美國西屋制動公司 (WAB) 2016 Q4 法說會逐字稿

(Operator Instructions)

Good day and welcome to the Wabtec fourth-quarter 2016 earnings 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 us being recorded. I would now like to turn the conference over to Tim Wesley, Vice President of Investor Relations. Please go ahead.

Thank you, Nicole. Good morning everybody. Welcome to our 2016 fourth-quarter earnings call. Let me introduce the other Wabtec team member s who are here with me. Al Neupaver, our Executive Chairman. Our President and CEO, Ray Betler; Pat Dugan our CFO and our Corporate Controller, John Mastalerz. We will have our prepared remarks and then of course be happy to take your questions. Certainly during the call we will make some forward-looking statements and we just ask that you review today's press release for the appropriate disclaimers. Al, go ahead.

Thank you, Tim. Good morning everyone. As you know, 2016 was a very challenging year for Wabtec, due to the recession in the freight rail market and sluggish conditions in many other industrial markets. In this environment we are focused on controlling what we can and on investing in growth opportunities.

With that in mind, 2016 was also a year of tremendous accomplishments for Wabtec. I think we'll look back on it as the year that we took steps to position our Company for a new era of growth and performance. So let's talk about those accomplishments.

Financially, although we did not meet all of our 2016 targets, we did compile some of the best results in our history and generated significantly more cash from operations than net income. Operationally we reacted aggressively to our challenges by cutting costs. Strategically we acquired majority ownership of Faiveley Transport which has strengthened our diversified business model, expanded our global footprint and added new products an technologies to our portfolio. Before I turn it over to Ray, I'd like to say a few words about the integration of Faiveley and what it means to our Company.

As most of you know we have been interested in acquiring Faiveley for many years and we were finally able to come to an agreement in mid-2015. Throughout 2016 we spent countless hours dealing with regulators in the US and Europe and we received necessary approvals to move forward in the fourth quarter.

On December 1st, just 12 weeks ago, we announced the purchase of Faiveley's family stake. And in late December we began a tender offer for the remaining public shares. That process is ongoing and we hope to achieve our goal of at least 95% ownership in the first-quarter of this year. There's no doubt that Faiveley represents the most strategic acquisition we have made to date and we're very excited about the growth opportunities we can pursue together.

Faiveley's strong position in the global transit market provides increased diversity of our revenue base across markets, across product lines, across geographies, to offset the cyclicality of the US and global freight markets. The Company has a particularly strong platform of product and service capabilities in Europe and Asia-Pacific, both of which are much larger markets than the US, thanks in part to its geographic diversity, Faiveley generated organic sales growth of about 5% in 2016.

Faiveley strengthens our innovation and technology initiatives and brings products that Wabtec has not been able to offer such as high speed brake for door and door systems and HVAC equipment. The Company also brings a strong and experienced management team to complement our existing organization. Over half of Faiveley's revenues are project based and backlog driven, which provides long-term stability and visibility.

Finally, we believe the combination of Wabtec and Faiveley will result in significant synergies to drive our growth synergies and cost improvements. We estimate synergies of about $15 million to $20 million in 2017, and we expect long-term annual synergies of at least $50 million to be achieved by year three through revenue growth, supply chain efficiencies, operational excellence and cost savings and by leveraging our engineering and administrative capabilities.

Here are just a few examples of synergies we're working on. Sourcing, combined we have a spend of more than $2 billion annually which gives us leverage with suppliers. By optimizing our product portfolio and new product development, where we offer similar products we will select the best that each Company has to offer in each geographic market and we'll eliminate redundant product development cost. From an internal supply standpoint Wabtec currently manufactures some products such as rubber and castings that Faiveley purchased from outside suppliers. Now they'll be buying from Wabtec.

Facility consolidations. There had are numerous opportunities for manufacturing and office consolidations. For example, Faiveley's existing Indian Plant will be used to meet localization requirements for contracts that Wabtec has won, which means we do not have to invest in a new plant there, a savings of more than a $5 million in capital. In all, we're tracking more than 100 synergy projects and seeing positive interaction and cultural integration among the teams.

So once again, just 12 weeks into the integration process, we're pleased with the progress so far and excited with the long-term opportunities and benefits we expect to achieve. I'd like to now turn over the presentation to Ray.

Thanks, Al. I'd like to mention one more reason for our excitement. Two weeks ago we held our first annual leadership conference for the new Wabtec. We brought together the top business leaders in our Company, about half the participants this year were from Faiveley. It was very gratifying to see the two executive teams come together and focus on our conference theme, Stronger As One. I think we're off to a really good start. Our business leaders shared ideas for new products. They shared best practices in disciplines such as quality and lean. We discussed new acquisition targets and we explored cultural differences and ways to overcome them. We have no illusions. This integration will be complex but we're committed to exceeding our synergy targets and to making Wabtec a stronger Company for all of our shareholders.

With that, let's talk about the current state of our business and our markets. So first, we'll focus on fourth-quarter 2016. During the fourth quarter we not only purchased the majority ownership of Faiveley, but we started the tender offer process and began the integration of two other recent acquisitions. Workhorse Rail and the Gerkin Group were completed. We completed also $750 million senior notes offering and we continued to manage through a challenging downturn in the freight market.

Overall, our financial performance in Q4 did not live up to our expectations with sales of $760 million and adjusted EPS of $0.81. There were several factors that affected our performance. Sales were about $20 million lower than we expected and product mix was unfavorable. For example, revenues from train control and signaling did not meet our sales targets. We added sales of about $100 million from Faiveley, which were dilutive to operating margins.

Integration costs and activities related to Faiveley were significant and they did create distractions throughout our organization. As usual, we also booked some year-end adjustments, none of which were significant individually. On a positive side, we did generate strong cash from operations of $202 million, and our backlog increased 10% compared to the third quarter, even excluding the Faiveley backlog of $1.9 billion.

Throughout 2016, our management team responded to difficult market conditions with aggressive actions to reduce our cost. These actions enabled us to maintain good adjusted margin performance for the year, within 100 basis points of 2015, despite an 11% drop in sales. We reduced total planned employment by more than 10% during the year and we continue to adjust that as necessary going forward.

We made further cuts in discretionary spending at corporate and across all business units and we stepped up our efforts associated with the Wabtec excellence program, which includes lean, supply chain initiatives, and quality initiatives.

Let's move to 2017 guidance. Today we issued our guidance for the first time. For the year, we expect revenues to be about $4.1 billion, with earnings per diluted share between $3.95 and $4.15, excluding restructuring and transaction charges, a non-controlling interest related to the Faiveley acquisition. The mid-point of the EPS range represents growth of about 6% to 7% compared to 2016 adjusted results.

Due to the ramp-up of projects already in the backlog and the timing of synergies from a Faiveley acquisition, we expect our adjusted EPS in the first quarter of 2017 to be similar to the adjusted EPS in the fourth-quarter of 2016. And we expect the second half of the year to be stronger than the first half. Accretion from Faiveley will increase during the year as projects and synergies kick in.

Other assumptions include the following. Revenue growth for the year will come from our transit group with the freight group expected to be down slightly. Faiveley will be accretive but its financial impact will be reduced by expenses for additional interest and a higher share count, along with purchase price accounting charges. We're assuming foreign exchange headwinds of about $65 million at current rates.

Our tax rate is expected to be about 29.5% for the year. We're assuming diluted shares outstanding of about $95 million for EPS calculation purposes. But our goals for 2017 are straightforward: to meet our financial plan; to right-size our business, and remain disciplined when it comes to controlling cost; to generate cash; to invest in growth opportunities, while strengthening our balance sheet; and to ensure a smooth and effective integration process with Faiveley to capture the synergies and the growth that we expect. As in the past, we strive to control what we can.

So let's talk about the freight rail market. In NAFTA, freight rail traffic was down about 5% in 2016. In the first few weeks of this year, the numbers are slightly better, with traffic up about 2% on average. We're not seeing yet any benefits from this as customer inventories of aftermarket parts remain lower than normal levels and equipment storage rates remain high. If rail traffic continues to improve, we do expect to see benefits in our aftermarket business later in the cycle, perhaps in the second or third quarter.

Our 2017 freight assumptions include the following. Railroad CapEx, which declined about 15% in 2016, is expected to be about the same in 2017. Locomotives will be down about 6% worldwide and about 30% in NAFTA. Freight car build will be down about 10% worldwide and about 30% in NAFTA. Combined, that represents a headwind of about $120 million in revenues. We have opportunities to offset these headwinds because our growth strategies and diversified business model allow us to focus on the aftermarket in the US, on international projects in places such as India, on acquisitions that we've completed in 2016, which will add incremental revenue of about $100 million. Those acquisitions include Graham Wright, Unitrac, Pride Bodies and Workhorse.

We also remain focused on increasing our global footprint and our product offering beyond our traditional NAFTA market because about 75% of our installed base for locomotives and freight cars are outside of the US.

Our transit markets remain stable, both in the US and abroad, with good bidding activity overall. Reflecting this activity, our transit backlog is at a record high, then legacy Wabtec business and Faiveley's backlog is near record high. Over the next several years the strongest growth is expected to be in Western Europe, Germany, France, UK, and Asia-Pacific, specifically India and Australia.

While talk of infrastructure for spending in the US would also provide additional opportunities. Current projects include: brake stores and HVAC equipment for high speed trains in Germany, freight auxiliary power supply, HVAC couplers, pantographs for regional and commuter trains in Belgium, brake stores, electronics for the regional network trains in France.

We're bidding on significant future projects such as subsystem and component business, maintenance for computer trains in Sydney, Australia as well as subsystems and commuter component projects for the New York City acquisition which is forthcoming. In addition, to sales growth, we are focused on improving our margins in transit, both in legacy Wabtec business and the Faiveley business. Many of the synergy projects that Al mentioned involve plans that we believe will drive significant margin improvements and we're committed to delivering on those plans.

We continue to focus on growth in cash generation. In 2016 we generated $449 million of cash from operations, which gives us ample capacity for investment. Our priorities for allocating free cash have not changed while we continue to strengthen our balance sheet. First, we would fund internal growth programs including product development and CapEx. Second, we would focus on acquisitions where we have ample opportunity to deploy capital. And third, we would return money to shareholders through a combination of dividends and stock buybacks.

In May we announced a dividend increase for the sixth consecutive year and during 2016 we purchased 3,046,408 shares of our common stock for about $212 million or about $69.63 per share. We have about $138 million remaining under our current share repurchase authorization. We remain focused on increasing free cash flow by managing our costs, by driving working capital down and by controlling capital expenditures.

Our growth strategies remain the same. They are global and international market expansion, aftermarket expansion, new product development and technologies and acquisitions. So let's talk about each of these strategies. On the global expansion side, for the quarter, sales outside the US were $450 million or 59% of our total. We're particularly excited about growth opportunities in India, where we have orders for brake systems and event recorders for locomotives and Faiveley has several orders for doors, brakes, and air conditioning equipment for various transit projects; the bidding activity there continues to be strong.

In France after years of flat or declining volume, the bidding activity is very strong including the largest commuter project ever in Europe for the RER Regional Fleet, which includes 240 high capacity trains. Aftermarket expansion sales there for the quarter were $433 million or 57% of our total. Gerken, one of the 2016 acquisition companies, recently won two multi-year contracts to supply its aftermarket carbon products in China and in Germany.

And then on the new product side, we introduced several new products last year. We built a new plant in China to build intercoolers for the power generation market. We introduced a new generation of centered brake pads for high speed rail. We developed bogie mounted brakes specifically for the South African market. And Faiveley has a new NeoFlexx brake disc which they've introduced to the market.

Moving to train control and signaling. Train control and signaling remains an important part of our long-term growth opportunities although it's part of the reason why our freight revenues were down in 2016. As you know, our customers were working hard to implement PTC, but decreases in freight rail traffic caused the railroads to reduce their CapEx budgets for both infrastructure and rolling stock. In addition, the deadline extension to at least 2018 resulted in changes in our spending plans. The result of all that are the revenues from train control and signaling decreased 30% in 2016 to about $350 million. We expect that to be flat to slightly up in 2017.

Long-term, we expect PTC and signaling will be a growth business for Wabtec based on the following opportunities. Multi-year maintenance service agreements which include software and product enhancements, international project opportunities, and continued growth in signaling through organic investment in acquisitions. In 2016 we acquired a small but very strategic signaling Company in the UK to allow us to focus on growth in that market. We're beginning to see evidence that our long-term strategy is working. We signed several maintenance and service agreements related to train control including the 10 year contract in Brazil to provide variety of train control and signaling services.

On the acquisition side, our pipeline continues to be active and we're pleased with the opportunities we're reviewing. In addition of Faiveley, during the fourth quarter we acquired Workhorse Rail, which is a supplier of engineered freight components mainly for the aftermarket. The Company has annual sales of about $35 million. Workhorse supplies freight car couplers, knuckles and related parts for a variety of Class 1 railroad and freight car options. Work horse offers a variety of product designs and sells primarily in the North American market. It brings an excellent reputation and strong engineering capabilities and new products to our portfolio.

In addition, we believe Wabtec's geographical presence and aftermarket footprint will provide new opportunities to expand Workhorse Rail's customer base in North America and around the world.

So with that, I'd like to ask Pat to talk a bit about some of the financial details.

Okay. Thank you, Ray. I'm going to go through our normal review but also spend a little bit of time on the adjustments just to help everybody with the math and their models and understanding what actually was recorded in the fourth quarter and for the full year. So sales for the fourth quarter were $760 million and when you compare this to a year ago quarter that includes a negative effect of about $22 million from changes in foreign exchange rates. If you exclude that FX impact, sales would have been about 6% lower than last year's quarter. This decrease can be attributed to the difficult market conditions in our freight segment.

Our consolidated sales figure included about $100 million from revenue with a dilutive impact on EPS including lower margins and higher interest costs. When you look at our segments from a year ago, the freight sales decreased about 32%. That's most due to lower organic sales, mainly from PTC, from freight OE, and aftermarket. About $174 million impact. Negative FX which is about $3 million, which is more than offset -- those two items more than offset the impact, positive impact of acquisitions which would have added about $17 million of revenue.

Our transit segment sales increased 26%. The acquisition of Faiveley and others contributed about $120 million of revenue to the segment. That more than offset lower organic sales of about $14 million and negative FX of about $19 million.

Operating income for the quarter was $63 million. This included the following. Transaction expenses of about $26 million related to the Faiveley acquisition. Some adjustments for contracts and restructuring expenses of about $15 million. If you exclude these expenses, our operating income would have been about $104 million or about 14% of sales. Most of these expenses were included in SG&A in the quarter, so that's the main reason why it's so much higher than year-ago quarter.

Going forward, our run rate for SG&A is expected to be about $130 million. Our engineering expense was down slightly and our amortization was up mainly due to the Faiveley acquisition. So I'd like to repeat what Ray said earlier, that our adjusted operating margin for the year was 17.6%. And that's less than 100 basis points lower than 2015, despite the drop in sales; that's a good performance in a difficult market.

Looking at interest and other expense was $50 million in the fourth quarter and this included $22 million of debt refinancing expenses and additional interest costs incurred from the delay in closing the Faiveley acquisition. Going forward, we expect quarterly interest expense to be about $16 million. Be assured, we are focused on generating cash to reduce that number going forward.

Interest tax expense was actually a tax benefit in the quarter due to two items related to the Faiveley acquisition. First was an expense of about $9 million as certain transaction costs become nondeductible and we have to make an adjustment in our tax provision. We also had income of $27 million reducing a deferred tax liability. We had discussed the expense, the $9 million expense with you in December. The income from the reduction of the deferred tax liability occurred late in the fourth quarter after we had already completed the purchase of Faiveley. We were required to reduce the amount of the deferred tax liability that we had set up on the opening balance sheet because of changes in the statutory tax rate in France. We expect the 2017 annual effective rate to be about 29.5%. I always want to remind everybody that that's an annual forecast. The quarters will vary due to timing of any discrete items.

So focusing on the fourth-quarter EPS. Earnings per diluted share were $0.42. The effect of all the items that I had discussed and the $9 million non-controlling interest expense related to the Faiveley acquisition reduced EPS by $0.39. So our adjusted EPS is $0.81. So just to bridge you from the $0.42 to $0.81, we start at $0.42 of earnings per share in accordance with Generally Accepted Accounting Principles. You add back about $0.21 of transaction expense. That would show mostly in our SG&A line, about $26 million. Contract adjustments and restructuring expenses, mostly recorded in the cost of sales line, about $0.12. You add back additional interest and other expenses of about $0.17. And then we deduct the net tax benefit of the two adjustments I referred to earlier, that's about $0.20, and the minority interest, about $0.09. That gets you from $0.42 to $0.81.

So going through the same exercise for the full year, our earnings per diluted share were $3.34. And the effect of all the items I discussed and the $9 million of non-controlling interest related to the acquisition reduced EPS by about $0.51. So our adjusted EPS was $3.85. Again, I'll just bridge you from $3.34 to $3.85. $3.34 is our Generally Accepted Accounting Principles number. Transaction expense and SG&A about $0.31. Contract adjustments and restructuring costs, $0.13, mostly in cost of sales. Additional interest and other expense, about $0.17. The benefit of the tax -- the net tax adjustments, about $0.19, and minority interest of about $0.09. That gets you to $3.85.

Okay. To talk about our balance sheet. It remains strong. It provides financial capacity and flexibility to invest in the growth opportunities we discussed earlier. We have an investment grade rating for credit rating and our goal is to maintain it. Our working capital at the end of the year included trade and unbilled receivables, about $943 million. Inventories were $659 million. And payables were about $530 million. At the end of the year we had almost $400 million in cash, mostly held outside the United States.

Our debt balances at the end of the year, debt balance was about $1.9 billion. And that consists of the following. A $750 million bond offering that we had entered into in 2016, due in 2026. $250 million of bonds that are due in 2023. A bank term loan of $400 million and about $400 million outstanding on our revolver. When you look at the balance sheet, if you just do a simple calculation from our balance sheet at the year end, our debt -- net debt to EBITDA is about 2.5 -- 2.7. I'm sorry. But if you do a kind of a full pro forma, it's lower, it's below 2. 5. When you look at what we expect to do in 2017 with our cash generation, we expect to be below 2. Lots of strength on our balance sheet, lots of capacity and helps reassure everybody that we're going to maintain that investment grade rating.

Cash from operations, we generated about $202 million for the quarter and that brings us to about $449 million for the year. That exceeds our net income of $313 million, so a strong performance in line with our goals.

Just a couple miscellaneous items we always review. Our depreciation was $14 million compared to $11 million in last year's quarter and for the full year we expect it to be about $65 million. Amortization expense was $6.6 million compared to $5.7 million in last year's quarter. We expect it to be $35 million for the year. Our CapEx for the quarter, $19 million compared to $16 million a year ago. And for the year, about $50 million compared to $49 million in 2015.

In our budget and we always budget and tend to spend a little bit less than this but we're budgeting right now for the combined organizations to be about $110 million for 2017. Looking at our backlog at December 31st, our multi year backlog was a record $4 billion including $1.9 billion from Faiveley. Even if you exclude Faiveley, our backlog was up about 10% in the fourth quarter.

Transit was $3.4 billion, freight was $576 million. Changes in FX rates reduced the backlog by about $65 million compared to the end of 2015. Our rolling 12 month backlog, which is a subset of the multi-year backlog, was about $2 billion. Transit was $1.6 billion and freight about $400 million. The total backlog figures don't include about $170 million of pending orders and contract options. We don't count them in the backlog until the customer exercises them.

So with that, I'll turn it back over to Ray.

Thanks, Pat. So to summarize, as Al said at the beginning of our call, we had to deal with some very difficult and challenging conditions in our freight and industrial markets in 2016. But we stayed focused on controlling what we can while investing in growth opportunities. We still face some of these challenges in 2017 and we'll continue to attack our cost aggressively while driving our growth opportunities.

We expect to get back on track as a growth Company here this year in 2017, based on current market conditions and our existing strong backlog of projects. We're pleased with the Faiveley acquisition and the progress we're making on integration and synergy planning. We're confident that our diversified business model and balanced growth strategies will enable us to respond to both long-term opportunities as well as short-term challenges. And with that, we'll be happy to answer any of your questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions).

Our first question comes from Justin Long of Stephens. Please go ahead.

Thanks and good morning.

Hi, Justin.

Hi. How are you?

Good.

So looking back on 2016, obviously results missed expectations and I totally understand, it's been a tough demand environment to battle. But especially with the month of December being so far below expectations, could you just comment on your visibility and confidence in the outlook for 2017 and as you do that, I'm also curious if you've changed your methodology in terms of forecasting the business, based on what we saw last year.

The methodology has not changed. We have a very detailed bottoms-up methodology that we use for forecasting and we're basically analyzing that on a week by week basis to make sure that we have as good visible as possible, Justin.

I think the Q4 results were disappointing. We had issues that we had to address on our contracts. We had a few contracts where we had to take contract adjustments and the freight business did not recover. The electronics business did not recover. We didn't expect it to.

But we were trying to negotiate some MSAs that we were hopeful would develop revenue opportunities sooner than they did. So it was a host of issues that resulted in a shortfall. I think a lot of those issues were one-time unique issues that we addressed and we think that the forecast for 2017 and the guidance is solid.

Okay. Great. And maybe to build on that a little bit, looking at the 2017 guidance, could you talk about what you're assuming for organic growth in the freight segment and also what you're assuming for organic growth in the transit segment.

We're expecting overall, as I said, about 6%, 7%. Freight we expect to be basically flat to slightly down. We will monitor very, very closely obviously the aftermarket opportunity. Our opportunity in freight to a large extent is going to be dictated by how fast we start to derive benefits from traffic.

If traffic continues to pick up, then again Q2, Q3 we should start to see some of the benefits from that. We know that on the OEM side that car builds are going to be down. We do anticipate some growth opportunities on the international side. But overall, we expect traffic to be down.

Transit organic growth about 5% over the year is what we anticipate, and if you analyze the backlog in transit, both on the Wabtec and the legacy Faiveley side, it's again, basically, a record high. And we continue to pick up new orders. The project, the good thing about the project business is it is pretty predictable and we anticipate improvements in revenue throughout the year.

Okay. That's really helpful. Lastly, when you look at the business, you just on an organic perspective, what are you assuming for the change in operating margins in 2017? Do you think in the environment you just described from a top line perspective margins will improve? On an organic basis.

Justin, this is Pat. I think what you're going to see, just due to the way the year should progress that we'll get to about a 15% operating margin at the end -- by the end of the year. That is in line with what we discussed earlier. Clearly the overall margin is impacted by the higher mix of transit sales from the Faiveley acquisition. So there's going to be a steady improvement in margin throughout the year. We expect to execute on the synergies and the other integration plans, and so we'll also see benefits from that too.

I might add that the one thing that you might ask, you look at December and we had a pretty good view, I just want to point out that because of antitrust reasons we really did not have a good view of the Faiveley business and how it would roll out during 2017. We assumed a lot about an equal business across, but the way they did a lot of completion on some projects in the fourth quarter and our Faiveley business will really start out slow during the beginning of the year and these projects will start kicking in as the year goes on.

And they're in the backlog. They're planned. And a lot of these projects you do percentage completion type accounting, so we have good visibility on this. This is not like our freight business, which is a component business, that you have much better equalized sales but you don't have the visibility as much as we do.

And that's really the strength of this diversified business model and the strength of the Faiveley acquisition. And as Pat points out, these synergies, they will build up as the year does. And that's one of the reasons we said we'll start out slow and be stronger in the second half of the year.

That's helpful, Al. Lastly, Pat, I just want to clarify on the operating margin comment. You said around 15% all-in. But would you be willing to share what the year-over-year change is, or what you expect in terms of the organic margin profile of the business?

Yes, I think I would rather stick with kind of the overall group, the combined margin and -- because the organic growth, I mean, the organic margin I don't see that really changing. But I think we need to do a little more analysis to make sure we have that for you.

Okay. Fair enough. Thanks for your time today.

Our next question comes from Sam Eisner of Goldman Sachs. Please go ahead.

Yes, good morning everyone. So just on the PTC aspect here, PTC was down -- PTC and signaling I believe was down about $150 million year-over-year, based on that 30% decline. Can you talk about which buckets between signaling and kind of core on-board electronic PTC how much those were each declining? And then is there any change in the mix expectations for your flat guidance for 2017?

So Sam, on the PTC, PTC hardware was down because capital spending was down. So we anticipate that this year the Class 1s will buy out the remainder of the PTC hardware. On the signaling side, we had -- one of the reasons we missed Q4, we had a pretty significant drop. It was actually a delay, cancellation, but it's anticipated to come back in 2017, a delay in one of the major projects.

It is associated with PTC, but we were doing signaling construction on that project. So it was for us the scope was signaling category. So about $250 million of PTC last year out of the $350 million total train control and signaling was the revenue mix.

The signaling really was pretty constant at about $100 million, 2015 to 2016, and the drop was in the PTC part of it.

Got it. That's helpful there. And then Ray, you called out these contract adjustments and certainly it was a decent sized headwind this quarter. Is there a way to get a finer point on what specifically these contract adjustments are?

Are there cost overruns that are going on? Are you taking lower margins on longer term contracts because, I don't know, there are issues with it? I just want to have a better understanding of where these are being impacted, which segment, what specifically, any greater details that you can give us on that would be great.

The contracts were really associated with overall delivery performance problems, Sam. They're a very different -- they're were three contracts that were in different industries, in different geographical markets. But for the most part they were associated with cost overruns due to supplier problems in two cases and basically late deliveries in another.

Got it. Maybe just one last one. You guys called out the synergies for 2017, but are there any additional cost savings actions that we need to be mindful of. This year there were he pretty significant cost savings. Is there anything else we should be mindful entering next year, in order to get to your roughly 15% EBIT margins for the full year.

We're going to continue the initiatives that we had last year. So we'll continue to try to proactively, as much as possible, adjust our discretionary spending so that includes all our expense items, travel and the like, headcount, things like that, as well as the synergy program. So the synergy programs are very explicit.

We have over 100 detailed programs with people responsible to deliver on those programs. We manage those on a day-to-day basis, but we have a consolidated meeting on a monthly basis. So we have very good tracking mechanism, visibility, and our focus is to accelerate those as much as possible, look for additional opportunities to add to that portfolio, and to deliver on the ones we've already defined.

And they're across the board. Across the world, across every business, every business unit leader, every functional leader has a target with specific projects associated with their responsibility.

And Ray, just a follow-up on that. Is there any numbers that you can put behind the 2016 cost saving on the discretionary items? Thanks and I'll hop back in queue.

I'll let Pat try to --

I've got to say that's a little -- we get asked that question a bit. I think the reality is that until we got to the fourth quarter and we had done a very good job of maintaining a margin with dropping revenue and so those cost saving initiatives in 2016 really are reflected in that improved margin. There was no one specific program initiative.

All we did was we were constantly focused on identifying cost, variable cost related to the volume exchange, but also being mindful of taking fixed cost out that would allow us to maintain that margin. So going forward, as Ray said, the real focus is on these synergies and integration opportunities we have and we'll continue to do the same thing with the changes in volume.

Our next question comes from Scott Group of Wolfe Research. Please go ahead.

Good morning. This is Ivan. Thanks for the time.

Hi, Ivan.

Good morning. Can you provide a little bit more detail on your updated guidance?

You lowered your revenues by $100 million from $4.2 billion to $4.1. Can you put that into which buckets that's in, what product lines, what segments, is that all freight?

And then a similar question on the earnings guidance where that's also been lowered from your original preliminary guidance in December as well. Are you seeing higher expenses in certain cost buckets? A little more color would be great.

Okay. As far as the revenue drop, that's associated with a host of things. It's associated with the freight market certainly, but also things like FX and other cost related items. As far as the second part of the question, can you repeat it?

Yes. Just similarly, are you seeing higher expenses in certain areas that prompted you to lower your earnings guidance from your preliminary projections?

We're focused as we said on reducing expenses, driving down our overall SG&A and our costs and continuing to improve our margins. It's really about reduced revenues that we're trying to fight.

Got you. Okay. Secondly, can you describe the current acquisition pipeline, both in the US and internationally? Are certain markets a little more active than others? And just want to get a sense of what you're seeing out there in the marketplace?

We have very -- still a very healthy pipeline. The pipeline is strong both in North America and internationally, one of benefits of the Faiveley acquisition is they obviously had their own acquisition candidates. So we're now including those in our overall portfolio as we consider prioritizing acquisitions. So we have both international as well as domestic and freight, as well as transit.

Great. Thank you so much for your time.

Thank you.

Our next question comes from Allison Poliniak of Wells Fargo. Please go a head.

Hi, guys, good morning.

Hi, Allison.

Good morning.

Just want to did back on the positive train control and signaling comments. I think you mentioned up to up slightly. Obviously the biggest headwind was on the PTC side.

What's changed? As we head towards the 2018 deadline I would assume that would ramp up. Is there a piece, whether it's systems design or something that's not coming back to where you thought it was? Just help me understand that a little bit.

No, I think for 2018, they're going to basically have to catch up in 2017 and 2018, and it has to be more loaded towards 2017. Because by the end of 2018 the requirement is basically that all the equipment be installed and ready for commissioning. So there is about 20%, 25% of the buy that they -- of the hardware that they still had to buy and we expected most of that is going to be bought out this year.

Relative to the signaling side, a lot of the infrastructure work had been completed. But they did pull back significant on the infrastructure. And then on top of that, we had new opportunities that we're booking for commuter lines and other railroads. So there is some pick up in new business associated with new projects, as well as a completion associated with the existing BTC procurements.

Okay. And then as you talked about, the aftermarket piece is a bit new, but sounds like you're getting maintenance agreements and so forth in there. Is it tracking where you thought it was? A little bit more? A little bit less? Any color there?

They were delayed a little bit, Allison. Honestly, again, another impact on last year's revenue. We were hoping to negotiate and close those earlier in the year. It was long, protracted negotiation in most cases. Railroads are very good at what they do. And we had most of the Class 1s under contract now. So they'll start off slow, low, and as the PTC implementation continues, they'll ramp up. And the contracts are negotiated, basically at the level that we thought they would be. We said 5% to 10% would be hardware OEM equipment level and that's about where we're going to ends up it looks like. We're pretty happy with the way the negotiations went once they were finished.

Great. And then just last on Faiveley. Would low to mid single digit organic growth assumption be the right way to look at it in terms of your visibility for this year for them?

Overall we think organic growth, yes, low to mid single digits is about where we think we'll be.

Great. Thank you.

Thank you.

Our next question comes from Saree Boroditsky with Deutsche Bank.

Thank you. Good morning. Could you provide more color on the performance of the industrial business and how you were thinking about that into 2017?

Sure. On the industrial business, we're not seeing any significant improvements in industrial. It's pretty much similar to freight. We're hopeful that will change, but at this point we're not seeing any significant changes. On the other hand, we do have growth opportunities associated with industrial through the new product development and geographical expansion that we talked about, so that intercooler project that represents growth.

We have businesses like industrial controls businesses in Australia and other places in the world that serve the power of distribution and power generation market. So I think we're forecasting a flat market for industrial, similar to what we are freight, but there are improvement areas that will offset the down depressed areas that you see in this country.

Thank you. That's helpful. And then just going back to the guidance. Is the implied ramp in earnings, is that just due to Faiveley projects and synergies, or is there anything else that we should be thinking about?

No, I think it's a total mix of our business. We're going to continue to manage for improved profitability in all of our business areas as we always do. That comes through our focus on cost improvement and on leaning on reduced cost of poor qualities, as well as the backlog associated with -- and the mix associated with traded in transit.

Aftermarket business is strong. We're continuing to grow the aftermarket business in both of those areas to more OEM business you get in transit the more aftermarket business you have for 30, 40 year life. So it's a mix across the entire business. But margin generation.

You are right. The two things that are going to be the major factors is the project phasing that again, we did not have visibility of back in December. And the second thing is we generate the synergies through the year. Those are going to be the major contributers.

But as Ray points out, these aren't the only two factors. You have a tremendously diverse business model now that really provides us with the opportunity to deal with large headwinds. Think about the headwinds that we're going to be faced with. Just FX and our headwinds from the freight business in the US, both railcar and locomotive. So I think that really speaks to the strength of our business model.

Okay. That's really helpful. I'll pass it on. Thank you.

Thank you.

Our next question comes from Jason Rodgers of Great Lakes Review. Please go ahead.

Yes. Wonder if you could discuss what your expectations are for ECP in 2017?

If you're referring to the regulation that's being contested, we don't anticipate that issue is going to get resolved, Jason, this year. I think it's going to continue to be debated and we haven't forecasted any revenue associated with ECP.

Okay. And then --

in the US.

Right. And how about the outlook for you raw material cost? Are you seeing any beginnings of increases there?

So far our raw material cost, basically only about 6% of our total spend is associated with raw materials. We have indexes under contracts for each of the raw materials, copper, aluminum, steel, et cetera. Some of the raw materials that are going up are offset by raw materials that are going down, like rubber, glass, wood. So bottom line is we feel pretty comfortable that we're going to be able to manage any raw material inflation across our business for the year.

But most importantly, we have either indices or surcharges with our customers and we also have fixed pricing with our suppliers.

And we're renegotiating those contracts to drive those fixed prices down frequently.

And can you remind us what percent of your total sales are derived from freight OEM currently?

You mean freight car and locomotive OEM?

Correct.

Or do you mean -- less than 10% of the business is related to new freight cars and locomotives in North America.

All right. And then just a final housekeeping question. Would you happen to have the shareholders equity balance in the quarter?

Sure, so the shareholders equity at the end of the year is $2,976,000,825.

Thanks very much.

Thank you.

Our next question comes from Matt Brooklier of Longbow Research. Please go you ahead.

Thanks. Good morning. I had a question around Faiveley synergies. I believe the $15 million to $20 million of synergies you anticipate to capture this year, that's up from your previous expectations. Maybe if you could just talk to what's changed, why you believe you're going to be able to capture roughly, I think, twice the amount of synergies that you formerly anticipated in 2017?

Yes, that number really is basically the same. It's a gross number. We still have costs that are associated with that. And as we go through the year, we've already had, I can't tell you how many meetings we've had that's been concentrated on a program. We have a full-time individual that's devoted to it.

As we develop our synergy program, maybe the next call Ray and Pat could provide a lot more color and visibility on it. But right now this is the best we have as a gross number between $15 million and $20 million of synergies. I think I mentioned we're tracking over 100 different projects right now.

Okay. So the number hasn't changed, it's just the $15 million to $20 million is gross?

It's the same.

You're anticipating there's cost offset that gets you back down to I think it's like a net $8 million to $10 million.

Exactly.

Okay. That helps. And then just broadly speaking, of the $50 million of total targeted synergies, could you talk to how much of that is related to costs and maybe how much of it is potentially related to some revenue synergies that you could capture with the combination of the business?

Yes. I think it's an excellent question. Because I think long term that's really where the synergy is, is how we capture market share and grow our volume. That's the whole reason. That's really the most profitable way to grow. And we're really focused on it.

There is some of that if in the $50 million but you have to be realistic about the acquisitions and ability to do that. We first concentrated and focused on getting the integration, get the teams culturally combined and focused on the right things. So that will probably not be something you would expect in 2017, but beyond 2018 and 2019 it should start to grow and that really is our long-term synergy. The main reason we keep saying this is the most strategic acquisition that Wabtec has ever done.

Okay. So just to clarify. The majority of the $50 million at this point in time are more focused on the cost versus the sales synergy potential?

I don't know you how you define majority but yes, most of them I'd say, there's a good bit of that on cost and not on growth.

Just trying to get a confidence level in terms of hitting that number. And then --

I've always classified them as hard synergies and soft synergies. Typically the revenues is a soft one.

Okay. That's helpful. And then do you -- for fourth quarter, do you have the breakout in terms of PTC revenue, how much of it was freight and how much of it was transit?

75% was freight, roughly.

Okay. And then just lastly, you talked out about -- well, actually Ray mentioned and I wanted to clarify something that at this point in time you've already signed the Class 1 rails into contracts for PTC maintenance and services moving forward? Is that -- did I hear that correctly?

Yes. Most of the Class 1s are under contract, yes.

Okay. And the expectation is revenue from those contracts are expected to ramp as their systems go live, so probably expecting minimal contribution from those contracts in 2017, is that a fair way to think about it?

Yes, that's right.

That's helpful.

We'll ramp up to a steady state this year, Matt.

Okay. And again, just to clarify, 5% to 10% of total revenue on equipment side of things for the Class 1s, that's a fair way to think about the total annual maintenance and services revenue moving forward?

We said 5% to 10% of our PTC hardware, the installed base that is out there.

Okay. Thank you for the time.

Thanks, Matt.

Our next question is a follow-up question from Sam Eisner of Goldman Sachs. Please go ahead.

Hey, sorry, just a quick question here. On organic growth there were a bunch of numbers that were thrown around. I thought Pat, you said 6% to 7%, but then you also said flat to down on freight and up 5% in transit. What are you guys expecting for organic growth in 2017? If you could put a number on it, that would be great.

I think the confusion is around how much acquisitions play in that, whether you include Faiveley or not. The overall volume is up tremendously, but internal growth is low to single digit growth.

That's helpful. Thanks so much.

Our next question comes from Steve Barger of KeyBanc Capital Markets.

Thanks, Good morning. Appreciate all the detail on the call so far. Wanted to ask one a little further out. If you do look forward a few years to the point where the integration is well under way and we have, say, a stable to modestly growing freight market, do you have a thought on what consolidated operating margin will look like given the new mix?

The only thing I would say is if you take a -- if you step back and you take a look at the Faiveley business, and we've identified in three years $50 million of synergies, one could easily just add that to their current position, and you would have an indication on what their margin might look like.

And I think Pat, do you want to challenge with the margin question about our base business, even under the volume demand to maintain those margins as they have within that percent, I think that long-term we should be able to maintain our high margin business in the traditional Wabtec businesses. That would give you an idea. That's just looking at it from 20,000 feet.

Understood. So fair to say as you go towards the end of the decade that you would think there's a couple hundred basis points of improvement from the 15% full year that you're talking about right now. Is that time frame realistic?

Yes.

All right. That's all I had today. Thanks. Thanks.

(Operator Instructions)

Our next question comes from Kristine Kubacki of CLSA. Please go you ahead.

Good morning, guys. A question a little bit longer term on the acquisition strategy now, it sounded like and I get the complexity of this deal was the largest you've taken on and you made the comment about distraction. Sounds like from a financial capability it is no problem to continue with the acquisition strategy. But where we're at with Faiveley, do you think that there is still bandwidth within management to continue a pretty aggressive acquisition strategy over the next couple years, given what's on the plate with Faiveley still?

Yes, I think, Kristine, that Faiveley brought the tremendously strong management team with them. Stephane Rambaud-Measson has done an excellent job pre acquisition to come to Faiveley to address some performance issues and improvement opportunities, and he was well along on that transition, put in place a strong management team around him. And those folks are a good part of the people that are running the transit business worldwide today.

So they have certainly their own relationship experiences and acquisition candidates that they brought with them and I personally have already participated in three different acquisition visits with folks from the Faiveley legacy, Faiveley Executive team. So yes, they're a fundamental part of our organization now. We look at them as part of us. We don't say they and we anymore, and we have plenty of capacity, probably more capacity, than we had before; definitely more reach.

And I'd add to that is that one of my main focuses is the integration and the synergy related to the acquisition. And as Ray mentioned in his prepared remarks, he said we don't have any dilution that this is going to be a slam dunk easy acquisition. The question is a very valid one and one that we take serious.

And I think when you look at where we're at in the integration process on this, from my years experience I think we are kind of where we thought we'd be. I think the biggest hurdle was still one of cultural integration. And I think we'd be careful in going ahead with a huge one, although we have the capacity.

I think you worry about resource allocation. You worry about attention to detail. But I don't think we're years away from that. I think we're months away from that point.

Okay. That's very helpful. Thank you very much, guys.

Thank you.

(Operator Instructions).

It seems we have no other questions at this time. So I would like to turn the conference back over to Tim Wesley for any closing remarks.

Okay. Thanks for everybody's attention this morning and we will talk to you in about two months with our first quarter earnings report. Have a great day.

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