allison. Good morning, everybody. Welcome to our 2015 fourth-quarter earnings conference call. Let me introduce the others in the room here with me. Our Executive Chairman, Al Neupaver; Ray Betler, our President and CEO; Pat Dugan, our CFO; and John Mastalerz, our Corporate Controller.

We will be taking your questions, but first we will make some prepared remarks, as usual. And of course during today's call, we will make some forward-looking statements, so we ask that you please review today's press release for the appropriate disclaimers. Al, go ahead.

Thanks, Tim. Good morning, everyone. In the fourth quarter we had a good performance: record earnings and strong cash flow, despite ongoing headwinds in some of our markets and a sluggish global economy. As a result of this strong finish to the year, we posted full-year records for sales, earnings, and cash flow, and we ended the year with a backlog of more than $2.1 billion.

In particular, our cash generation was excellent in 2015, with cash flow from operations of $448 million for the year, exceeding net income by 12%. The business is performing well thanks to our diversified business model, our strategic growth initiatives, our dedicated employees, and the power of our Wabtec Performance System.

Now, that's not to say we are immune to the challenges that we are all facing, probably in every transportation and industrial company these days. But I do want to emphasize that we have managed through many cycles over the years, and we have the business model and the ability to do so in the future.

Today we issued 2016 guidance for the first time. As you might expect, because it's early in the year and because of the current macro uncertainties, we think it's very prudent to take a conservative approach to guidance. Our full-year earnings per diluted share are expected to be between $4.30 and $4.50, with revenues flat to slightly up for the year.

The midpoint of this EPS range represents growth of 7.3% compared to 2015. This guidance does not include our pending acquisition of Faiveley Transport and any related expense. I will talk more about Faiveley in a minute.

The guidance assumes the following: slow growth in the global economy; taking into account current conditions in all of our key markets, any revenue growth for the year will come from our transit group, with the freight group expected to be about flat. Our guidance assumes no changes in foreign exchange rates from current levels.

We assume a tax rate of about 32% for the year. We assume that the diluted shares outstanding will be about 92.7 million for EPS calculation purposes. That's 92.7 million shares outstanding diluted. We expect our 2016 quarterly results to improve sequentially during the year as we realize the benefits of our ongoing cost reduction initiatives as well as delayed projects that are already in the backlog that will begin to ramp up as we go through the year. As always, we will be disciplined when it comes to controlling costs and focused on generating cash to invest in our growth opportunities.

Now back to the Faiveley acquisition. As you know, we've signed a definitive agreement to acquire from the members of the Faiveley family about 51% of Faiveley Transport, a leading global provider of value-added integrated systems and services for the railway industry, with annual sales of about $1.2 billion. We've also entered into a definitive tender offer agreement with Faiveley Transport and a definitive shareholders agreement with the majority shareholders. Closing of the transactions is subject to various customary conditions, including completion of remaining regulatory requirements. While we can't predict the timing with certainty, we are making progress, and we expect to close by midyear.

This opportunity probably has the most compelling strategic rationale of any acquisition that we've ever made. We will be recombining the original WABCO rail divisions to create one of the world's largest public rail equipment companies, with total revenues of about $4.5 billion in the worldwide freight, rail, and passenger transit industry.

This combination offers complementary geographies with minimal overlap. It offers diversified end-market offerings. It's an extension of product and service capabilities. It enhances technology and innovation initiatives. This technology and innovation is really needed by the rails, not only in freight, but also in transit -- that would help improve the safety, the efficiency, and the productivity of the rails throughout the world.

It expands relationships with blue-chip global customers, and it provides synergies to drive growth. We expect the long-term annual synergies of about EUR40 million to be achieved through supply chain efficiencies, review of operations for efficiency and cost savings, and leveraging SG&A capabilities. This combination, as I said, improves our ability to offer safety, productivity, and efficiency enhancements to the global rail markets. So we are very excited about the future growth opportunities provided by this acquisition, and we are working through the process to get it completed.

In the meantime, we remain focused on running our business. Ray, can you cover our current markets and growth strategies?

Okay, thanks, Al. Let's start with some general comments about the global economy. As stated in the third-quarter call, and as Al just repeated a couple minutes ago, we think sluggish is a good way to describe the economy in general. Lower commodity prices continue to have a negative effect on a number of transportation and industrial markets, and we can't predict when that will change.

The North American market is seeing lower rail volumes, due in part to reduced shipments of coal and other commodities such as metals, minerals, and oil. As China's growth has slowed, that has led to reduced demand for natural resources in places like Brazil and Australia.

In energy, low oil prices have reduced the number of drilling rigs in the US. Some of these headwinds could represent secular changes in our markets, and some may also be recessionary; but either way, we have reacted and will continue to react to these changes. Over the years, Wabtec has proven that it can perform because it has a diversified business model and because we remain focused on what we do control -- and that is our costs, improving those, and aggressively pursuing our growth strategies.

So let's talk about cost reductions. I will talk about growth initiatives in just a minute; but on the cost reduction side, we have programs in place. As is always the case, some of our business units compete in markets that are growing, while others are in markets where overall demand is more challenging. That is not unusual. We are well equipped to respond to these market conditions. In this case, we have taken the following steps: we have reduced total employment by more than 5% in the fourth quarter, and we will continue to adjust as necessary our employment levels going forward; we initiated expense reduction programs, both at the corporate level and across all business units; we have set more aggressive goals for activities associated with our Wabtec Performance System which includes lean, supply management, and other quality initiatives, and we have continued to include those savings in our guidance today.

On the freight side, a few words about the freight rail markets. In NAFTA, freight rail traffic was down about 2% in 2015, with the second half of the year down more than the first half. In the first few weeks of this year, the numbers are worse. With total traffic growth down 5%, the comparisons will start to get easier as we go through the year, and we will continue to monitor this trend very closely.

For 2016, our NAFTA assumptions are that we will see flat rail traffic; that freight car deliveries will be about 60,000 -- that's down 25% from last year; and that locomotive deliveries will be about 1,100, which is down about 5% from last year. Together those represent headwinds of about $100 million in revenue compared to 2015.

Freight traffic in some of our global markets is challenged, especially in commodity-driven markets, as I mentioned before, like Australia and Brazil. We are focused on increasing our global footprint and also our product offerings beyond our traditional NABDA markets. Remember that about 75% of the installed base of locomotives and freight cars are outside of NAFTA.

Our transit markets remain fairly stable both in the US and abroad. In the US and Canada, ridership was down about 1% in the most recent quarter, although the UK and France saw increases. Russia saw slight decreases. This year, we are expecting North America transit cars to be up about 4%, with bus deliveries about the same. We've seen some transit products delayed in recent quarters, and we expect some of them to start ramping up as the year goes through.

Transit funding in the US is projected to grow about 10% in fiscal 2016, as the federal government did finally pass a multiyear transportation bill. That bill includes small increases in future years, along with the much-needed funding required for positive train control, especially for the transit authorities.

Reported revenues in our transit business in 2015 were down about 5%, but if you exclude the effects of foreign exchange, they were actually up about 3%; and our total transit backlog continues to grow, which bodes well for our future. Our multi-year transit backlog is now at a record level, and it has increased in the third consecutive quarter. Among orders that we've booked are the PRASA order in South Africa, which is a $160 million order over a 10-year period; the MBTA project in Boston, which represents about a $70 million opportunity; and the San Francisco MUNI job, which represents about $50 million to Wabtec.

And remember, just as with freight, we are focused on global growth and increasing our product offerings, because the international markets are, again, much larger than NAFTA. We estimate the global installed base for transit cars to be about 330,000, so 95% of the total fleet is outside of North America.

We continue to focus on growth in cash generation. In the quarter we generated $193 million of cash flow from operations, giving us $448 million for the year, which gives us ample capacity for investment. Our priorities for allocating free cash have not changed. I will remind you what they are: to fund internal growth programs, which includes product development and capital expenditures; acquisitions -- and we have plenty of opportunities and a strong pipeline to deploy capital in this area; to return money to shareholders through a combination of dividends and stock buybacks, where we've been very active.

In May we announced a dividend increase again, for the fifth consecutive year; and during 2015, we bought back about 4.9 million shares for about $388 million. That left only about $33 million on our $350 million buyback authorization, so we are pleased to announce that our Board has just authorized a new $350 million program. And we plan to continue to be active in the market, because we believe in our stock.

We remain focused on increasing free cash flow by managing costs, driving down working capital, and controlling capital expenditures. Our four corporate strategic growth strategies remain the same: to grow globally and in the markets we currently serve; to seek out expansion in the aftermarket worldwide; to look for investment in new product development, innovation, and new technologies; and to pursue acquisitions. So let's talk about those strategies.

Our growth strategies -- global and market expansion. For the year, sales outside of the US were about $1.6 billion, almost half of our total sales versus about one-third only five years ago. Markets such as Brazil and Australia were challenging due to lower commodity prices, but we did generate sales increases in markets such as Asia, Europe, India, and the Middle East. In Qatar, for instance, we won an order for conductor rail through our Fandstan business. In Saudi Arabia, we won a component order for freight cars, which includes electronic-controlled breaking. In Russia, we won an order for current collectors; Thailand, for break equipment. And there is a lot of activity that we are pursuing in countries such as India and Indonesia.

On the aftermarket side, aftermarket sales for the year were about $2 billion, about 62% of our total sales. Recent orders include locomotive rebuilds in the US for various railroads that are not buying new locomotives; PTC installation for several transit authorities; and a major truck overhaul program for the MTA in Baltimore, which includes traction motors, brake equipment, and brake shoes.

For the year, sales outside of the US, as I said, were strong. But if you look at the new product area, we have growing internal development product opportunities where new projects can therefore be pursued. We have developed several products that are on test and being homologated in Russia. We delivered next-generation video and event recorders for locomotives to several Class 1s. We've developed and enhanced our electronic brake control equipment, not only for freight, but also for transit. And we were selected for a new intercooler opportunity in a power generation business, which will mainly address the Asian growth opportunities in power generation.

Positive train control has been one of several growth areas, and it continues to be strong. As you all know, the PTC deadline was extended in the fourth quarter. The deadline is now the end of 2018, with two one-year potential extensions. That compares to the original deadline of 2015.

We don't expect the extension to have an effect on our total opportunity across PTC. It could have an effect on the timing of our revenues. We had strong PTC revenues in Q4, and we finished the year with revenues at about $400 million. We expect slight growth in 2016, with a slow start to the year as our customers sort out their own spending plans for the new -- associated with the new deadline. We continue to have a lot of activity around building a long-term aftermarket business associated with PTC, which includes service and maintenance contracts, software upgrades, and enhancements to our base installed systems.

In Brazil, our customer is running the PTC system at MRS. The signaling system we installed in revenue service is seeing significant extended benefits from our system. We expect this transition to soon migrate into the maintenance and the service opportunities, and we think that will be a model for other railroads. Our experience and market position in train control has also enabled us to expand our signaling capabilities in niche markets through acquisitions and other organic initiatives. And we view the train control and signaling market as one of our long-term growth opportunities in our business.

On acquisition side, our pipeline even beyond Faiveley continues to be active and strong. Al talked about our planned acquisition of Faiveley, and I would like to say a little bit about another acquisition that we made, this one in Australia. It's called RMS, Relay Monitoring Systems. That business was acquired in Q4.

RMS manufactures electrical protection and control products, with annual sales of around $15 million. These products are used in the power generation market as well as in rail applications. They include relays, transformer control systems, voltage regulators, as well as electrical monitoring systems and sensors. RMS is an excellent strategic fit, especially associated with our Mors Smitt business which we acquired a few years ago, based in Netherlands. Together these companies offer complementary products and geographical synergies that will help enhance one another's portfolio.

I would like also to give you a quick update on the performance of Fandstan. We acquired Fandstan in mid-2014. Fandstan continues to perform very well. As we discussed previously when we made the acquisition, we saw many opportunities for growth and improved business. We focused our Wabtec Performance System on the Fandstan business and institutionalized lean and sourcing improvement opportunities. We realized additional synergies by integrating Fandstan's sales efforts with our existing Wabtec worldwide sales and marketing organization. And we have been able to grow this business with new products in a variety of product areas and geographical markets.

As a result of all these efforts, we expect Fandstan to grow about 8% this year, with margins that will almost be double what they were when we bought the Company less than three years ago. It's a tremendous success story, thanks to Fandstan's strong management team that came with the business, and also our corporate group executive, as well as our other WPS champions across our organization.

So with that as background, Pat, can you talk about some of the financial details in the fourth quarter, please?

Sure. Thanks, Ray. Sales for the fourth quarter were $833 million, about 1.5% higher than the last year's quarter. You have to consider that this also includes a negative impact of about $27 million or 3% from changes in foreign exchange rates. Excluding FX, all of our increase came from acquisitions adding about $45 million.

Looking at our segments, freight segment sales increased 4% as acquisitions contributed about $39 million, and that more than offset the negative effect of FX, or about $10 million. Transit segment sales decreased 2% as the negative effect of changes in FX rates, about $17 million, more than offset growth from acquisitions, which was about $7 million. For 2016 we expect any revenue growth really to come from the transit segment.

Looking at our operating income for the quarter, it was $151 million or 18.2% of sales. In 2014 our fourth-quarter operating margin was a comparable 16.7%, so we continue to find ways to improve our margins. SG&A for the quarter was about $91 million, about $2 million lower than the year-ago quarter. And this is due to a couple of factors -- a few factors: changes in FX rates, which lowered our expenses as we consolidated our results; internal cost controls and initiatives; and a lower expense for benefits and compensation. I will also point out that in that line was costs related to the transaction and the acquisition of Faiveley of about $2 million.

Our engineering expense was up slightly, as we continue to invest in product development. Amortization was about the same as the prior-year quarter. And our interest expense was $4.2 million, slightly more than the year-ago quarter.

In our other expense and income line, I want to point out that we had other income of about $2.4 million in the quarter, mainly from non-cash foreign currency translation gains. So this gain really offsets the Faiveley transaction cost that we recorded above in SG&A.

I also want to comment on the effect of FX on our guidance. We have exposure due to the consolidation of our results, similar to what I just discussed, and today's guidance takes into account FX rates at current levels. Any changes could affect our 2016 results.

Our effective tax rate for the quarter was 31.9% compared to 29.4% in the year-ago quarter. This is higher mainly due to a one-time benefit we realized in the year-ago quarter, offset by a greater mix of profits and higher taxes in the US versus our international locations. Most of our international locations have lower tax rates.

We expect the 2016 annual rate to be about 32%. And remember, as I always say, that is an annual forecast, and each quarter could vary due to timing of any discrete items.

When you look at our balance sheet, it remains strong, which provides financial capacity and flexibility to invest in our growth opportunities. We have an investment-grade rating, and our goal is to maintain it.

When you look at our working capital, at December 31, trade and unbilled receivables were $599 million. Inventories were $479 million, and accounts payable were $319 million. Just as a reminder, the unbilled receivables are related to long-term contracts where we need to hit certain project milestones before we are able to actually bill for the work and collect the cash. When you look at unbilled receivables at the quarter -- at the end of the quarter, the end of the year, it was $104 million compared to $151 million at the end of the third quarter of 2015. That's the lowest number since the end of 2012 and reflects our efforts to hit project milestones, bill, and collect the cash for our work.

Our cash balance at December 31 was $226 million, mostly held outside the United States. It was -- that balance was $209 million at September 30. That balance does not include about $200 million we are currently holding in escrow related to the Faiveley transaction financing.

Our debt balance at December 31 was $696 million compared to $451 million at September 30. It has increased mainly due to the funding of our stock repurchases that occurred in the fourth quarter. And our cash from operations in the quarter was $193 million, which brings us to $448 million for the year, more than our net income of $399 million -- and we view that as a solid performance.

Just a couple of miscellaneous items that we always review for the call. Our depreciation expense was $10.9 million compared to $10.4 million in the year-ago quarter. Our amortization expense was $5.7 million compared to $5.9 million a year ago, and our capital expenditures for the quarter were $16.3 million versus $16.7 million a year ago.

For the year, our CapEx amounted to $49 million. And that compares to $48 million a year ago. And we're expecting a similar level of capital expenditures for 2016.

When you look at our backlog, our multi-year backlog was $2.1 billion, 1% lower than the end of the third quarter. Our transit increased for the third -- transit backlog increased for the third quarter in a row to a record $1.47 billion, and our freight backlog is $672 million. You've got to remember that changes in FX rates reduced the backlog total by about $105 million when you compare it to a year ago 2014.

Our rolling 12-month backlog, which is included in the multi-year backlog, was $1.2 billion compared to about $1.3 billion in the third quarter. Transit was about $622 million, and freight was about $586 million. The total backlog figures don't include about $250 million of pending orders and options, so it does not include pending orders and options. And we won't include them and count them until the customer exercises those options or any pending orders.

So with that, I will turn it back over to Al for some concluding remarks.

Thank you, Pat. Once again, we had a good performance in the fourth quarter and for the full year of 2015. Let's take one more look at 2015. Revenues increased 9% to a record $3.3 billion. Income from operations increased 15% to a record $608 million. EPS increased 13% to a record $4.10, and we ended the year with a backlog of more than $2.1 billion.

Looking ahead at 2016, we are anticipating another record year, with EPS guidance of between $4.30 and $4.50, with revenues expected to be flat to slightly up. We are pleased with our strategic progress and the long-term growth opportunities we see. We are responding aggressively to the current challenges in some of our markets. We remain excited about our long-term growth prospects as countries around the world continue to invest in freight rail and passenger transit infrastructure. 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 costs.

We have an experienced management team and a dedicated group of employees that are taking advantage of our growth opportunities and responding to the challenges. With that, we will be more than happy to answer your questions.

(Operator Instructions) Scott Group, Wolfe Research.

I know you mentioned that you tried to take a conservative approach with the guidance, given some of the uncertainty out there, but with railcar deliveries down 25% and locomotives down 5%, you're still talking about flattish freight revenue for the year. So maybe help us bridge the gap of those declines, and then what's growing to offset that, and why you feel that that is conservative.

Okay. If you take a look at the freight markets, the things that we have -- the headwinds that we talked about, and I think they have been discussed for a number of months; I don't think we need to repeat them. And I think Ray gave a pretty good analysis of the impact of that.

Offsetting those are things that are growth initiatives. We are still excited about the growth, and I think that our comment about we think that we will get a slight growth out of our PTC train control signaling business is one thing that we feel will continue to grow into the future and provide some of that offsetting growth.

If you look at our freight markets, they are not just here in North America, and we have opportunities in new markets. Some of those markets are emerging countries -- whether be China, India; Ray made a mention of our involvement in Russia. We've got additional projects in even the mining countries that are seeing a slow -- some slowness and impact from the commodity prices, but we have projects that we are working on to grow. So I think that all said and done, we have headwinds that we are faced with, but we also have a lot of things that we're excited about and been working on as far as growth strategies for a number of years. And hopefully those are the things that we see will offset those challenges that are real.

Okay, that makes sense. In terms of Faiveley, so maybe just some perspective: is this -- is it taking longer than you would have thought to close the deal? And should we be seeing -- are there any kind of regulatory risks that we need to be thinking about?

And then just kind of separately on Faiveley, if this deal closes around the middle of the year, should we expect a normal, kind of quick ramp in earnings accretion in the back half of the year? Or because of accounting things, is the earnings accretion all likely to really kick in starting in 2017?

Okay, I think that was seven questions. (laughter) Let's start out. I'm a very patient individual. So as far as what we thought -- yes. As far as what we thought and how it's occurring, I think that the -- our legal group, internal and external, gave us a pretty good indication how long the process would take. Whether we wanted to accept that or not, that's a whole other story. So I think we got good counsel, and we understood that it's going to take time.

When you think about -- I think the question -- uncertainty related to the regulatory -- we really can't comment on that. What we have said, and we continue to say: it's not a matter of if, it's just a matter of when this will close. We have confidence, especially from our legal department and others inside and out that we have to deal with the regulatory questions, respond to them. And it's just a matter of when this thing gets completed.

As far as the impact on this year, we will obviously provide that information at the right time. When the close is imminent, we will definitely have a conference call. We will explain the one-time costs; we will explain what we would see from any accretion in the remainder of the year. I think it's premature to do that right now. So we're going to continue working on the regulatory process. As we stated or anticipated, we can get this done by midyear; and it's just a matter of when and not if.

And I think, Scott, as far as your question about timing, you know we don't control the timing. But you asked, basically, is it unusual -- abnormal. If you look at the Alstom acquisition and that whole transaction, and then others that are -- have occurred recently, I think it's pretty consistent.

Okay, thank you, guys. I will get back in queue.

Allison Poliniak, Wells Fargo.

On your cost reduction activities, was there any impact to Q4 profit? And should we think about that for maybe the first quarter, first half of this year as well?

Allison, it's Pat. Our philosophy has always been that we're trying to match the costs that we incur in restructuring and reductions with benefits within the quarter. So I would say that they are probably not really material to the fourth quarter. And we've obviously targeted these headcount reductions in other areas that we reduce our costs going forward, really in line with -- as our revenues are evolving.

Okay, perfect. And then, Ray, you talked about, obviously, positive train control, and maybe a more moderate level of growth this year. Just given some of the challenges, obviously -- in the US today, specifically -- is there a risk that that spend could actually go negative this year, since they have a little more leeway with timing?

No, I don't think so, Allison. I think it's a mixed portfolio. It includes international business as well as domestic business. I think what most -- I think the Class 1s are still very much engaged and very focused on completing the PTC implementation. That is certainly our experience in the day-to-day interaction with our customers. So I don't see that. In parallel, we're in the process; we are very close to signing several service agreements, which -- we told you that would come after we did the OEM portion of the installation.

So we are already started on developing new-generation equipment enhancements and other things. And there's going to be productivity improvements that come with the equipment itself. So I think for all those reasons, we feel pretty good about our guidance on the PTC side.

Yes, I think, Allison, I'll just add a little bit to what Ray said. I think that what we may see is that now that there is an extension, that the Class 1s take a breather, and they try now assess what their programs are going to be over the next three years, and how they are going to get there, and reassess how this priority lines up with their capital available to spend. So we can't control that.

I think if any effect, it would be that we would come out of the beginning of the year here at maybe a little bit of an impact because of wait-and-see. But as Ray said, I think a big misconception about PTC is that it is a limited product where we sell an onboard computer to -- on locomotives. And maybe we've not done a good enough job to explain, but we vision this train control and signaling as a long-term opportunity and probably growth for many years to come.

Our vision with this is that we really feel that we want to work toward creating intelligent trains and have a more automated total system that operates the Class 1s. That would mean less infrastructure for them, and it would improve their safety, productivity, and efficiencies and reliability.

Right now, in addition to the onboard computer, we offer dispatch systems; we offer back-office servers; we're working on enhancements to these systems related to wireless crossing activation, navigation enhancements, upgrading the computer itself. Keep in mind that this was all based on a computer that I think we would have sourced and developed in 2006, 2007 time frame. Is that right, Ray? About that time frame.

So that -- there's opportunities for upgrade. We are working on fuel management, dispatch movement planning, locomotive data collection, monitoring, diagnostics. And as Ray mentioned, for example, the MRS -- we're going to be moving from -- we put in a total system that is operating -- they are getting all these efficiencies, things that we're moving into the maintenance and service portion of that business. So these all create an opportunity. The worldwide market in signaling is huge, and we are a small player. A lot of that is transit in both Asia and Europe, but it's a $22 billion market. And we want to grow our PTC train control signaling market over time.

And when we talk about growth, could there be a quarter where it's less because of capital priorities? Obviously. But there's a lot of things driving our PTC business. I just want to make sure we clarify that opportunity a little better than we've done in the past.

Yes, just -- Allison, one more thing. Sorry to belabor the PTC issue, but it's something we're very excited about, very focused on. If you look at how long it's taken Class 1s to do their PTC implementation, recall that a lot of transit authorities, again, did not have funding up till now. This FAST Act bill provides funding. Now they virtually have three years to implement their systems. That's from start.

So that's not -- that's a very, very compressed period of time for the transit authorities. So while the Class 1s may extend -- prolong a little bit their investment in their program, the Class 1s really are going to be motivated to get it done.

That's great. Thanks for the color on that.

Justin Long, Stephens.

So I wanted to ask another one on PTC. You mentioned the service agreements, but could you talk about when you expect those service agreements to start kicking in and contributing to revenue? And would it be fair to say that the margin on those service contracts is more favorable or will be more favorable versus what you have seen on the installed base?

I think we have talked about the margins before, Justin, as being comparable to the PTC business as a whole. It's a good business for us, and we think it will continue to be. As far as the timing goes, we are anticipating several of those service agreements to be in place in Q1.

Okay, great. And I know the remaining opportunity on PTC is a moving target, but after getting 2015 in the books, could you share your ballpark expectation on the remaining addressable market? Between freight and transit, would it be fair to say that there is at least another $1 billion dollars or so that you could compete for over the next several years?

Let me take that. If you look at the progress that the railroads issued through the AAR, basically they have spent $6 billion out of an estimated $9 billion of $10 billion -- I think it's more like $10 billion estimated sales before they get this thing operational.

Of the route miles that will be PTC-ready, by the end of 2016 it will be 38%. And I'll give you the exact numbers; I'm looking at them. At the end of 2016, 63% of the 22,000 locomotives will be equipped with PTC. Transit adds another 3,000 to that, so -- I will talk about transit separate. Half of the employees will be trained, and about 87% of the trackside signaling systems will be ready. And 77% of the base station radios will be installed.

So you could realize that up to this point, we have about $1.3 billion of revenue that we've talked about in this whole signaling arena over the last -- since I think 2008 is when we might have started reporting, or even a little later than that. So that gives you a relative amount. 80% -- I mean, I think it's around $800 million that we have in freight. So you can get a relative feel for, based on those percentage of completion, what it might be, but that is only one portion of our PTC system.

If you look at the transit business, they estimate that it will cost probably about $3.5 billion. And we have about $300 million of revenue over that same time frame. And if we look at where we think they are at, counting the -- they actually put out a publication that showed what transit authorities will be completed in 2016 and estimated that out into 2020, actually. And we're about a third of the way on getting PTC ready on the transit.

So there's a lot of room in those areas. And then on top of that is -- really the opportunity is we want to have enhancements. We want to try to work toward our vision of having this intelligent train. And we have the service agreements that are kicking in.

That's all really helpful. Thanks, Al. And I'm going to sneak one more in.

You mentioned one of the assumptions in the guidance for this year was flat rail volumes. We've had all the rails report. Most of them have talked about expectations for volumes to take another leg down this year. If the volume outlook is worse than you think -- let's just say rail volumes are down 5% -- can you talk about the sensitivity in your model in that environment?

Well, the rail volumes have multiple impacts. The first impact is in aftermarket business that we have. And generally it's -- any impact that we have would be proportional to that metric or that change. But also what happens -- when carloadings come down, the demand for rail cars and locomotives could decline. We probably have reflected that type of decline already.

I think our estimate is probably aggressive on being flat, but that's how we see it. We read the same reports. We will see what happens. I just wanted to make sure you knew -- keep in mind, when you develop these plans, this -- doing the plans, I think we start in the August/September time frame, right, Pat? And things change as you go. And these are some of the assumptions that we have, and we want to be open about what those assumptions are.

Okay, great. I will leave it at that. Thanks for the time today.

Matt Brooklier, Longbow Research.

The $430 million to $450 million -- the guide for 2016: does that assume incremental share repurchase activity? Or is that just a reflection in the share count that you gave the number? That's just a reflection of the [365] that you bought back in fourth quarter?

There's no anticipated stock repurchase. That's the number that we ended the year with.

Okay. Okay. Have you provided the PTC revenue breakout for fourth quarter per freight in the transit divisions?

I think it was 75% on freight, 15% on transit, and roughly 10% on international.

Okay. And did you guys talk to the total number in the quarter?

I believe Ray said it was about $400 million for the year.

For the year? Okay, I can back --.

I think it was $109 million, $108 million.

Okay, I can -- $109 million, okay. And just -- the commentary on the earnings progression as we move through 2016: I'm just trying to get a little bit more color on what that could potentially look like. If we look at first quarters historically, you have seen over the past at least four years, sequential growth in terms of earnings from 4Q into 1Q.

So I'm trying to get a sense for if we see a similar -- I guess if you expect for earnings in first quarter to look historically like they have over the past couple of years, i.e., do we think that you see a little bit of growth in 1Q? Or are we expecting things to be more flattish, and we kind of go from there? I'm just trying to get a better sense as to the progression of earnings through 2016.

I really appreciate the question. And what we don't do is we really don't give quarterly guidance because of fluctuations. However, directionally, there is a lot of headwinds and I think some of the things that we said about the backlog, and programs have been delayed and will kick in during the year, may be a readjusting of how people allocate the capital related to PTC. I think directionally, we're telling you how we see it. And we think that it will sequentially improve as the year goes on. And that's without providing exactly where we start from.

Okay. And then just my last question: you talked about projects -- and I think this is more specific to transit; it may not be -- but projects that have been delayed that are starting to ramp up, and then the expectations are for these projects to ramp up as the year progresses. Can you maybe talk to, kind of big-picture, what some of those projects are? And why we should think about things ramping as 2016 progresses, given we are seeing some cycle headwinds here? Thanks.

Okay, Matt. So in the past we've talked about transit projects and explained it. It's relatively normal in the transit industry because of the paperwork process, approval process, commissioning process for these projects to be delayed. And so there's projects like our 179 in New York, CTA, the BART projects -- those are all huge projects in the transit industry.

Every one of those projects is delayed relative to their original schedule. So if you go back to the time when those projects are awarded to the car builders, and look at what the commitment milestone dates were, some of those projects are up to two years delayed.

And again, I want to emphasize: it's not a criticism on any car builder. It's not an unusual situation in the transit industry. Those projects are moving along, though. They're obviously not going away. They're going to be delivered. And we have revenue streams associated with all of them. On the new project side, the CTA project that's in process is associated with CTA 5000.

There's another huge build or huge buy coming up -- CTA 7000. That procurement has been delayed two years. So that's still going to go ahead. If you look at the bill that was just put out and improved by Congress in the transit area alone, they've allocated additional monies for 10 projects that are already under construction that need additional funding. Those are places like LA, San Francisco, Honolulu, Boston.

But then, in addition, there's another 31 projects that the US government has identified that have been asking for funding that hasn't been able to receive it that are going to come. So the existing projects are -- I would not be exaggerating to tell you every project we are involved with is delayed at the car builder delivery level. So that just, again, emphasizes it's not unusual. There's various levels of delay. And there are a lot of new projects coming.

Mike Baudendistel, Stifel.

Wanted to ask you, because there is a theory out there that Class 1 rail CapEx is in a secular decline, and it looks like it's going to be down in 2016 at least from 2015. Is Class 1 rail CapEx a meaningful measure to look at for your business? Or is it too broad in too many different areas that it's not terribly relevant?

I think, Mike -- I think the real important thing you said is that there are structural or secular changes that happen in the railroad. We're not going to -- if you look at coal, it will be declining. It's hard to tell what other structural changes we will have related -- crude-by-rail and some of the other things that -- the headwinds they are being faced with. Those kind of things, obviously, are a concern and could impact just how much money is spent related to capital.

However, I think the reduction of capital is appropriate due to the -- not only the structural changes, but the recessionary changes that we see. And we are not immune from being impacted by any change in capital. But I think whenever they do reduce their capital, I think prudently, they change -- you know, they look at the prioritization of where they form that out. And the things that we are concentrated on are critical to safety, efficiencies, productivities. So some of it could be more discretionary and have an impact.

It is a meaningful thing for us to look at. So we do follow it. And I think it has an impact long-term and short-term.

Okay, great. That's helpful. And then hoping you can comment on the portion of your revenue -- I think 10% to 15% is outside of rail. Things like turbochargers. What's the outlook for those segments in 2016?

We have seen most of those bottom out in 2015. I think a lot of them we feel have bottomed out. We've diversified that group, which makes up like 15% of our total revenue. And in a couple of areas -- Ray mentioned one, power generation, our product development gives us a nice opportunity late in the year or into 2017. But those are the things we are working on -- broaden those offerings in those specialized areas of power generation, friction, and thermal management.

But we think they've kind of bottomed out, but that really depends on what happens to the economy. That not only relates to that portion of our business, but it really relates to the rail portion. More so -- the economy drives -- as you know, it's the market driver for the freight rail. The transit rail is driven by public funding as well as ridership, and we think that will be stable.

Great, that's helpful. Just wanted to ask you, also, on the aftermarket revenue in North America, freight -- I just want to make sure I'm interpreting this correctly. So you are assuming that's flat in the guidance, because you are expecting the rail traffic to be flat? And then related to that, do you ever get into a situation where, you know, if North American freight rail traffic is down 5%, that you could see customers defer maintenance on things, and then aftermarket could be worse than proportional?

Our experience has been proportional. There's always one-time items, but over the year -- over the 10 years I've been involved in it, it's pretty proportional.

Great, thanks very much.

Art Hatfield, Raymond James.

Al or Ray, when you say rail traffic is going to be flat, are you commenting on revenue ton-mile number or carloading number?

We're mostly looking at carloadings. We don't actively look at ton-miles right now because of -- I know with the decline in coal, the measure year-to-year has become less, I guess, applicable. So we've been looking at carloadings.

Okay, no, that's helpful. Quick question -- maybe you gave this and I didn't hear it, but can you give us what the breakdown in 2015 was for NAFTA versus non-NAFTA sales?

Sure. If you look at freight, international sales in freight in the fourth quarter was -- 32% of the total was international. For the year of 2015, it was 36 international. For transit, it was 65% in the fourth quarter and 66% for the year. So consolidated, the 45% for the fourth quarter and 47% for the year was international sales.

How do you -- do you have an estimate on how you think that is going to change in 2016?

We do, but the one thing that we have talked about -- you know, the Faiveley creates a total --

Oh, yes. Yes.

That's a big change of it. So if you look at Faiveley, and I think when we gave the presentation when we announced it, we're going to end up with more like -- that number would be more like 59% or 60% outside of the US.

And ex -- but ex-Faiveley, do you expect that number to change meaningfully?

We've actually been growing more rapidly in the international area.

All right. So that should go up this year.

Right.

Okay. Real quick, back to PTC, is -- a couple questions there. And I appreciate your clarifications today, and I hope you do kind of -- I think there is a lot of misperception in the marketplace on what the opportunity is for you, so further communication is great.

Quick, on the transit side, are you concerned at all about funding or where funding -- the timing of funding; if funding is going to be available for these -- I know they have to hit these markers, but are you concerned at all about funding for transit PTC projects?

No. And I think that -- Ray, you might want to comment a little bit about the FAST Act.

No, Art, the offset -- we feel a lot better about it today than we did previous to the FAST Act being enacted. So this basically addresses the void that existed for all these transit authorities who were doing the planning but couldn't go through the implementation.

What we understand is there was a 10% increase in funding for year one, and the normal transit is about $10 billion. So that's about $1 billion. And remember, I talked about 3.5 --.

Right.

And you know that the federal government [isn't] going to fund all of it.

Right, right. So going back to that real quick, in your comments on that, I think, Al, you alluded to the fact that PTC -- it is really not as narrow as most people think it is; but it's a broader in scope for you as you go forward in more the communications and signaling opportunities that may be out there for you. And I think at one moment, you may have thrown out a number about what that broader opportunity is, I think on an annualized basis? One, did you do that? And what was that number?

Again, in our estimate, we think that the entire global signaling market is about $22 billion a year.

Okay.

That doesn't mean we play in that right now. We view that as a big pond that we would like to play more in.

And I was -- go ahead, I'm sorry.

What I was saying -- in very niche areas.

And I would assume that that opportunity would be driven by acquisition strategy?

Internal development and acquisition targets.

Okay. Fair enough. Thank you for the time this morning.

Kristine Kubacki, Avondale Partners.

Quick question, in terms of Faiveley, you talked a little bit about the timing and that. Through the process, have you -- and I know you said in the past you didn't expect that, given the adjacencies of the business, any thoughts to -- that you are going to have to do any divestitures or anything like that?

We really can't comment on the process. We are right in the middle of both the European Commission as well as the DOJ processes, so we really can't comment on that. It will become clear as we go forward.

Okay. And then just a lot of my questions have been answered, but maybe, Ray, you talked a little bit about Asia. I was wondering if you could talk a little bit about what is going on in China in terms of the infrastructure there, both on the freight and the transit side.

So the freight is pretty stagnant; it's always been pretty stagnant, to be honest. It's not really a significant market in terms of rail overall.

The transit market continues to be a good market. We continue to get relatively steady, increasing the number of projects year on year, so our business has grown. The overall investment in the market is relatively steady. It has not declined. And the government on a regular basis injects stimulus money into the economy, focused on their transit projects. They have about 40 active projects in process in China. And so there's various opportunities for us across those projects.

Additionally, the Chinese industry has become much more aggressive about coming into the international market and competing. We have scope on several projects in various continents -- in South America; they're obviously here now in North America; they are competing for this large job in Chicago. We already won a job with them in Boston, and they are planning to compete in Europe. So their industry is -- while their economy is in probably a recession, their transit, and rail industry transit in particular, is still pretty active and strong.

Okay, that's very helpful. Thank you very much for the time, guys.

Jason Rodgers, Great Lakes Review.

Just a question on the transit market. The projects that have been delayed that you expect to realize later in the year -- has that been due to funding delays? Or is it just a matter of being slower to be implemented than originally expected?

It's just performance-related issues, Jason. A lot of it is associated with approvals, software submittals, design reviews, first article inspections. So the process is cumbersome and bureaucratic, and it takes time. And often it does not anticipate the iterations you have to go through in each of those cycles.

And this is not abnormal. The only thing that's abnormal is the number at one time. Otherwise we wouldn't even mention it. It's a normal process they go through. It's delay after delay. But right now there is kind of a backlog of these things that were worth discussing.

Okay, that's good to know. Just two quick follow-ups -- if you have the transit book-to-bill for the quarter as well as the shareholders' equity balance for the quarter.

Okay. Shareholders' equity at the end of the year would be [$1,701,000,339].

I got the transit book-to-bill. The 12-month was a little under 1. It was 0.94. And the total was 1.2.

Thank you very much.

Liam Burke, Wunderlich Securities.

Ray, you talked about freight business outside of NAFTA, and you quoted a 30%-plus contribution. Is the split between OEM and aftermarket similar to North America? And are those -- are you purchasing in those markets any differently than you would in North America?

I don't recall a discussion of contribution margin, but as far as the approach to the market, no; we are approaching the markets in a similar way. As a matter of fact, in freight -- it's a little bit behind transit in this respect -- but in freight, a lot of the car builders are now participating on an international basis. Greenbrier, for instance, won this big order in Saudi Arabia. We won the opportunity to supply to them, so obviously they're a big customer of ours in North America.

So we have relationships some South, CTX, and other players. In addition, I mentioned the Chinese; they are coming out from the other direction, from the East. And we are participating with them. And there is a nice mix of aftermarket business and OEM business on the international market.

Okay, and then just quickly, reinvestment in the business is a big priority. You quoted a CapEx number. Is there any particular project or anything in particular waiting in the capital expenditure this year that you are looking at vis-a-vis 2015?

No. We have a standard process; it basically looks at ROI. It's -- there's a requirement of all business units to fill out this capital appropriations request. It's essentially a business plan that justifies the investment. And if they can exceed the hurdle rates that we give them, we will make the investment.

Great. Thank you, Ray.

Willard Milby, BB&T Capital Markets.

A lot of my questions have been answered. So just to keep on the transit discussion, the projects slated for the second half -- is that what's going to drive the potential for revenue growth this year? Is that where you see the -- turning positive, I guess? Or what is driving the positive revenues?

Yes, that's exactly what we see is contributing to what we've talked about sequentially -- seeing business change over the year. Exactly.

All right. Okay. And just some housekeeping stuff I might have missed. Did you give an SG&A number to think about for 2016?

Yes, and we typically give a quarterly run rate. And we think that the run rate -- you know, our fourth quarter had some costs related to supporting the transaction as they're working on it. So we're thinking we're around $88 million to $90 million a quarter. I think that's a pretty safe number to use in your model.

Okay. And typically the fourth quarter is up versus the other remaining three, for whatever reason. Are we thinking, like, a lower Q1 to Q3, and then a bump up in Q4 for an average of about $88 million?

Yes, as an average. I think you have to look -- you know, our -- we have a calendar year, and we have like a 13-week quarter. So you end up with extra days in the fourth quarter; you end up with -- any given quarter you will have discrete items that might come through. But I think that using those numbers as an average for the year would be a good jump-off point.

All right, great. And last thing: I heard the locomotive and freight car delivery estimates, but did you say something on buses and transit cars for 2016?

Yes, we said we expect transit cars to be up somewhere around 4%. And buses, we, I think, didn't mention it; but we expect it to be about flat.

Okay. And what was the transit car for 2015?

It was around 850, 900 transit vehicles. New built.

All right. Great, thanks for the time, guys.

Samuel Eisner, Goldman Sachs.

This is actually Nick Stuart on for Sam. Thanks for taking my questions.

Just real quick, do you have maybe a more multi-year outlook for what rail car deliveries should do, given that historically we've seen two- to three-year declines in rail car deliveries in prior cycles?

I think a lot of it will have to do with what the economy does and what that order rate is during 2016. We know that the backlog -- I think it was 111 or something like that. You subtract the 60, and there's backlog to really soften the downturn in the rail car build. But if the economy heads south, I think that there could be a bigger impact in 2017 and 2018.

Got it, that's helpful. And then to your point on the $88 million, $90 million run rate for SG&A, given that you are also suggesting flat to slightly up revenue, does that also imply EBIT should be basically flat to slightly up through 2016 as well?

In order to get the EPS growth that we have, we would obviously be able to improve our -- there's got to be a margin improvement if we won't get the contribution from the volumes.

Right.

So we would hope these cost reduction items start ramping up and kicking in as well.

Got it. Okay, that's also helpful. And last question, I think you said that PTC revenue for the quarter was about $400 million, which was better than the kind of --.

That was for the year.

That was for the year.

For the year.

For the year, for the year, I'm sorry. And then that was better than the $350 million number that you had -- the implied guidance for $350 million of PTC revenue that you quoted earlier in the year. What was the source of the maybe $50 million delta there?

We can only speculate a little bit, but our feeling is because of the pending deadline, which was the end of 2015, there might have been some spending that happened in that fourth quarter period that would have otherwise happened into the first quarter. And that's why we think they are going to regroup and take a real look at their programs, now that the time has been extended through the end of 2018.

Got it. That's helpful, thanks. That's all for me.

Steve Barger, KeyBanc Capital Markets.

Al, you talked about freight products in China, India, and Russia -- and I think you said even mining countries -- as offsets to North American freight. Just round numbers, how much revenue is emerging-market freight? And is the margin profile similar to North America or would that be negative for mix?

The freight portion internationally was, I think, 32% for the quarter --

Yes.

-- outside of the US. So as far as margin, I think that it's comparable to what we get. I think if you really step back, I think we set the standard for technology globally in the freight markets.

So no real negative mix there?

Right.

So as you frame up PTC, the North American cycle, the positive offsets we just talked about, and the productivity initiatives, would you expect freight margin to be down in 2016 versus last year, and you will make it up on transit or corporate? Or can you be flat or up on freight?

I'm going to let Ray answer that, because --. (laughter)

We've been pretty consistent in being able to significantly improve our margins in every one of our market sectors. So that is obviously the charge that we've given our group execs in our business units, and they have plans in place that they are accountable for, that they are committed to deliver on. We manage those on a monthly basis, and I have confidence that we're going to do exactly what we've done in the past, and that's continue to improve our margins year on year.

Okay. And one last historical question: roughly speaking, you have driven 500 basis points of operating margin expansion since 2010. Can you say how that breaks down to into what you might call structural improvements, and how much of that was volume driven?

Well, we will not deny that we get the benefit of volume on the way up and it really -- something that we focus on eliminating on the way down. When you look at a margin improvement and you consider the FX, I don't think we have really broken that out, but I'm quick to say that volume hides warts. And we are -- we really have to focus on that, especially as -- those businesses where volume is coming down. And those have to be structural, or you won't get the results.

Right. So fair to say that that is where you will focus the accelerating cost out and efficiency initiatives? Is that -- I mean, on the freight side, specifically?

That's exactly right, Steve. You have to change your structure on the way down. If you don't, you are going to -- you will go down at a much larger contribution margin than you went up.

And I know you guys work on this all the time, but have you already identified what you're going to be doing over the next couple of quarters to offset that -- those decrementals from volume?

One thing that I'll share with you that Ray and his team presented to our Board -- contingency plans, some of which have started to be implemented later. Others going to be implemented as our assumptions prove right or wrong.

I think that Ray left the Board with a lot of confidence that they are ready to take the right actions that are needed to manage through any kind of challenge that we are faced with. We all have to admit that there is tremendous uncertainty as we look forward. The only thing we want to do is draw a line and say, here's what our assumptions were. Whether they are right or wrong, we don't know. But we are ready to react to them.

Very good. Thanks for the time, gentlemen.

So the answer is yes. (laughter)

(Operator Instructions)

Okay, well, we really want to thank you for your participation and look forward to talking to you at the end of the first quarter or sooner.

Thanks, everybody.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.