美國西屋制動公司 (WAB) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Wabtec First Quarter 2018 Earnings Release Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Tim Wesley, Vice President of Investor Relations. Please go ahead.

Thanks, Steven. Hello, everybody, and welcome to our first quarter 2018 earnings call. Let me introduce the others who are here with me in beautiful downtown Wilmerding, Ray Betler, our President and CEO; Pat Dugan, our CFO; Stéphane Rambaud-Measson; our COO; and our Corporate Controller, John Mastalerz. Let me say our welcome to Stéphane who's joining us on the call for the first time.

As usual, we'll make our prepared remarks and then we will take your questions.

We will make forward-looking statements during the call, so I would just ask that you review today's press release for the appropriate disclaimers.

And just before I hand it off to Ray, a quick reminder of our investor conference -- Investor Day is coming up on May 7 in New York. If you like to attend, the RSVP deadline is this Friday. So if you need more details, please get in touch with me.

Ray, go ahead.

Thank you, Tim. Good morning, everyone. It's good to talk to you today. After a year of transition in 2017, we are off to a solid start here for the first quarter of 2018. And as expected, we're seeing improvements in some of our core markets.

We slightly exceeded our expectations for the quarter and affirmed our guidance for the year, which we hope will prove to be conservative. We saw year-on-year revenue growth in both of our segments for the second quarter in a row. Our backlog grew again and remains at a record high.

A couple months ago on our fourth quarter call, we told you that our company was stronger and better positioned than it was a year ago, and we're pleased to start demonstrating that with our performance in Q1. We expect to build on these first quarter accomplishments throughout 2018 based on our record and growing backlog; the improvements we're seeing in our Freight aftermarket; our Wabtec Excellence Program, which gives us the ability to generate cash and continue to increase margins over time.

So with that, I'm going to turn it over to Pat to go through the first quarter numbers.

Okay. Thanks, Ray, and good morning to everybody. The sales for our first quarter were about $1 billion, $1.06 billion for the quarter. When you look at our segments, our Transit segment sales increased 19% to $677 million. That increase was due to a favorable FX impact of about $64 million, organic growth of about $32 million and from acquisitions -- a full quarter acquisitions of about $12 million. This is the second quarter in a row where we've seen organic sales growth, which demonstrates that our backlog -- our record backlog is starting to kick in.

Our Freight sales increased 9% to $380 million, and that's the second year-on-year increase in a row. This increase was due to sales from our acquisitions, about $24 million; some impact from FX of about $6 million; and an organic growth of about $2 million. The sales were the highest level for Freight in almost 2 years, and the backlog for Freight increased 15% and is now at the highest level in 2 years. Freight aftermarket sales showed a year-on-year growth for the third quarter in a row, all of these are positive indicators.

Looking at the income statement for the quarter, our operating income was $131 million or about 12.4% of sales. As we mentioned in our press release this morning, this included restructuring and integration expenses of about $1 million, $1 million for ongoing cost-cutting actions. Going forward, our 2018 operating margin target is about 13.5%, with improvement expected throughout the year as we work our way through some of the lower-margin -- some of our lower-margin contracts we talked about last year.

Our SG&A for the quarter was about $147 million. The increase was mainly due to changes in foreign currency exchange rates and a full quarter impact of our acquisitions, and we expect it to be about $140 million to $145 million per quarter going forward.

Our amortization expense was up mainly due to those acquisitions, and we expect a similar quarterly run rate for amortization expense the rest of this year.

Taking a look at our segment operating income. For Transit, our operating income increased 39% to $68 million for an operating margin of 10.1%. Just to remind you, in the year ago quarter, we did have restructuring and integration expenses in this segment of about $7 million for an adjusted operating margin of about 9.7%. So even after adjusting for those expenses, we generated some margin improvement compared to the year ago quarter. In Freight, our operating income was about $70 million, down 2%, 200 basis points for an operating margin of 18.3%. This included some planned investment and cost and strategic growth initiatives in our electronics business and other areas, and the prior year comparison is also impacted by some sales mix. For the full year of 2018, we expect our operating margin improvement for both segments during the year compared to last year. These improvements will come through better project performance, a better mix as we complete our lower-margin contracts and the benefits of our restructuring and cost reduction programs.

Just as a quick update on our integration and our synergy plans. In 2017, we generated about $30 million of synergies compared to our target of about $15 million to $20 million. In 2018, we expect to achieve an additional $15 million, and we are on track to achieve that in the first quarter. Our total target for the first 3 years is at least $50 million, so we're ahead of that pace and expect that to continue.

Talk a little bit more about the income statement. I want to talk about interest expense and the other income and expense. And I just want to remind everybody that companies have changed the way we account for our pension expense and how that impacts interest and other income and expense. Previously, pension expense was captured entirely in our cost of sales, but the new method is to split these into 3 categories of service costs, interest costs and our return on investment into different line items on the income statement. Now, only service costs are captured in the cost of sales, interest costs are recorded in the interest expense line and the return on our investment is recorded in other income and expense. There is no change to the bottom line at all. It doesn't change our historical EBIT margins materially, but we do have to revise the interest expense and other income line items for the last year, which is why those 2017 Q1 numbers in our press release today are different from the ones we reported a year ago. The effect of this is that we reclass about $2.5 million of pension expense, which increased both interest expense and other income. Interest expense was $20 million for Q1 2018. And going forward, we expect interest expense to be roughly the same, although we are focused on generating cash to reduce debt, and then, of course, the interest expense on that debt.

Other income and expense -- other income was $2.6 million compared to $4.8 million in the prior year quarter and the decrease was due to a smaller FX gain that we had last year.

Income tax and our effective rate for the quarter was about 23% in line with our guidance, and our 2018 full year assumption remains at about 23.5%. I'll just remind everybody that, that's an annual estimate, and our any individual quarter can vary due to the timing of any discrete items.

Our GAAP earnings per diluted share were $0.92 compared to $0.77 in the year ago quarter. The 2017 first quarter included restructuring and transaction expenses, tax adjustments and noncontrolling interest adjustment from the Faiveley Transport acquisition, and the combination of which reduced earnings per diluted share by a net of $0.07. So our adjusted comparable number for the 2017 Q1 was $0.84 compared to our $0.92 in Q1 of 2018.

You take a look at our balance sheet, it remains strong, providing the financial capacity and flexibly that we need to invest in our growth opportunities. We have an investment grade rating and -- credit rating, and our goal is to maintain it.

Our cash from operations, we generated $24 million compared to a use of cash of $26 million in the year ago quarter, so we improved about $50 million quarter-over-quarter. This is the third quarter in a row that we have improved our cash generation compared to the prior year quarter, and we expect our cash generation to improve during the rest of this year and to finish 2018 with more cash from operations than net income.

At March 31, our -- we'll talk about working capital. At March 31, our receivables were $886 million, inventories were $829 million and payables were $608 million. In addition, we have unbilled receivables of $383 million, which are -- were offset by customer deposits of about $378 million. Cash on hand at March 31 was $250 million, mostly held outside the U.S. And our debt at March 31, we had a total debt of around $1.92 billion and net debt of about $1.67 billion, which gives us a net debt-to-EBITDA of about 3x.

Just a couple miscellaneous items for everybody. Our depreciation expense for the quarter was $18 million compared to $16 million in last year's quarter. And for the full year of 2018, we expect it to be about $75 million. Amortization expense for the quarter was $10.4 million compared to $9 million in last year's quarter. For the full year of 2018, we expect it to be about $41 million. And our CapEx for the quarter was $18 million compared to $19 million a year ago, and we expect or forecast to spend about $100 million in 2018 in capital expenditures.

Turning to backlog. We had another good quarter, generating new orders, as you can see in the numbers we reported in the press release. At March 31, our multiyear backlog was a record $4.9 billion, a 7% increase from year-end, and our book-to-bill in the first quarter was 1.28. Of the increase, about 40% was due to changes in FX rate. Our rolling 12-month backlog, which is a subset of the multiyear backlog, was at a record $2.5 billion, a 7% increase compared to the end of the year, which, again, is another positive sign for this year.

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

Thanks, Pat. As I mentioned previously, we affirmed our guidance for the year based on our first quarter performance and our outlook for the rest of the year. We expect full year revenues of about $4.1 billion, with adjusted earnings per diluted share of about $3.80, excluding restructuring and integration charges compared to 2017. This would represent revenue growth of about 6% and adjusted EPS growth of about 11%. Given that we slightly exceeded our first quarter expectations, we hope the guidance proves to be conservative. We expect to generate cash from operations in excess of net income for the year. Our key assumptions include the following: revenue growth in both segments; our consolidated operating margin target for the year is about 13.5%; as Pat mentioned, we should see improvements during the year through better project performance, the completion of lower-margin contracts and get the benefit of restructuring and cost reduction programs. Our tax rate is expected to be about 23.5% for the year, and we're assuming diluted shares outstanding of about 96 million for EPS calculation purposes.

Our goals in 2018 are straightforward: to meet our financial plan, to generate cash, to invest in growth opportunities while strengthening our balance sheet and to capture the additional synergies and growth we expect through the Faiveley acquisition. We continue to focus on cash generation to fund growth. Our priorities for allocating free cash remain the same, although we expect to reduce debt throughout the year. Those priorities are to fund internal growth programs, including product development and innovation in CapEx; to fund acquisitions where we have ample opportunities to deploy capital; to return money to the shareholders through a combination of dividends and stock buybacks. We remain focused on increasing free cash flow by managing costs, driving down working capital and controlling capital expenditures. Our corporate strategic growth strategies also remain the same. We expect to achieve growth through new product development and innovation in new technologies, to invest in aligned market expansion and global expansion, to invest in aftermarket and service expansion and to invest in acquisitions.

Before I ask Stéphane to discuss the Transit and Freight markets, I'd like to talk briefly about PTC. Obviously, this will continue to be a topic of great interest as we get closer to the deadline at the end of 2018.

In Q1, our revenues in this area were $91 million, and we're comfortable with our estimate of about 5% growth, which would be about $350 million. During Q1, we booked about $75 million of new train control contracts to provide equipment and project management and aftermarket services for various customers. Also this year, our aftermarket revenues are starting to kick in from master service agreements with our freight and transit customers. As you know, we've said that this would generate annual revenues between $50 million and $100 million. We're already in this range, which represents a strong foundation for our ongoing revenue.

In addition, as we're focused on helping customers meet their deadlines in the near term, we are also investing to ensure that we capture the long-term growth opportunities from this installed base. For example, our largest single investment in new product development is designed to help us maintain our leadership position in North American market PTC and to leverage our PTC installed base for future follow-on opportunities in enhancements and added functionality.

Stéphane, can you now discuss the Transit and Freight segments, please?

Thanks, Ray. I'm happy to discuss our operating groups and their performance. Our Transit business is now a true global player. Over time, that should mean more visibility and stability; better growth opportunities, both organic and through acquisitions; and improved margins as we benefit from increased scale and market share and that aftermarket revenues increase.

Currently, the state of the Transit market worldwide is strong with investment in public transportation growing. We are seeing those opportunities, for example, in India and Europe, especially Germany and France. India is a market where we expect to benefit over time from good model, from repeat orders on standard products. And in the U.S., we are participating in all the major new vehicle projects.

Our position within the market is also strengthening. During 2017, our backlog increased about 20% as we moved orders in all major markets, in all our major product categories and in all of our major customers.

During the first quarter, our backlog increased again, this time by 5%. The project includes supplying components and system for new cars in the Middle East, in Southeast Asia and in Europe. And during the first quarter, we also added organic sales growth of about 6%, and some of the backlog is starting to kick in. You have to remember that these OEM orders typically lead to long-term aftermarket contracts, which then provide revenues and good profitability for about 30 to 40 years.

Let me give you a quick update on new product development in Transit. We have a number of green and environmentally friendly products in the pipeline. It includes low energy consumption HVAC systems, the compact and lower-weight doors mechanism, compact brake control electronics and light-weight brake disc for commuter and high-speed trains.

Let's move now to our Freight rail business, which is also showing improvements. In NAFTA, Freight rail transit is at about 2.5% year-to-date. And while we see still -- we still see a lot of (inaudible), these numbers continue to come down. For example, the [partner communities] are down about 10% since the end of last year. Around the world, freight market conditions are mixed, with growth in some areas offset by service demands in others. We can mention India is a bright spot, with a significant increase in new freight rail production this year.

Throughout 2017, we saw in the year modest pickup in our Freight aftermarket revenues, but that outlook is improving. We continue to see more inquiries for component servicing and repair and even for locomotive overhaul projects.

Our Freight backlog is now at its highest level in 2 years. And as Pat mentioned, our first quarter revenues showed year-on-year increase for the first time in 2 years, which are positive indicators. We are also seeing some improvement in our nonrail businesses, particularly the heat exchangers products, which is being driven by higher oil and gas prices. As a reminder, our 2018 Freight assumptions include the following: Railroad CapEx, which declined about 10% in 2017, is expected to be flat or slightly up in 2018. New locomotives, we see a slight increase worldwide, down in NAFTA, but it's looking like 2018 will be (inaudible). For new freight cars, NAFTA should be flat to slightly up.

As in our Transit business, we're also investing in new products in Freight. Whether it is data analytics through electronic and sensors or train control automation using onboard computers, we have an extensive pipeline of innovation.

Finally, let's review the 2 acquisitions we made in the first quarter. We acquired Annax, a market-leading supplier of public address and passenger information systems for transit vehicles and stations; and Lynxrail, an manufacturer of vision-based wayside inspection systems for the rail industry. Combined, they have annual sales of about USD 60 million.

Annax is headquartered in Germany and provides a wide range of products and services, including communication systems, intercoms, audio technologies and displays throughout all main car builders' platforms and market segments. Annax focuses on offering the innovative and added-value solutions and processes, such as WiFi, passenger counting, smart and new technology. Annax strategically aligns with our existing electronic products for Transit and those markets. And its leading-edge solutions complements well and broaden Wabtec's product portfolio.

Lynxrail is headquartered in Australia, the first product that leverages sophisticated machine vision technologies and algorithms to assess components and provide real-time actionable analysis to the customer. This technology complements the condition monitoring products supplied by a Wabtec unit, Track IQ, which specializes in wayside condition monitoring equipment and data management systems. The combination of Lynxrail and Track IQ creates a unique opportunity for Wabtec to become one of the largest supplier of wayside condition monitoring technology worldwide. Ray?

Thanks, Stéphane. I'll conclude my prepared remarks by talking about our long-term growth opportunities. As you know, we completed our first strategic plan as an integrated company last year, and our 5-year plan meets our long-term financial goals to average double-digit growth in revenues and earnings through the business cycle while improving margins. To achieve these goals, we have growth initiatives in each of our major product lines, consistent with our 4 growth strategies. 5 years from now, we expect to be a stronger, more global, more balanced, more profitable company.

So just to reiterate some of my comments at the beginning of the call. We're off to a solid start in the first quarter 2018. We slightly exceeded our guidance for the quarter and affirmed our guidance for the year, which we hope will prove to be conservative. We saw year-on-year revenue growth in both of our segments for the second quarter in a row. Our backlog grew again and remains record high. We expect to build on these first quarter accomplishments throughout 2018. Based on our record and growing backlog, the improvements we're seeing in our Freight aftermarket and our Wabtec Excellence Program, which gives us the ability to generate cash and continue to increase margins over time, we believe this is going to be a good year.

With that, we will be happy to answer your questions. I'll turn it over to Tim.

Okay, Steven, if you want to poll for questions, go ahead.

(Operator Instructions) And our first question comes from Sam Eisner with Goldman Sachs.

Can you maybe talk a bit about some of the investments that you're making in Freight? You called out increased investments in strategic growth initiatives. Curious how much of that has been a drag on the first quarter performance, how much should we expect for the year, presumably that's embedded in your 13.5% margin target for the full company. How long do you expect them to last? Just the overall review of kind of what these investments are, how big they are, how long they're going to last.

Okay. Thanks, Sam. Yes, we've talked often on about investments in the freight market throughout last year and happy to continue to do it. As you recall last year, last year, we invested in the heat exchanger for the energy business, energy market over in China. It was through our heat exchange business this year. We talked about last year, we started this year our investment in a facility in Turkey to expand our presence in Turkey overall, but significantly to focus our freight activities in Turkey. Turkey is a large market. East Europe is a large market. We have a facility in Macedonia, which we continue to upgrade, which will complement the facility in Turkey. One of the things that we did is with the unit track business, which is one of our maintenance infrastructure businesses. When we acquired that company, it had 2 separate locations. And while they were only a short distance apart, they were still 2 separate locations. They did not offer really efficient production capabilities. And so we've invested in a brand-new facility. It's in the same geographical location but a couple miles from the existing businesses. And we've consolidated everything in 1 location. It's all under 1 roof. One of the 2 facilities that we acquired was exposed to the environment, which you can imagine in Tennessee is a tough way to work in the summer. So we've completed that investment and will be able to improve our product offerings and productivity for infrastructure products. And we've mentioned several times the investments we continue to make in electronics, which are significant.

Understood. Is there any way to put any numbers behind what these investments should be, the expectation for a drag on profitability, the return profile that you expect? I mean, just any kind of financial details would be greatly appreciated.

Yes. Pat's the numbers guy, and so let me hand it over...

Sam, I guess, we don't want to carve out a whole lot of data on these specific investment programs. I can tell you that all these investments are definitely in our guidance. I would say that you kind of look at our overall spending for R&D and other operating type expenses and these developments are somewhat consistent with what we've spent in prior years. You can clearly see a little bit of additional CapEx versus a normal year in our numbers. But what really -- where it really comes to light and becomes visible is you can see it impacting our segment operating percentage time to time based on the timing of those expenses and how they're going to hit. We always look at these initiatives and expect to have them pay for themselves in a fairly short order if not even within the year.

Understood. And maybe just sticking with Freight. You guys historically have given expectations for rail traffic growth, locomotive deliveries, railcar deliveries. Any update that you guys have on those specific figures now that we're 1/4 through the year and seemingly Freight is maybe a bit better than expected when you guys first gave your guidance?

I think that's our feeling, Sam. We're pretty encouraged by the improvement that we've seen in Freight. On the locomotive side, you know they gave us an order for 200 cars earlier in the year. And that order was not expected to come that early. Certainly, in 2018, we are aware of other orders that are in discussion in the industry. Freight car build is definitely tracking ahead of plan. Cars and storage are coming down pretty dramatically both on the locomotive side and the freight car side. There's about a 10% improvement, for instance, since the end of December on the locomotive side; and for railcars, about 15% since midyear last year. So I think, all in all, the market is headed in the right direction. We're picking up business in the aftermarket and are encouraged by the OEM opportunities.

If I can just sneak one more in. On PTC, I know you're guiding 5% up year-on-year, $350 million for 2018. Just looking out to 2019, I know you don't have guidance out there, but presumably a lot of investors are focused on what happens post the deadline. Any way for investors to kind of think about, is there a hole, is there not a hole? Do you anticipate having [DAQ] market revenue go from $50 million to $100 million? Is there any kind of broader comments that you can give on 2019 post the deadline?

So maybe let me talk about the deadline for a minute, so people really can put it in context. The deadline for end of '18 is a mandate that people need to have their equipment completely installed and basically be under a test mode to qualify the equipment. Some people won't be able to go into PTC operation across their entire network. Some people will need to extend to leverage the opportunity to extend from 2019 to '20. Those extensions will be based on a specific case-by-case submittals that have to be approved from the FRA. We're meeting with the FRA on a regular basis to make sure that everybody is on the same wavelength in terms of information and to optimize the rollout. So the fact of the matter is the market is not going away. There's going to be business in '18, '19, '20. And as that PTC business continues, we're going to be able to run that business through the enhancements we've talked about, operational improvement opportunities and through new product development that ultimately for our product road map leads to autonomous operation.

Our next question comes from Matt Elkott with Cowen.

Ray, it sounds like you clearly have increased confidence in the guidance for 2018. Can you talk about the primary areas of the business that give you this increased confidence? Is it mostly Freight aftermarkets or margins? Or just any more clarity on what seems to give you more confidence in the guidance for 2018 will be appreciated.

Yes. I think it's a combination of things. I think the Freight market in general that I just spoke of is certainly one big factor but also the fact that we spent a lot of time and effort to integrate our business last year and that we have done a lot of work to baseline our projects, the backlog we have in Transit and the work that Stéphane is doing to improve our overall performance on productivity across our organization, the opportunities that exist through the synergies that we've already completed and the ones that are still in our plan and, frankly, our position in PTC. I mean, it's a very good position that we're in. And this is an important year for everyone. And because of the closeness of our company with our customers and the regulatory authorities, I believe that's going to offer new opportunities for us.

Okay, that's great. Speaking of the Freight aftermarket business, you did have an encouraging increase in the organic portion of Freight sales. You had a decline last quarter. Based on -- do you think based on what you see in the market and based on where we are today in the second quarter, does organic Freight sale growth can continue for the rest of the year?

I can't really speculate on where it's headed, but I feel good about the market right now. We're in regular touch with the freight car builders both in terms of their domestic field as well as their international. A lot of these freight car builders are expanding their operations overseas. And certainly, the aftermarket, you folks know the issues that exist right now with congestion, the sensitivities. Each of the Class Is have been called in to respond to Surface Transportation Board and velocity (inaudible). So I think between the need for improvements in terms of overall performance and the need for equipment, it looks pretty good. So I guess, the term I would use is we're cautiously optimistic about the market going forward.

Got it. And just one final question. I know you guys are always evaluating a pool of different acquisition targets. Can you talk about the acquisition candidates that you're evaluating at this point? Are they more freight companies or transit companies or sizes? Any color would be appreciated.

Yes. So we -- when we do our strategic plans, each of our business unit leaders identify candidates, and we go through a very large potential portfolio of acquisition candidates through a funneling process to shortlist candidates. So there's, at any given time, a dozen candidates that will be in some phase of pursuing. So it's a mix across our total business. There's good opportunities in every one of our segments. And really, it comes down to which one represents the best return on investment for us as they compete for our acquisition funding.

Our next question comes from Justin Long with Stephens.

Maybe to follow up on that last question. Obviously, there was an article that came out last Friday about the GE transaction and your potential involvement. I know you guys won't comment on rumors, and I certainly want to respect that. So maybe I can ask a different way. When you think about your buying power for acquisitions and you look at your leverage ratio today, the integration of Faiveley and other recent deals, is there a limitation on the size of acquisitions that you'd be willing to entertain?

Yes.

Yes. I think -- Justin, this is Tim. So in the context of your question and the media reports and everything, we've always had our longstanding policy of not speculating on rumors, commenting on rumors or speculation. So I think we'll stick to that.

But separating your -- this is Pat. Separating your question about how you led into the question to our leverage. We said in our prepared remarks that we intend to remain an investment-grade company. We respect the leverage ratios, and that is something we consider in our capital allocation strategies. And that's very important.

Great. And you think in order to remain investment grade, you would need to keep leverage ratios about where they are today, is that the assumption?

I think we've talked about our long-term goal and where we wanted our leverage ratios to be. Obviously, there's a certain amount of deleveraging that is expected in our investment grade rating right now. And that's -- it's a big part of our -- formulating our cash strategy. And I think that, that's remained consistent and hasn't changed.

Okay. And I guess, secondly, going back to some of the margin commentary for this year. You gave guidance for both Freight and Transit margins to improve year-over-year in 2018. But is your view that margins in both segments should improve quarter-to-quarter throughout the year relative to what we saw in the first quarter? I just wanted to get a better sense for how we should think about the cadence?

Yes. Justin, that's sort of quarterly guidance, isn't it? I mean, really, at the end of the day, executing on our plan and hitting the numbers that we have put forward for the full year really sort of implies that throughout the year we're going to have continuous improvement in our margins, just as we always build into our strategic planning and to our budgets year-to-year. We feel good about our full year guidance, and so I think that kind of gives you an indication of how it should evolve.

Okay. And lastly, there's been a lot of discussion about the Freight aftermarket business, and it's encouraging to see the pickup there. I wanted to ask about what you're seeing in the Transit aftermarket business. How should we think about the growth profile of that operation over the remainder of 2018?

Stéphane, do you want to take that one?

Thank you, Ray. Actually, it's a slightly different dynamic, number one, on the Freight market for very obvious reasons. One of them is that our Transit business is absolutely truly global. We are primarily -- I mean, what we're going to sell market for Transit is primarily 2 components. One is selling stock parts, the (inaudible) stocks after the warranty period and last for 30 to 40 years. In most of the cases, we have a relatively captive position as most of our spare parts are safety critical. The second part of our offering is engineering services. We offer to our end customers to refurbish equipment -- retail equipment, modernize equipment over the lifetime of the train. We -- I mean, it's relatively difficult to model any service business on the Transit part due to the significant fragmentation of our customer base, they're very global business and then the very different nature of the contract arrangement we have all over the world that we can't foresee. And it's one of our strategic targets to continue to increase the volume of our service business for Transit worldwide and gradually balance services and original equipment.

Our next question comes from Allison Poliniak with Wells Fargo.

Not to harp on this Freight margin question, but I guess, if I -- Pat, if you strip out the investments that you're making and just look at the base organic margin, are you seeing expansion there? And would you expect wider expansion at least on the base core as you go -- with some volatility with the investments? Is that how we should think about it?

Yes. I think you could see that the margins would get to kind of a more typical for the full year. You definitely have an impact to this, some spending here and some other costs that are being realized in that segment. But I think to answer your question, the best way to look at it and model this would be a recovery to a more -- a typical Freight margin, which is a little bit higher for the full year. We continue to be focused on these -- on the margin for these businesses, and it's a big part of the overall EBIT expansion that we talk about through the rest of the year. We have programs in place to continue to improve, and I think that you'll see that as we look at it on a full year basis.

Great. And then just on Faiveley, synergies coming in pretty quickly. I mean, as you dig a little bit more into the 2 businesses, with that number, do you think at this point you could exceed that number on the revenue side? Are you seeing incrementals that maybe you weren't expecting coming out of it? Any thoughts there?

So I mean, we talked about it in the prepared remarks, which is that we were on our plan -- that we've built into our plan additional savings and synergies that we're realizing. I think in terms of any kind of top line synergies, you're really seeing it manifest itself in the backlog improvement that we get quarter-to-quarter. Clearly, the Faiveley integration is a big effort by our management team. We feel really good about it. It's been successful. Ray talked about it earlier, and we really see that the long-term vision of this to continue to evolve and result in improved results.

Our next question comes from Scott Group with Wolfe Research.

So I wanted to try one more on the GE question. I know it's tough. But is there anything you guys have ever said in the past that suggest that a deal with GE couldn't or wouldn't happen because of any sort of strategic or size, anything you ever communicated in the past? And then maybe can you say what your average content is per locomotive and maybe in an ideal world, how high it could go if an OEM used all of your products on their loco?

Scott, this is Tim again. I'll jump in again and just say that we're not going to comment more than anything related to rumors or speculations. So we're not going to comment on that. As far as content on locomotive, it varies. I think we've said that if we get everything, maybe it's a couple hundred thousand. But we've never given an average content level that's on the max.

Okay. Pat, the last couple quarters, I think you've given some sort of directional guidance on the upcoming quarter's EPS. I don't think you said anything this quarter. Any color or comments that you feel appropriate to make?

I don't know that I've said anything about quarterly guidance in terms of EPS. But at this point, it's really kind of -- it will be very difficult for me to really break it out by quarter what we think is going to happen, and we're going to stick to a full year guidance in terms of EPS.

Okay. And then on the PTC aftermarket, I think, Ray, you said that you're already doing $50 million to $100 million of aftermarket this year. Is there any way to say what percent of your customers are already paying aftermarket? I'm just trying to get a sense of if this is already as good as it gets or should there be a lot of growth from here in aftermarket because only half or less than half of the customers are paying aftermarket.

So we -- one way or another, we're servicing all of the customers that we've delivered equipment to in various ways. One is under MSAs. We've mentioned in the past that all the Class Is are under MSAs with 1 or 2 international customers and a few commuter rail customers, and we continue to negotiate. There's many customers, Scott, as you know, that have just recently entered into contracts with the OEM equipment. So those customers probably won't come under MSA agreements for 2 to 3, maybe 4 years down the road. But we have a pretty significant portfolio now, and we're supporting either under MSAs ongoing medium, long-term MSAs or just normal aftermarket transactional business, all the customers that we've serviced so far. And in that portfolio, there's 40-plus customers.

Okay. And then last one real quick. The low-margin contracts that you talked about a couple of times, Pat, how much is that impacting full year operating margin?

Yes. We haven't given that number out. I mean, I think that you can kind of look at it as the adjustments occurred in the fourth quarter, and we called those out. But clearly, it creates a very low margin revenue stream that goes into a portion of 2018. So that does affect our operating income a little bit -- percentage income guidance. But it is -- yes, as Tim's reminding me, it's all been contemplated in our guidance and it's all in our full year.

Our next question comes with Matt Brooklier with Buckingham Research.

The $75 million in new orders that you talked to in the press release for first quarter, is that inclusive of signaling? I'm just trying to get to what was the pure positive (inaudible) number for first quarter in terms of orders.

It does -- new orders do include whatever we booked in train control. We don't break it out. So Matt, PTC and train control system projects are in that $75 million, if that's what you're asking.

No, I'm just trying to figure out what's pure PTC and then what's signaling? I know you've included -- you include that now together. I'm just trying to figure out, of the $75 million, what's pure PTC orders versus some of the non-PTC signaling work that you guys do?

Yes. Again, we don't break it out. We do give you the revenues for both, but we just haven't broken out the backlog or the contracts for both.

Okay. And then I think I heard more numbers talked to in terms of the revenue that you booked in the quarter. Do you have the stand-alone PTC revenue number for first quarter?

I'll look for that, so go ask your next question. I'll look for that.

Okay. Yes, we can take it offline if need be. And then just finally, it sounds like you're more positive on the aftermarket portion of your business at Freight. You talked to it a couple of times through the conference call. And I think part of that has to do with this directional pickup in the locomotive market. Could you maybe talk to your OEM business, the new order side and delivery side of it, if you think that potentially -- this pickup in locomotive activity, that sounds like it's hitting your aftermarket portion of your business, could it potentially also result in maybe better industry delivery this year and maybe the timing around that, if that's the case?

Yes. I think the OEM business will come later in the year, Matt, what we're seeing right now that the OEM business from the improved OEM locomotive orders. On the OEM side for Freight, that business is relatively short term, 3 to 6 months turnaround. So that business is coming now and part of the revenue stream that we are seeing now. But to give you an example of some of the types of businesses, and you have to remember in terms of capital budgets, Class Is have committed to basically hold flat their capital budgets year-on-year. So they're putting more money into other parts of their systems because they don't have to spend as much on PTC. Some of that is showing up in rolling stocks, some of that is showing up in maintenance, both of which we get. But on the aftermarket side, there's customers that have increased their overhaul programs for overhaul locomotives from one customer, I won't name that customer, but from -- 1 program change from a request of 100 to 200 this year overhauls. That's -- a lot of that is drop-in business. For us, there's another customer that's converting DC to AC power for 100 locomotives. These are all business opportunities that are improving conditions over last year.

Matt, this is Tim again. So the first quarter revenues for PTC was $59 million, signaling was $32 million for a total of $91 million.

Our next question comes from Saree Boroditsky with Deutsche Bank.

I appreciate all the color on PTC and was wondering if you could just help us understand the breakout of overall revenues between Transit and Freight.

Yes. We don't give the specific breakdown for train control and signaling by the 2 segments. Historically, a majority of it has been in Freight. That's been a lengthy shifting a little bit more -- the mix might be shifting a little bit to Transit as we do some of the project work with transit agencies, but we don't give a specific breakout.

Okay. And then just to confirm, I believe you have previously set a debt-to-EBITDA of 2 to 2.5x to maintain the investment grade. Is this how you're still thinking about the leverage target?

Yes. I think our long-term view of our leverage is that we should be in that 2 to 2.5x. Clearly, it's part of the Faiveley acquisition. When we talked about this with our rating agencies, there was a plan for deleveraging over time. And they're fully aware of our financial policy and our goal of getting there. We expect to be an investment-grade company and maintain that investment grade rating, and that leverage ratio is a big part of that long-term vision.

Our next question comes from Mike Baudendistel with Stifel.

Just wanted to ask you, on the components that you're selling to locomotive manufacturers over the world, do you view the North American freight locomotive manufacturers as being competitive with others in other parts of the world that specialize in either transit, locomotives or locomotives for other geographies?

No, Michael, they're very different. GE is definitely competitive in all freight applications, so heavy haul markets around the world. EMD is the same. But they're not competing for typical European passenger locomotives. Siemens Bombardier, ALSTOM compete for that business. So their core business is really focused on freight.

Got it, makes sense. And just to sort of add on to that, are you selling the same or similar components to all of those locomotive OEMs? Or are those sort of different product lines that you're selling to those different segments?

It's different. You're familiar with the components that we sell for Freight here, the compressors, the brake systems, the electronics, the heat exchangers. I'll let Stéphane talk about the European locomotive builders.

Michael, the technology is very, very different. Most of the European dealers are supplying locomotives which are for electrified networks. The technology is not following the same standard as in North America. So they are virtually different. And we supply actually most of the locomotive builders in most geographies, whether it be Europe or India or China.

Our next question comes from Steve Barger with KeyBanc Capital.

Nice year-over-year swing in operating cash flow. Can you tell us, did you generate positive cash flow on both Freight and Transit this quarter? And would you expect both will be positive in each quarter this year?

Yes. We actually -- because we're so -- the operations are so intertwined, we really don't kind of break it out in Transit versus Freight. It just would be -- well, first of all, when I set up to do it, it would be very difficult to do. I think all in all, what you see is a good overall cash flow performance. When you look at the prior quarter, it's typical operations as we come out of the year-end in the first quarter and some other things and the timing of some of how our working capital evolves. But our goal for the year is to exceed our net income.

Okay. And just longer-term thinking about free cash flow efficiency or conversion, is there any structural reason why Wabtec can't get back to the levels that it used to run prior to the Faiveley acquisition?

I don't think so. I mean, clearly, last year, with the acquisition, we became more international, more transit. It really created some challenges in last year's performance. But what you've seen now is 3 quarters in a row where we continue to improve. We're very, very -- we feel very good about our quarter-over-quarter cash flow from operations and performance and want to see that continue. Our goal remains the same, as I said. We haven't changed our goal. That's what we're planning to do is have our cash from operations exceeded our net income.

Got it. And one more quick one. I'm curious about electronics and signaling orders outside of the North American freight market. As you're out in the market talking to customers, are you seeing more interest from new projects where you can get involved in project design early on? Or is this more upgrading existing systems? And I'm just trying to get a sense for what type of customer you're seeing and the value in the products and how that's evolving?

Yes. So we try to stay pretty close with our customers, try to understand their business and opportunities. Certainly, when we get to a point where they have orders and their own orders forecast, we're trying to position ourselves to work with them as a partner, not just as a supplier. So that's -- in the case of Transit, I mean, we work with customers 2, 3 years ahead of the actual award of the contracts. So there's a long-term ongoing relationship with the freight car builders and the locomotive builders that facilitates that on the Freight side also. So yes, we're involved with our customers early on and basically trying to work with them more in a partnership to integrate our equipment into their designs and their platforms.

Our next question comes from Jason Rodgers with Great Lakes Review.

Yes. Do you expect FX to benefit sales at a similar rate as we saw in the first quarter looking out into the second quarter and the second half?

Yes. I mean, we don't usually forecast FX. But I think if you just kind of look at the FX rates, obviously, it's -- and to the extent you see them remain consistent, that's the kind of impact we'll see in consolidation.

And wondered if you could talk about what you're seeing in the way of raw material price increases and if your contract surcharges are fully offsetting those increases.

We're definitely seeing an impact, but it's -- so far, it's been relatively small, minor impact to our earnings. What we do is we get in -- with our contracts, there's the opportunity to reprice or apply an escalation to really offset those impacts to us.

And then finally, the accounts receivable was up year-over-year and sequentially a bit larger than a normal increase for you. What was the reason for that?

Well, when you just look at the absolute dollars on the balance sheet, you have to factor in the -- some impact of FX, especially when you look at prior quarter. But all in all, it's really related to the higher sales and the timing of how those sales hit in the quarter. So as we're growing, we're going to have -- see some receivable growth and some inventory growth and some payable growth to offset that.

Our next question comes from Liam Burke with B. Riley FBR.

Ray, could you give us some sense both on an opportunity and competitive front how the Transit PTC is rolling out for Wabtec?

I think on the commuter side, again, we're in a sole-source position, but what we've been able to do is improve our overall product offerings and capability to be able to participate at a turnkey level as a prime or as a sub to a prime. So we're not only able to deliver the onboard PTC. We're delivering a lot of subsystems and, in some cases, the entire project management and integrated system. So you have places that are greenfields like TEX rail, as an example, that we're participating and in a position that we're delivering the overall signaling system. And then separately, we have a contract to deliver the PTCs. So we're, I think, in a pretty good position in that market. There's other people that are doing that, but I think we have the majority of the share.

And on the pricing side, the profit profile side, is it similar to Freight?

Yes, it's very similar.

Our next question comes from Jay Van Sciver with Hedgeye.

I just wanted to follow up on the materials cost component, if you could. Does that become at all a headwind later in the year as there's a lag between the price changes and your cost as you incur them?

Yes. So we study it, and obviously, some more information will come later when we get the Q filed. But what we've seen is that our material costs as a percentage of sales have not changed. And we've also measured kind of on the outside through our sourcing team and a little bit is definitely -- that is impacting that is definitely immaterial. It's just not a big number. But what we think and expect to happen is that similar to other years where we've had rising material costs due to commodities that the programs and the protections that we have in place will continue to operate well. We have -- obviously can reprice some of our shorter-term orders that come into our backlog that are shorter term in the sense that they are -- you win the order and deliver. The pricing can be adjusted to accommodate that. We have surcharge programs in for our longer-term agreements with our customers. And finally, we have escalation provisions on our long-term Transit projects. So all of those things are in place to protect us from the impact of any kind of commodity spike.

Just on SG&A as a percentage of sales, it was a little bit, I think, higher than what we would have expected. How do you think about that -- the cadence of that through the year?

So when we look at our SG&A, I think in our prepared remarks, we talked about a run rate of about $140 million to $145 million. It's higher from a quarter a year ago because of acquisition, because of the FX impact on our -- especially our European operations. And we definitely have some discrete items that were lower a year ago and some discrete items that came in, especially on the professional fee area related to some costs we incurred in the tax reform act -- bill that was passed. So all in all, I think you definitely see some a big -- an increase compared to 2017 first quarter. But when we look to study it on a run rate basis, we're probably in that -- we feel very good about that $140 million to $145 million as a go forward.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Tim Wesley for any closing remarks.

Okay. Thanks, guys. We will talk to you again after our second quarter. Take care.

The investor conference.

The investor conference.

Oh, see you at the investor conference. I'm sorry. Bye-bye.

Thank you.

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