美國西屋制動公司 (WAB) 2017 Q2 法說會逐字稿

Good day, and welcome to the Wabtec Second Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Tim Wesley, Vice President of Investor Relations. Please go ahead.

Thank you, Allison. Hello, everyone, and welcome to our 2017 second quarter earnings call. Let me introduce the rest of the Wabtec team who's here with me, Ray Betler, President and CEO; Pat Dugan, our CFO; and our Corporate Controller, John Mastalerz. We will, as usual, make our prepared remarks and then we'll take your questions. During the call, we will make forward-looking statements, so we ask that you please review today's press release for the appropriate disclaimers. Ray, go ahead.

Okay. Thank you, Tim. Good morning, everyone. Although we remain confident in our future growth opportunities, our second quarter results and updated full year expectations are lower than we anticipated. As a result of these short-term challenges, we are continuing to cut costs to manage aggressively through this difficult period. At the same time, we are seeing many positive developments, including, of record, in growing backlog, significant progress in the Faiveley integration and ongoing investment in our balanced growth strategies around the world. So let's cover all these topics in more detail.

Second quarter and the full year. The main reason for our shortfall in the second quarter and our reduction in full year guidance is that we've seen about $250 million of revenues, roughly 5% of our full year total pushed out due mainly to revised timing of sales and projects already in the backlog, and to the market conditions, which we've discussed previously rebounding slower than we anticipated. These factors are more than offsetting the expected ramp up of synergies from the Faiveley integration during the year. Some of the revenue slippage occurred in the second quarter, including projects for signal, design and construction work, locomotive overhauls, which both have -- did not materialize, so we removed them from our 2017 forecast. Also, we are not yet seeing the expected recovery in the freight aftermarket spending, and the OEM freight markets remained sluggish. As a result, we revised our 2017 guidance as follows: Compared to the first 2 quarters of the year, we expect some modest improvement in our third quarter results due to seasonality, with the strong fourth quarter and an adjusted operating margin target in the fourth quarter of about 15%. With more of our revenues coming from Europe, the seasonality in the third quarter will be more of a factor than it's been in the past. For the year, we now expect revenues of about $3.85 billion, with earnings per diluted share of between $3.55 and $3.70, excluding restructuring and transaction charges and noncontrolling interest related to the Faiveley acquisition. Our guidance is based on revised timing of sales and projects already in the backlog, market conditions rebounding slower than expected, and the expected ramp up of synergies from the Faiveley integration. Clearly, we are still operating in a challenging environment, which means we have to stay focused on controlling what we can. That means being disciplined when it comes to costs, taking actions to rightsize our business, properly mobilizing the new Transit projects and ensuring a smooth and effective integration process with Faiveley so we can capture the synergies and growth that we expect.

Positive developments. As I stated at the outset, we remain confident in our future growth opportunities, even as we manage through these short-term challenges. During the quarter, we saw several positive developments. Our backlog increased 10% compared to the first quarter backlog and our book-to-bill was 1.4, which is a positive indicator for future organic growth. Our cost-cutting actions are having a positive effect as our operating margin adjusted for restructuring and transaction expenses was about the same as the first quarter despite a shift -- a mix shift toward lower-margin Transit revenues.

During the quarter, we continued to invest in our growth strategies, especially new product development. I will talk about our investment in that area later in the call. And also, acquisitions. We acquired Thermal Transfer, the manufacturer of heat exchangers for industrial markets, with annual sales of about $25 million; and Semvac, a European-based manufacturer of sanitation systems for transit vehicles and locomotives, with annual sales of about $15 million. We have other acquisitions in the pipeline and expect to make announcements in the near term. We continue to make significant progress on the Faiveley integration. We are also beginning to develop our first strategic plan as an integrated company, now with the benefit of Faiveley's worldwide presence. We expect to emerge with a growth plan that meets our long-term financial goals to average double-digit growth in revenues and earnings through the business cycle. And we expect to be a stronger, more global, more balanced and less cyclical company at the end of this 5-year plan.

Moving to the Transit market. With the acquisition of Faiveley, our Transit business has transformed into a true global business, where we're a true global player. Many markets are larger and more stable globally than our traditional North American market. Over time, that should mean more visibility and stability, better growth markets, both organic and through acquisitions and improve margins as we benefit from increased scale and market share. Although we have seen some existing projects delayed until later this year and next year, we booked a record amount of new orders during the quarter, more than $350 million in Europe and Australia alone, and have a record multiyear backlog. Our Transit book-to-bill in this quarter alone is 1.6, which bodes well for organic growth next year. During the quarter, we won orders in Germany, France, Australia, the U.S., China and India, demonstrating our global reach and our diversification.

Here are some specifics. We will provide brake, doors, air conditioning and pantographs for new commuter rail cars, being built in, for us, Sydney, Australia, by Rotem where revenues are more than $80 million. For the Paris Metro, cars being built by Alstom and Bombardier, who will provide the same components for 71 trains for about $100 million of revenue. The customer has the option to order another 180 trains, which will make it our largest order ever. Remember that these types of OEM orders typically lead to long-term aftermarket opportunities, which provide revenue and good profitability for 3 to 4 decades.

Under Faiveley integration, Faiveley represents the most strategic acquisition we have made to date. And we're very excited by the growth opportunities and synergies we are driving. 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 3 through supply chain efficiencies, operational excellence and cost savings, and by leveraging our engineering and administrative capabilities. We continue to track more than 100 synergy projects in every operational and functional areas. We're achieving success in sourcing, new product development optimization, tax planning and in reducing redundant activities and resources. For example, we've completed a comprehensive review of our total product portfolio and have eliminated all overlaps. Longer-term synergies are focused on facility consolidation, global market expansion and new product development. The acquisition has also enabled us to strengthen our management team and to consolidate our organizational structure.

During this past quarter, we named Stéphane Rambaud-Measson as our COO and have also appointed him as a director on the Wabtec board. We streamlined our organization to go from 11 operating units to 7. So once again, in just a few months into the integration process, our synergy plan is progressing and we expect it will provide increased savings as we go through the year. This progression is built into our guidance.

In the Freight market, we have some sort of short-term challenges that continued to face us, but the Freight backlog has increased 3 quarters in a row and demand appears to be stable. In North America, Freight traffic is rebounding after being down for 2 consecutive years. Through mid-July, total traffic is up almost 6%. Despite this improvement though, the number freight cars in storage increased 5% during the quarter. That's the first time that's happened this year. As a result of this, in the railroads own cost-cutting efforts, we have not seen yet an expected pickup in the aftermarket business that we anticipated. And now, we are assuming that we will not see that pickup throughout the second half of the year. U.S. OEM markets for cars and locomotives also remain sluggish and may be down again next year, and that's true on the international market also. Freight conditions are mixed internationally. In Australia, the OEM market is weak, but we're seeing some aftermarket growth. In Brazil, the overall economy remains soft. The government has delayed renewal of some railway concessions, both of which have curtailed spending. In India, some of the growth in aftermarket spending has occurred with new locomotive deliveries expected to pick up next year. Russia, overall the economy continues to be slow. And in South Africa, recession has led railroads to in-source much of its maintenance spending. Due to these international market conditions and NAFTA conditions, our Freight-related business are balancing the need to reduce costs in the short term, while maintaining an appropriate amount of investment for future growth.

So I move to cash allocation. Our priorities for cash remain the same. To fund internal growth programs, including product development and CapEx; to fund acquisitions, where we have an ample supply of opportunities to deploy capital in this area; number 3, to return money to shareholders through a combination of dividends and stock buybacks under our current share repurchase authorization. We may also look to reduce debt during the year. As always, we are focused on increasing free cash flow by managing costs, driving down working capital and controlling capital expenditures. Our growth strategies remain the same. We focus on new products and technologies on global and international market expansion, on aftermarket opportunities and on acquisitions. We have a lot of activities in each of these areas, but on this call, I'd like to highlight our long-term vision, specifically in the Train Control and Signaling area. 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 are down. In the second quarter, revenues from Train Control and Signaling were $67 million compared to $86 million in the year ago quarter. For the year, we expect them to be down about 4%, mainly due to the delay of the signal, design and construction contract that I mentioned earlier. As PTC equipment purchases have slowed down in recent years, we have offset some of that decline with new contracts that demonstrate the breadth of our capabilities. For example, in the second quarter, we signed contracts worth about $60 million for projects with the railway in Chicago and with South Florida Regional Transportation Authority, where we are providing back-office servers, wayside communications and signals, a dispatch system, construction, training and system integration. And now, we have a number of maintenance and service agreements related to Train Control and PTC worth about $40 million annually, with more in negotiations.

So long term, we expect Positive Train Control and Signaling will be a growth business for Wabtec based on our multiyear maintenance and service agreements, including software and product enhancements, international project opportunities and growth in Signaling through organic investment and acquisition. Our new product road map includes considerable activity in this area, including Wabtec 1, which is a means of collecting and analyzing data. As you know, there's a lot of industry talk these days about increasing asset efficiency and utilization about digitalization through data analytics. Wabtec is involved in all these areas and in all of those discussions. We continue to invest not only in data analytics, but we also are investing in a fail-safe capability for our office systems. So with a product that's focused on safety critical office systems, data analytics and our PTC capability is building blocks that allows us to position ourselves to ultimately be able to support autonomous railway capability in the future. So our product road map is not to stop at the Positive Train Control level, but to go beyond that to driverless trains, and that's a product capability that will allow for increased safety and increased throughput and operational efficiency for the railroads.

With that, I'd like to turn this over to Pat for more comments on the financials.

Okay, thanks, Ray, and good morning, everybody. So I'll just go through some highlights on the financials and -- that we'd normally go through in the past. Our sales for the second quarter were $932 million. When you look at the breakdown and at the segments that compose that sales number, our Transit segment sales increased from a year ago quarter by 80%, driven by the Faiveley acquisition. Acquisitions contributed $283 million of revenue, which are slightly offset by lower organic sales, down about $11 million; and the impact of FX, which is down another $12 million.

Our Freight sales decreased 13%. Lower organic sales mainly from Signaling and train control, Freight, OE and aftermarket sales were down about $93 million. There was a small FX impact of about a negative $3 million, and then we had an offset from acquisitions that contributed an additional $44 million. Freight sales have been in the range of about $340 million to $350 million for 3 quarters in a row now. Our Freight backlog has increased for the third quarter in a row. Those things, I think, are a positive indicator. Our operating income for the quarter was about $114 million, and this included restructuring and transaction expenses of about $9 million specific to the Faiveley acquisition. These costs are included in our SG&A. If you exclude these expenses, operating income was $123 million, or about 13.2% of sales. That's about the same as our adjusted operating margin in the first quarter, so that shows some positive benefit from our cost-cutting and integration activity, even as Transit revenues have increased at -- on a mixed basis as a percentage of our total sales. Going forward, we expect our SG&A to be about $120 million to $130 million per quarter.

Engineering expense and amortization were up quarter-over-quarter mainly due to the Faiveley acquisition, and we expect similar quarterly run rates for the rest of the year. Our interest expense was $15 million in the second quarter due to borrowings -- up mostly due to the borrowings on the Faiveley acquisition and higher interest rates. Our interest expense included a $2 million benefit related to the prepayment of debt assumed in the Faiveley acquisition. So it was an adjustment related to some of the restructuring of the financing on the Faiveley balance sheet that we got a little bit of a benefit in the quarter. Going forward, we expect interest expense to be roughly about $17 million per quarter, although we are clearly focused on generating cash to reduce debt and of course, the interest expense during the remainder of the year.

Other expense. We had other expense of about $1.6 million in the quarter, mainly from noncash foreign currency translations. In the year ago quarter, we had an expense -- a similar expense of about $1.2 million for the same reason. Income tax. Our effective tax rate for the quarter was 25.4%, slightly lower than we expected due to our mix of profits in different jurisdictions. We expect that the effective rate for the rest of the year to be about 27.5%. I'll just remind you that that's an annual forecast and the quarters will vary due to timing of any discrete items.

Just to help you with some of the reconciling the EPS numbers we've given you, our EPS in the second quarter on a GAAP basis per diluted share were $0.75. The net effect of the restructuring in the transaction expenses and the benefit from the interest expense item I mentioned reduced EPS by $0.05, so adding that back, our adjusted earnings per share was $0.80. So just to help you reconcile for the second quarter, we have $0.75 on a GAAP basis. We add back the restructuring and transaction costs that are in the SG&A line, that's a $0.07 benefit. You deduct the interest expense benefit that was in the interest line, that's about a $0.02 negative. And it comes up with a net income per diluted share, excluding these items, of about $0.80. If I do the same math for the year-to-date, I would start at a net income per diluted share in accordance with GAAP of about $1.52. I add back restructuring and transaction costs of about $0.11. You deduct the interest expense benefit, the same $0.02, and then I have some onetime PPA in the first quarter, tax impact from our opening balance sheet, minority interest impact, I end up with a $1.64.

Okay. Moving to our balance sheet. It remains strong. It provides the financial capacity and the flexibility to invest in our growth opportunities. We have an investment-grade credit rating, and our goal is to maintain it. So when you look at our working capital over June 30, receivables were $813 million, inventories were $746 million and payables were some $548 million. Our cash on hand at the end of the quarter was $329 million, most of that was -- is held outside the U.S. When you look at our debt, debt at the end of the quarter was about $2 billion, consisting of a 10-year -- $715 million of 10-year bonds, another $250 million of bonds, $390 million of a term loan and a revolver balance of about $576 million. When we take into -- all this into account, our net debt-to-EBITDA is about 3. When you look at our cash flow for the quarter, cash from ops was $14 million. Year-to-date, we have actually used cash, resulting in about a $14 million of cash from operations. So this is obviously a result that we need to improve. We're being impacted by 2 things: the first being, all these costs that we referred to in the restructuring and the deal and integration costs, some of which were accrued at year-end and paid in 2017, but also some working capital performance that needs to improve. We had about $49 million of cash that's been used for deal, restructuring and other integration costs year-to-date, about $30 million were in the Q1 and the rest in Q2. And these costs are mostly consist of restructuring, banker, legal and then the finance restructuring -- the debt restructuring I've talked about. The remaining use of cash is in the working capital performance is mostly accounts receivable that's been impacted by the timing of our invoicing, our project performance and achieving contract milestones. We continue, as always, to push to improve and expect to achieve our normal goal of have cash from ops exceed our net income on an annual basis.

A couple miscellaneous items I just want to review. Our depreciation was about $16 million for the quarter compared to $11 million in the year ago quarter, and for the full year, we expect it to be about $65 million. Our amortization cost $9.4 million in the quarter compared to $5.5 million in last year's quarter and for the full year, to be about $38 million. And our CapEx for the quarter was about $19 million compared to $11 million a year ago, and we expect to have a spend for capital expenditures of about $80 million for the year.

Some information on our backlog. As of June 30, our multiyear backlog was a record $4.5 billion, roughly half of it is related to Faiveley, and our book-to-bill for the quarter was about 1.4 overall. Transit under that total backlog accounts for $3.8 billion and Freight, about $611 million. Our rolling 12-month backlog, which is a subset or a component of what I just referenced, is about $1.8 billion. Transit is $1.4 billion and Freight about $413 million.

So with that, I've reviewed some of the financial information, and I'll turn it back to Ray.

Okay, Pat, thank you. So to summarize, we continue to face some challenging conditions in our Freight markets, and we need to manage through some project delays. In this environment, we are continuing to cut costs and take actions to manage our situation aggressively. Despite our current challenges, we remained very confident in our future growth opportunities. We have a record and growing backlog, and we're making great progress in the Faiveley integration. And we're continuing to investment in our balanced growth strategies around the world.

And with that, we'd be happy to take your questions.

(Operator Instructions) Our first question will come from Justin Long with Stephens.

So first question, actually a couple of questions on the $250 million of delayed revenue. So I was wondering, first, do you still expect this amount to be recognized at some point in 2018? Or is there a chance this number comes out of the backlog? And then secondly, could you talk about the margin profile on that delayed revenue? I'm just curious where that business stacks up versus consolidated margins today.

Okay. As far as the $250 million revenue, Justin, it was not in the backlog. It was in our plan. So it was revenue that we anticipated, it comes in really 3 main buckets: One bucket is a Signaling project for commuter railroad that is under construction, but has been re-phased. So there was a section -- it was -- the contracts were being let in phases through change orders and there was a large change order that was anticipated that would be constructed this year. So that was in our plan. We are executing work on that particular project in other sections of the railroad that will be open for passenger service in the near future. So the question of whether or not, ultimately our customer -- the ultimate customer decides to build that particular section of the railway is a decision that they'll make at a later date, and that's not something that we anticipate in '17 or '18. It was -- I want to emphasize, this is not a PTC project, this is a Signaling railroad construction project that we were performing. And the second main bucket is really the Freight aftermarket. That is just a reflection of what we anticipated in the second half of the year, and we're not seeing any significant pickup in the aftermarket. So we decided to take that aftermarket anticipated revenue out of our guidance, out of our forecast for '17. We do expect that the aftermarket opportunities will come back because traffic is continuing to grow. It is a little bit sporadic. Some weeks, it's 5%, 6%, 7%. I think last week, it was 1.7%. So again, it's not a robust recovery. The railroads, many of them reported already, are showing good growth and we know that ultimately, our opportunities lag their opportunities and we do anticipate that next year, the aftermarket business will improve. But we are not continuing to forecast that for the remainder of this year. So basically, we're anticipating flat revenue in the Freight area. And then the third big bucket is really associated with overhaul -- we have a large overhaul contract for locomotives in our plan, and we had more Tier 4 locomotives in the plan. So the mix between -- first of all, the locomotive build is down from what was originally planned, as you know, and the Tier 4 locomotive content for us is better than Tier 3 or international. So given that the Tier 4 build is down about 100 locomotives plus this year, that represents the remainder of the shortfall in the revenue.

Okay, that's all really helpful color. And then maybe to follow up on that second question that I had, it seems like between Signaling, Freight aftermarket and the overhaul business, that's probably higher-margin business. Is it fair to say that, that $250 million of revenue carried a more favorable margin profile than consolidated averages?

Yes, it was. And just to give you an example, the Tier 4 -- going back to Tier 4 locomotives, those obviously are good -- that's a good business for us. We're in a sole-source position with the locomotive builders. And you know that in our Freight business, our margins are 20%, 25%. So overall, it was definitely a better margin opportunity than our average.

Okay, great. And then second question, you talked about a modest improvement in results in the third quarter. And I know you aren't giving specifics here, but if I just ballpark it and say EPS goes from -- adjusted EPS goes from $0.80 in the second quarter to something like $0.85 in the third, that implies you need to see a pretty big jump to call it $1.15-or-so in EPS in the fourth quarter to get to the midpoint of the guidance range. Can you just help us understand the assumptions behind this big step up in the fourth quarter and the level of visibility you have on that front?

Yes, so Justin, you're absolutely right. We do expect a very strong fourth quarter, and we have high level of confidence in our ability to deliver that. And the reason for the high level of confidence is that we have the backlog in place to be able to deliver the revenue required for the fourth quarter. A lot of projects that we have in our backlog are just starting up and we'll ramp up, as all projects do, over time and those are programmed in for about, let's say, in average of 3 years. So we have very good visibility about those projects and the revenue stream that is in that fourth quarter plan. Additionally, our synergies continue to grow throughout the year, so each quarter, we have increased synergies in our plan. We've been able to hit our synergy targets very consistently and we anticipate improved performance in the synergy area in third quarter and even greater in the fourth quarter. So those are some of that contributors that give us confidence in the fourth quarter. One other thing to take into account is I mentioned seasonality in the third quarter. I want to explain that so people understand. In Europe, given that a lot of our backlog and our revenue was on the Transit side now from and out of Europe -- in Europe, in August, there's a vacation season. So normally, plants are shut down for the month of August and so there's a gap in terms of revenue generation. So that's part of the differential that exists between third and fourth also. So again, my real point that I want to emphasize is we have very strong confidence and we have the plan in place to be able to deliver the guidance that we're sharing today.

Our next question will come from Allison Poliniak with Wells Fargo.

I just wanted to go back to the Signaling and some of the Transit project delay. Understanding that you have a backlog that it gives you some level of visibility, I mean, what's your comfort that some of those won't get pushed further out? I know it's part of the practice, but is there a risk that we could see some of that pushed into '18, still?

There's always some risk associated with project delays, Allison, as you said, but in a short term, it's -- we have normally pretty good visibility about the status of the projects. Once that projects actually ramp up, normally, they're not going to be delayed. In this particular case, it was a situation where the project just wasn't awarded, that change notice was not awarded and this alignment is being built in phases. The original program plan was to sequence those phases, and the customer communicated what the sequence would be. So we put that into our forecast in our internal budget -- our forecast for 2017. And the customer never awarded that particular section of the track. They decided to re-sequence -- change the sequence, in which they're building this new greenfield railroad and they're going to start up an abbreviated revenue service with a section that is being constructed and built, and we are participating in that work. So, as I've said, will the section that they canceled come back later in a future award? It could. But at this point in time, they have not forecasted that, they are not communicating that, so we are considering it indefinitely suspended and we're focusing on the project that we're working on it here. It's an unusual situation and different from having been awarded a project in starting to actually execute on the project than what we talked about for the third, fourth quarter projects that we actually are working on already. So I don't anticipate a problem like this in Q3, Q4.

Great. And then on, I guess, following on Justin's comments about Q4, you talked about an exit rate of 15% EBIT margin. Is most of that, I guess, from your perspective, good visibility on just given where you see the volumes today, and I guess, more importantly, the synergies and such with Faiveley?

Yes. I'd love Pat to answer that, but yes, we do.

Well, you have a number of factors that are going to contribute to that fourth quarter EBIT percentage. The first and the easiest one is that you have a volume increase, and you're going to get a contribution margin that with the year, your fixed cost being leveraged, you get a better result. We're also going to be continuing to be working on our synergy plans and executing as benefits -- those benefits really ramp up over the course of the second half of the year. A lot of the hard work that's been done already starts to become a benefit in the second half of the year. So it's the 2 items. It's really the higher volume and contribution margin and the continuing execution on the synergy plan with the combination with Faiveley.

Our next question will come from Jason Rodgers with Great Lakes Review.

Yes. I wonder if you could talk about any changes in the competitive environment? And any material change in the number of contracts that you're winning on both Freight and Transit?

So the competitive environment probably has changed more in our side than on the other competitors' side. We are the largest equipment supplier in the industry with the acquisition of Faiveley. We continue to make significant progress in terms of winning orders. The ability to capture $350 million of projects in 1 month is very indicative, I think, of our new capabilities. So on a worldwide market basis, our main competitor continues to be more New York Air Brake in the States, and they are a very formidable competitor. We have a lot of more regionalized competitors around the world, but the market dynamics are such that I think we've either been able to maintain or grow market share in almost every sector that we work in.

And your results so far in July, how does that tracking compare to your revised guidance?

We're tracking -- Pat, maybe you want to comment on how we're tracking for Q3. We're tracking in concert with the guidance, Jason, that we just issued.

And just a few number questions or at least shareholders' equity. I don't know if you have that number handy for the quarter.

Yes. Shareholders' equity is $2,584,000,371.

And what's the current target for debt-to-EBITDA? And when would you expect to realize that?

Well, our goal is with the debt-to-EBITDA is to maintain our investment grade rating, which would put us into the 2 to 2.5. We expect with the -- we'll have cash flow generation, and we would get to that within a fairly reasonable period of time here. And then we would look to maintain that as a long-term goal, financial policy. The impact of any kind of acquisition, of course, would create some variability there, but we're always making sure that we're going to drive our -- and have the plan to drive our debt-to-EBITDA down into that range, which is consistent with our investment-grade policies.

And finally, I just wanted to get your thoughts on perhaps giving more priority to share repurchase here in the near term with the stock at its current level.

Yes. We really haven't -- we're going to -- we have an authorization with our board. But right now, our priorities are to invest in the company, invest in our R&D, in our organic growth, our acquisition strategy. And to the extent that we have excess cash, we're going to do a combination of delevering, but also be opportunistic in the stock buyback plan. We don't have any commitment or a plan we're going to roll out and execute on. Right now, we're just going to be opportunistic and prioritize our cash, as we talked about before.

Our next question will come from Scott Group of Wolfe Research.

So Pat or Ray, any rough sense how much of the $15 million of $20 million of synergies you guys have realized so far year-to-date?

Yes. We have exact sense for what it is. It's exactly in line with our plan, Scott, for the year. So we won't comment on the specifics, but it's tracking exactly where we planned it to track.

Yes. I mean, we're definitely -- this plan because as you would imagine, you're executing on consolidations and other cost synergies. You see the benefit of the hard work we do in the first half of the year and the second half. So I'd really rather not kind of forecast out there the synergy by quarter. But I could just tell you that overall, we expect to be on our plan.

I think maybe more directional, is it fair that you've -- that there's been kind of very little of the realized synergy so far, and that's more coming in third and really fourth quarter? I'm just trying to marry that with the ramp in margin.

Yes. The increase is a year ago, Scott. But that's exactly right, your perception.

Okay. Can you give us the breakdown of Signaling and PTC between the PTC and the non-PTC Signaling for the quarter? And then just how you're thinking about that for the rest of this year?

Yes. So the PTC sales for the quarter, the actual was about $43 million. And our Signaling was about $24 million in sales, for a total of about $67 million. And for the rest of the year, we're expecting some slight ramp-ups because of the confirmed backlog that we have and a normal kind of year-end spending that does occur, but not a whole lot of growth there. That's already -- that's been reflected in our guidance that we've given you for the rest of the year -- for the full year.

Okay, that's helpful. One more. Transit -- it looks like the Transit 1-year backlog fell about $200 million from the first quarter, and the multiyear backlog increased about $300 million from the first quarter. So some moving parts there. Help us understand what's going on with the Transit backlog.

Sorry. I'm not sure I -- your number there doesn't -- I'm looking at my total backlog for Transit, and I have it up over $300 million from Q1.

The total one -- yes, I was looking. The total one, exactly up $300 million. I thought that you said that the 1-year backlog fell from $1.6 billion to $1.4 billion?

Oh, I see. I'm sorry, obviously, in total, you were looking at less than 12. Yes, I don't think that there's anything that's unusual in that other than just the project plans and the staging. But yes, so I don't really see anything that's unusual in that. Nothing that I'm aware of. I think it's something we can follow up on.

Okay. And then just last one for you, Ray. Can you help us give some like preliminary thoughts about the moving parts for next year in terms of which of the businesses you expect to see some growth, and where, if anywhere, you see continued pressure on the business?

Yes. I think we'll definitely see growth in the Transit area. I anticipate growth in the Freight aftermarket area. Our opportunities are surely going to develop in the Freight aftermarket area. I think there will still be pressure on the OEM area for both Freight cars and locomotives, although I think it's going to be less than we have anticipated previously. I think there's still going to be slow economic recovery internationally, so I don't expect that to change dramatically. We are seeing improvement in Australia, in particular. I think we'll see improvement in India. There's a lot of capital spending going on in India. I think on the PTC side, pure PTC will be -- will start to diminish in terms of hardware. We'll have pretty much delivered all the initial hardware, but we will see improvements in growth in the service and enhancement areas, and I think we'll continue to see increases in the Signaling area. We've booked a significant amount of projects in skill and the PTC commuter areas as well as the Signaling project area, Scott. So I think those will continue to grow.

Our next question will come from Matt Brooklier of Buckingham Research.

So my question is, my first one, mostly centered around the kind of the cadence of the quarter versus your expectations. I'm just trying to get a sense for you had a very good first quarter. It sounded like you had good conviction in terms of the progression of the year getting to your guidance, and then we've got this pretty meaningful guide down. So I'm trying to get my arms around when you had a line of sight on your previous guidance and results coming in below that, and why potentially we didn't get an update earlier in terms of the guide for the year.

Yes. Matt, this is Tim. Let me -- I'll take that one. Hindsight's always 2020, but this is really about unexpected delays and market conditions, most of which are affecting the second half. A portion of this we see in the second quarter. So the majority of it is in the second half, where we've taken some things out of our forecast, like a pickup in the aftermarket, and then some of the projects that Ray and Pat have talked about. So our forecasting knowledge is based on current and expected market conditions, and then, of course, our best estimate of risks and opportunities.

I think also, Matt, we struggle long and hard, debated internally about the aftermarket situation. Is it going to improve? Isn't it going to improve? I've talked about it on previous calls. And basically, we want to take a conservative approach there because we're not seeing the pickup that we anticipated. We thought it would start to come at the latter part of this quarter, going into third quarter, and we haven't seen it. So we don't want to mislead people and suggest that it's going to come. We can't find evidence that that's going to happen. There's no question that the railroads are seeing improvement in their performance, their traffic. Their loadings are all going in a positive direction. You know what we do in the industry. So there's no question that, that business is going to come. I'm hopeful that it comes before the end of the year. But at this point, we don't have evidence to be able to guide that it is going to happen. So we took this approach.

What do you think are the bigger contributing factors to the aftermarket not turning on? I mean, Class I rail volume up, I think, 6%-ish year-to-date. Is it a function of just where we are in the cycle, and there's still too many cars in storage? Is it delay from the rails just because they're trying to be more conservative in terms of their CapEx? I'm just trying to look for signs as to what we need to look for to get better conviction that the aftermarket eventually is going to turn on. And again, we appreciate that you guys are being conservative, but I'm just trying to get a better line of sight on when that business starts to be a bigger contributor to your results.

Yes. So as far as our visibility, I've said consistently on our earnings calls that -- and in investment meetings that we have not seen a robust recovery. So it goes up a healthy amount, and then it comes down, and then it goes up again. And it's not a robust recovery, and it still doesn't appear that way today. So when -- I guess, our biggest surprise was when we saw that cars in storage went up again. So we sold that. A lot of cars were coming out of storage. They were coming out. Some of the car types were actually fully depleted, and then we've got reports that cars in storage were going back up. So that was one issue that we're disappointed in and didn't anticipate. And it's not a good sign. It's not a positive sign. It's not a positive indicator. So hopefully, that trend's going to reverse again and consistently reverse. Then comes the issue of basically buying habits and behaviors of the Class Is. So I've mentioned in the past that I think the Class Is did a much better job in this downturn than they did in the previous downturn. They were very diligent about the equipment they had in inventory. They've maintained that equipment, and they had the equipment ready to go into service. And so they -- when they went into service, they didn't have to utilize outside service facilities like our own to upgrade or overhaul or prepare the equipment to go into service. They're buying habits that are changing in the industry. As you know, there's some customers that are completely changing their business models. So I think all those things are having some impact on our situation. But again, medium- and long-term, that equipment will need to be maintained. It will need to be overhauled, a lot of it is specialty related equipment with proprietary designs, and we'll get those opportunities.

Okay, that's helpful. And is the majority of the pressure or the -- I guess, the lack of acceleration that's mostly in the Freight business, are you able to talk to your Transit aftermarket? And maybe if you have the numbers, and I can always follow-up after the call, but if you could talk to your aftermarket perspective businesses in terms of what you're doing -- what the numbers were in Freight for 2Q and what they were in Transit.

First, as far as Transit, we'll get the number for you here in a minute. But as far as the Transit aftermarket business, it continues to grow. Both of those areas are areas that we have a strategic focus and continue to try to grow our aftermarket and services business and both generate about the same profitability. So we'll give you the actual numbers from Pat.

Okay. Well, so in -- we're looking at Transit, right? So your Transit aftermarket sales were from -- went up from about $312 million to $321 million from the first quarter to the second quarter. And looking at Freight, first quarter to the second quarter, it did go up also, aftermarket sales by $207 million to $222 million. So a positive trend, but not nearly as high as we really had expected and had planned for.

Okay. And then just my last question. I think you talked to the potential organic rate of growth within your Transit business for this year, and I think the number was around 5%. Is that still a good number to use, to think about?

I think it is, Matt. We're just starting our 5-year strategic plan process. So I'm excited about that process because we're going to have the opportunity really to analyze the overall markets and to be able to -- on a worldwide basis and to be able to look at those markets as an integrated organization. So I think we have an opportunity to outperform the organic growth rates in most markets that we serve because of our product portfolio and our technologies. So I think 5% is about double what you would see normally in the market, and I think we have reasonably good opportunity to be able to do that.

Our next question will come from Sam Eisner with Goldman Sachs.

Yes. Just going back to some of the PTC comments. Pat, you were saying before that PTC was only going to grow a little bit -- PTC and Signaling were only going to grow a little bit in the back half of the year. But I think the guidance that Ray was giving, down about 4% year-on-year, I think the way that I calculate that is that second half, you're implying basically $50 million of growth in PTC, and that's around 30% year-on-year. So that doesn't seem that small to me. So I'm curious, what's happening in the back half of the year?

So what I'm -- all I'm saying is I'm just benchmarking off of Q2. I'm not looking at it overall. I mean, you have -- so we mean to say where our Q2 is, that $67 million, pretty flat with Q1. And then if you just sort of go from there, you would have PTC and Signaling sales that would be -- that would increase modestly through the second half of the year with some of the projects that we know that we have a backlog and kind of the normal spending habits that come with the railroads.

Right. I guess, my point is, last year, you did about $155 million in the back half of the year. In order to hit the down 4% guidance that you just gave, that's implying around $200 million of PTC revenue in the back half of the year, the $50 million year-on-year increase. So again, I'm just trying to understand. That's a relatively large step-function change from what you did in the first half of the year. Is there anything in particular that's happening here? Or is that just the backlog that that's the normal progression? Or again, it seems like a relatively large step-up.

Yes. No, I mean, I understand. I'm just -- what I'm -- what you definitely get is, and just like you had in previous years, you have a Q4 that tends to be stronger than the rest in just -- if we're just talking about PTC now, you have -- stronger than the rest. You have some backlog that we know that we're going to have deliveries that are going to occur there, and we have some good visibility into how this should play out in Q4.

Yes. I think, Sam, what we have programmed in the second half of the year is to build out the rest of the -- predominantly the rest of the PTC hardware. We know that the 2 largest Class I railroads are targeted in the 2018 date to commission their equipment. And the other thing is, as I said, we continue to book pretty significant PTC commuter projects that we're delivering and are in our project plan, just as we have the Transit projects that we spoke of. So we have pretty good visibility on the project revenues associated with the milestones in those contracts. And those are the 2 components that make up that remark for Q4.

Got it. Maybe going back to some of your earlier comments about the reason for moving into Faiveley helps reduce cyclicality in the business. I guess, are we just trading kind of end-market cyclicality of Freight versus Transit for perhaps project choppiness or project lumpiness that maybe we're actually adding increased volatility now that we're moving more into OE relative to the aftermarket of your business? I guess, how do you just think about kind of the respective risks that you now have in the business relative to kind of the more pro-cyclical mix that you had prior?

Yes. So I explained in the last call, if you look at the Transit business, the lumpiness associated with Transit is at the front end. So you can have projects when you compete for them in the bid phase. They get delayed 1, 2, 3, 4, 5 years. So projects, in terms of being awarded, are often delayed. It's a very normal process. Sometimes, it's because of funding mechanisms or lack thereof. Sometimes, it's because of changes in planning, things like that. Once you book a Transit project, it is pretty predictable and pretty consistent. You're not going to see lumpiness. It can be scheduled out. There may be some delays associated with the actual vehicle production. That's normally if there's going to be delays where there'll be. But the visibility is very good, and it can be programmed very consistently. And so when you have a lot of Transit projects, it really does remove cyclicality in your business. And that, to some extent, it's no different than PTC projects, Signaling projects we talked about before. What happened in the case of this particular project is -- this particular Signaling construction project, it just was never awarded.

All right. Maybe just another housekeeping...

The answer to your question is, the answer I don't think we're trading one for the other. I don't think Freight -- the Freight market is ever going to change. I think there's always going to be cyclicality in that market. The way we've offset the cyclicality is to minimize the impact by continuing to diversify our product portfolio.

All right. Maybe just 2 quick housekeeping questions here. On the book to bill that you guys gave, or the 1.4 on the multiyear backlog, is there a way to parse out what the book to bill was ex-Faiveley? And then just on your Freight business, what was the growth in your non-rail business that you guys are seeing?

We can't -- we're not going to parse out ex-Faiveley. I mean, that's part of our business now. And they were in there at the end of the year. They were in there at the first quarter. So -- and then as far as -- what was the second part of your question, Sam?

On the non-rail portion of the Freight business, given their award and kind of the non-rail portion.

It's about 10% of our total revenues now. The non-rail is about 10% of total, if that's your question.

And that also is a growth area, Sam, we're strategically focusing on. So...

Our next question will come from Steve Barger with KeyBanc Capital Markets.

You've talked a lot about PTC and Signaling as growth businesses. And thanks for giving us some of the recent wins, but when you look at global opportunities, how are you thinking about that total market opportunity? And how do you think about medium or long-term growth rates for those products or channels?

You're specifically asking PTC?

Or -- and Signaling, if you can break them out.

So I think as far as Signaling goes, Steve, the Signaling growth is going to be somewhere around GDP or slightly above the Signaling portion of the market, by definition can't grow any faster than the rest of the market. So it's a fundamental subsystem of an overall infrastructure project. So there's opportunities for PTC as a subset of that. A lot of that is going to be dependent on 2 issues: any regulatory issues that may influence it; and secondly, a desire for operational efficiency. So we are pursuing PTC projects. I can tell you there's a couple of large ones that we have bids, that we've submitted internationally, and we're hopeful that they get awarded and we win those projects. But the overall Signaling business, as it evolves is, again, a large market. It's about a $20 billion market worldwide, and there's a lot of opportunities within that $20 billion that we can capture.

The $20 billion, obviously, you have small share. Where do you think that can go?

So we've talked about targeting about 10% of that market. We want to be a niche player. We don't want to be a commodity player in that market. And we're focused on technology to be able to achieve our growth that we're anticipating.

Got it. So you expect your own growth and Signaling to be a lot higher in the near term as you start to move towards that market share size?

Yes, that's right. That's correct.

Any target on what that growth could look like or how you think about what's achievable?

So we're, as I said, just getting into our strategic planning process. So we'll have internal, very specific targets developed. But I think the opportunity to grow, as we talked about before in the Transit area, to grow at a double -- 2x the market growth rate is not unrealistic. So 5% growth in the Signaling area would be a pretty realistic expectation for us.

Okay. And my last is more of a comment than a question. But as Wabtec has become more complex and we all have more revenue channels and product lines to think about, I hope you'll consider increasing the disclosure on the press release around segment margins and giving us the complete financial statements and backlog performance. I think that would be helpful to investors as we start to think about the global platform.

Yes. I think it's a good comment, and it's something we're working on. And we're going to roll something out that makes sense probably by the end of the year.

Our next question will come from Mike Baudendistel with Stifel.

You mentioned that you have a robust pipeline of acquisitions. Are any of them individually large enough to move the needle? Or is it all just a lot of little tuck-ins like you typically do?

Yes, it's typical stuff that -- the very first requirement, Mike, is a strategic fit. So it's typical stuff. It has to be a strategic fit. And its requirement is and expectation is that it's a strong technology business.

Okay. So nothing the size of, say, Fandstan or anyone that's multi-$100 million dollar in revenue?

Well, we -- again, we have a lot of visibility on opportunities that are $1 billion-plus, and we have a lot of visibility on more opportunities that are multimillion. Faiveley is by far the largest that we've done, followed by Fandstan, followed by Standard Car Truck. So we're not afraid or opposed to a large acquisition if we could find the right strategic targets in the areas that we're interested in. We talked about our interest in, for instance, the Signaling business. So if we could find a Signaling business that was -- had critical mass, that was a worldwide organization, we would probably go after that.

Great. Sounds good. One other question is, I've been covering you a few years, this is the first time I don't think I've heard Al speak on the analyst call. And I'm just wondering, is anything changing with Al's role as Executive Chairman? Or any comments about his plan?

Yes. In the May board meeting, Al was -- Al transitioned from Executive Chairman to Chairman. But Al still has obviously a strong influence over the organization. He's a leader of our board. And basically, we're continuing to follow the strategy he put in place in 2006.

Our next question will come from Saree Boroditsky with Deutsche Bank.

You talked about cars in storage increasing. So I was curious if you could provide some more color on whether this is just related to higher velocity or maybe a particular rail, implementing precision railroading. Just any color you could help us on that?

Yes. Saree, this is Tim. Yes, I don't think it was any particular railroad or any particular effort on anybody's part. But it did, for the first time, I think it was in -- first time in the last 3 or 4 quarters, the store car number did go up. One other thing we wanted to mention, normally on the call, we talk about the Freight car orders deliveries and backlog for the quarter. Actually, that's information, as probably some of you know, because you cover this, too, just got released. And it's actually good news. The backlog went up by about 10%. Orders were actually pretty strong. Orders of new Freight cars is about 18,000 for the second quarter, and deliveries about -- of about 10,000. So that's probably -- as far as the deliveries, that's now 20,000 or so for the first half, which is pretty consistent with our 40,000 for the year. And the orders being up, the backlog being up, I think also it's consistent with our comment that maybe next year wouldn't be down as much as we initially thought. So I just wanted to mention that. That information was released during the call.

I think that's really helpful. And then quickly, I just want to clarify on the margin guidance because I think there was some confusion during the last call. So when you say about 15% in the fourth quarter, is this slightly under 15%?

Yes. We said about 15% just for the quarter. So I think that's -- it's plus or minus the 15%, right?

Our next question will come from Jay Van Sciver of Hedgeye.

CRRC has been pushing in international markets, has had some notable wins this year. Could you comment a bit on the content you have on those projects, say, versus the random win or your standard win? And secondly, can you also just let us know what the Freight segment margin was for the quarter?

Okay. As far as -- you can probably take this Freight question later. But as far as content on the CRRC cars, it's very consistent. Every project, every contract is different. Obviously, the opportunities are normally pretty similar, and we have consistently won the majority of the subsystems on many of the transit contracts with different car builders. So in the case of CRRC, we've won subsystems with air conditioning, breaks, couplers. So we have a multifaceted portfolio that were delivered to CRRC on the majority of their contracts. Here in the States, we have similar content on several other projects internationally and also in China. And the same story holds true with Kawasaki, with Rotem, with Bombardier and other car builders.

So just addressing your margin comment, we haven't disclosed it. I think directionally, I'll just say that the margin is down a little bit on the Freight and Transit, up a little bit in the Freight. And our 10-Q will be compared to the first quarter. And the 10-Q will be issued in our normal filing deadlines, and the full disclosure will be there.

(Operator Instructions) And having no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Tim Wesley for any closing remarks.

Okay. Thanks, Alison, and thanks to everybody for listening and for participating. And we will talk to you again in about 3 months. Take care.

Thank you.

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