Westinghouse Air Brake Technologies Corporation (WAB) Q2 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Wabtec Second Quarter 2018 Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Tim Wesley, Vice President of Investor Relations. Mr. Wesley, please go ahead.

Thank you, Anita. Good morning everybody and welcome to our 2018 second earnings call. Let me introduce everybody else who is on the call with me. Ray Betler, our CFO; Pat Dugan; Stephane Rambaud-Measson, our COO; John Mastalerz our Corporate Controller and Albert Neupaver, our Executive Chairman. As Anita mentioned, we will make our prepared remarks and then we will take your questions. During the call we will make forward-looking statements, so please review today’s press release for the appropriate disclaimers. Ray, I will turn it over to you.

Thank you, Tim. Good morning, everyone. It's good to talk with you today. I am happy to report we exceeded slightly our financial targets in second quarter and our now comfortable increasing our guidance for the year to revenues of about $4.2 billion and adjusted earnings per diluted share of about $3.85. In the second quarter, we saw a year-on-year revenue growth in both our segments for the third quarter in a row. Even with strong revenue growth this year adjusting for changes in FX, our backlog is at a record high as we have won new business in most of our major product lines around the world. As we focus on our short-term performance, we are also pleased to be able continue to invest in our long-term growth opportunities including of course our planned merger with GE Transportation, which we will talk more about during today's call. So, first I would like to turn it over Pat to review the second quarter numbers.

Okay, thanks, Ray. Sales for the second quarter were $1.1 billion, and when you break it down and look at our segments, our transit segment sales increased 19% to $699 million. That increase was due to strong organic growth adding about $51 million of sales; favorable FX which increased $33 million and acquisitions which contributed about $28 million. This is the third quarter in a row; we've seen organic sales growth demonstrating that our backlog is starting to kick in. Freight sales increased 20% to $412 million, the third year-on-year increase in a row. The increase was due to strong organic growth adding about $54 million sales, slightly favorable FX of about $3 million and acquisitions which contributed about $11 million. Sales were at the highest level for freight in two years and the backlog increased 3% and is also at the highest level in two years. Freight aftermarket sales showed year-on-year growth for the fourth quarter in a row; all of these were positive indicators. When we look at our consolidated operating income for the quarter, it was $124 million or about 11.1% of sales. As mentioned in our press release this morning, this included transaction costs related to the GE Transportation merger of about $9 million, the restructuring costs of about $4 million and expenses of about $4 million for goods and services tax law change in India all which is reporting in SG&A. Excluding those items our operating margin was 12.6%. Going forward, our full year 2018 adjusted operating margin target is about 13.5% with improvement expected in the second half as we work through some of our lower margin contracts in the UK that we talked about last year and as we realized some of the benefits of our restructuring action. SG&A was about $171 million; the increase was mainly due to the expense items I mentioned as well as changes in foreign currency exchange rates, acquisitions, and increased incentive corporate goals. We expect it to be about $145 million to a $150 million per quarter in the second half excluding expenses related to the GE Transportation merger and any additional restructuring. Engineering expenses decreased to $19 million due to the timing of our spending because some of those expenses can be captured in the cost of sales. Amortization expense remained about the same in the year-ago quarter. When we look at our segment operating income for transit, it decreased to 2% to $58 million for an operating margin of about 8.3%. This includes the $4 million for the tax, the Indian tax law change and $2 million of restructuring expenses and if you exclude those items the margin was about 9.1%. We expect the margin to improve in the second half as we work through some of those lower-margin projects I mentioned, and to continue with our restructuring and cost reduction initiatives. Freight operating income was $84 million, up 34% for an operating margin of 20.5%. The improvement compared to last year was due to higher sales and more favorable product. For the full year of 2018, we expect operating margin improvements for both segments during the year and compared to last year. These improvements will come through better project performance, better mix of sales and the benefits of restructuring and cost reduction. Just a quick update on a Faiveley integration and synergy plan. In 2017, we generated about $30 million of synergies compared our target of about $15 million to $20 million and in 2018, we expect to achieve an additional $15 million. Our total target for the first three years is at least 50. So we're ahead of pace and expect that to continue. Looking closer on the income statement for interest expense, our interest expense was $32 million in the second quarter and that included $12 million of financing costs specific to the bridge loan that I will talk about later and related to the GE Transportation merger. For comparison, the interest expense in the prior quarter was lower than normal by about $2 million benefit related to a prepayment of debt assumed in the Faiveley Transportation acquisition. Going forward, we expect our interest expense to be about $20 million per quarter in the second half of the year and if you exclude any-- that would be excluding any effects from the GE transportation. Remember, that we are focused on generating cash to reduce debt and reduce our interest expense. The other income and expense line-- the income was $2.2 million compared to about a $1 million in the prior year quarter. The increase was mainly due to higher income from minority investments. Looking at her income tax expense our effective tax rate for the quarter was 11.2% lower than expected due to a benefit of about $13 million from the reduction of the estimated transition tax charge initially reported in the fourth quarter of 2017. That charge was related to the 2017 US Tax Reform Act. Excluding this benefit, our effective tax rate was 25.1% per quarter and our 2018 full year assumption is about 24%. Remember that's annual estimate; the individual quarters can and usually vary due to the timing of any of these discrete items. So to help with our earnings per share, our second quarter EPS on a GAAP basis on per diluted share were $0.87. Expenses for the GE Transportation merger, our restructuring actions and the beneficial effect of that discrete tax items reduced our EPS by a net of $0.09. So to help you reconcile you can also find these details in our press release. You start with net income per diluted share in accordance with GAAP of $0.87, you add back restructuring expenses that are recorded in both cost of sales and SG&A of about $0.03. You add back our cost related to the GE transaction which is recorded in both SG&A and interest of about $0.16 adding back the impact of our-- for the India tax item which is in SG&A that's about $0.03 and you deduct the benefit of the change in our transition tax charge of about $0.13, we end up with a net income per diluted share excluding these items of about $0.96 for the quarter. Okay, shifting to our balance sheet. The balance sheet remained strong. It provides the financial capacity and the flexibility to investment in our growth opportunity. We have an investment grade credit rating and our goal is to maintain it. In terms of cash from operations, we generated about $44 million compared to $12 million in the year-ago quarter; our performance was even better when you consider that we spent about $19 million on transaction expenses related to the GE Transportation merger and other restructuring costs. We expect our cash generation continue to improve in the second half and to finish 2018 with more cash from operations than net income. Looking at working capital at June 30th, our receivables were $837 million, inventories were $864 million and payables were $616 million. In addition, we had unbilled receivables of about $378 million which were more than offset by customer deposits of about $390 million. Our cash and debt at June 30th consisted of the following. We had $246 million of cash mostly outside of the US and total debt of about $1.9 billion and net debt -- so debt left the cash of about $1.64 billion. Our net debt EBITDA ended being about 2.6x. Just to remind you and to talk about our new financing arrangements, in anticipation of the GE Transportation merger, we did complete new financing arrangements. It included a syndication of a $2.5 billion senior unsecured bridge commitment and $400 million senior unsecured delay draw term loan to fund the cash portion of the merger. The bridge commitment will be reduced by any alternative financing that we arrange before closing. In addition, we refinanced our existing revolving credit facility with a $1.2 billion senior unsecured revolver for the five-year term and refinanced an existing $350 million senior unsecured term loan with a three-year term loan. Just a couple of miscellaneous items for the models. Our depreciation was $16 million consistent with the last year's quarter, and for the full year 2018 we expect depreciation expense to be about $70 million. Our amortization expense was $9.9-- about $10 million compared to $9.4 million in the last year's quarter. For the full year of 2018, we expect it to be about $41 million. Our CapEx for the quarter was $22 million versus $19 million a year ago, and we expect about to spend about $100 million in capital expenditures in 2018. Looking at our backlog, we had another good quarter for generating new orders as you can see from the numbers we are reporting in the press release. At June 30th, our multi-year backlog was a near record $4.7 billion; this was slightly higher than at March 31st if you exclude the impact of changes in foreign exchange rates. Our rolling 12-month backlog which is a subset of the multi-year backlog was a record $2.5 billion. With that I will turn it back over to Ray.

Thanks Pat. That's a lot of numbers to go through and a lot of work you accomplished since last quarter. So thank you John Mastalerz and your entire team for the work that you have done. As I mentioned previously, we increased our guidance for the year based on our first quarter-- first half performance in our outlook for the rest of the year. We now expect full year revenues of about $4.2 billion with adjusted earnings per diluted share of about $3.85 excluding cost related to the GE merger restructuring charges and the effects of tax law changes. Compared to 2017, this would represent revenue growth of about 8% and adjusted EPS growth of about 12%. 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 adjusted operating margin targets for the year is about 13.5% as mentioned by Pat we should see improvement throughout the rest of the year. Our adjusted tax rate is expected to be about 24% for the year, and we are assuming diluted shares outstanding of about $96 million for EPS calculation purposes. Before I turn it over to Stephane to discuss the transit and freight operating segments, I would like to give you just an update on the merger with GE Transportation. I've been calling this opportunity once-in-a-lifetime opportunity, and I truly believe that it is. We are excited by both the short-term and the long-term opportunity it presents. The combination will make Wabtec a Fortune 500 company. We will be a global transportation leader in rail equipment, in software and services with operations in more than 50 countries around the world. Financially, GE Transportation has continued to perform as expected this year and is confident about its outlook for 2019. In the second quarter, the company had revenues of $942 million; that's an 8% improvement versus first quarter and a segment profit of a $155 million which is up 20% versus first quarter. The company has booked orders of $4.7 billion in the last three quarters including $1.1 billion in the second quarter. Year-to-date its orders are up 44% compared to prior year. Across the industry, product locomotives continue to improve ending the quarter down of about 31% since last year. We still expect the GE Transportation transaction to be completed in early 2019 subject to customary closing conditions, approval by Wabtec shareholders and regulatory approval. As expected, both Wabtec and GE have received a request for additional information from the US Department of Justice as part of the regulatory review process and we are cooperating fully with the DOJ as it reviews the proposed transaction. So let's talk about the compelling strategic rationale for the merger. After closing, we will be a diversified global leader in transportation and logistics. We are combining Wabtec's freight and transit components with General Electric Transportation's locomotive manufacturing and service capabilities. From our discussion so far, we see a strong cultural fit that should enable a seamless integration. Our combined electronics and digital businesses and technologies can lead to autonomous operations. Wabtec will be positioned to meet the growing demand for train intelligence and network optimization. We will benefit from recurring revenue in a high-margin aftermarket and service sectors. Complementary global customer relationships will drive a substantial cross-selling opportunity and help dampen cyclicality. Our pro forma financials are compelling especially at this attractive stage in the cycle. Our combination will afford a significant skill, rapid growth trajectory, superior margins and strong free cash flow. General Electric Transportation is well-positioned as the industry recovers with a backlog of $18 billion and robust orders. The significant operating synergy potential impacts benefit drive values creation approximately $250 million of anticipated run rate synergies driven mainly by cost reduction opportunities, and a net tax benefit of about $1.1 billion. We will have a strong free cash flow profile that will enable us to rapidly de-lever. We remain committed to retaining our investment grade ratings and our dividend and with that I will turn it over to Stephane.

Thank you, Ray. I will start with our transit business. In the quarter, we are 9% organic revenue growth as our backlog is starting to kick in. Our profitability has been affected by the lower margin contracts in the UK that we have discussed last year. We expect margins to improve from the restructuring actions and have some of these lower margins revenue beginning to roll off. Our goal is to improve transit margin by 1% annuity during our cut period and we expect to achieve this goal by self-applying a more vigorous bidding process, being more selective, better project management and improved cost culture from our restructuring actions and the transfer of work to lower cost countries and a disciplined deployment of our lean and sourcing initiatives. Worldwide, the state of the transit market remained strong, and we continue to win and bid on significant orders in all of our major markets. In the quarter, we booked a long-term aftermarket service agreement with SNCE in France, orders for brake equipment and new cars for India and France, and orders for brake equipment in HVACs on new cars for Israel. Remember too that our OEM order typically lead to long-term aftermarket contracts which then provides revenues and good profitability for the rest of the year. As we look at our business over the next several years, India remains one of our most dynamic markets, driven by record orders for coaches and electric locomotives for Indian Railways along with new metro project. The European markets continue to expand, driven by replacement of metal sheet in London, in Paris, in Berlin and new infrastructure projects such as rotary. The regional market in Germany continues to grow and a new bill just start in France that could trigger new volume in the medium to long term by opening up the regional market to private operators. As a true global player, over time our transit business should have better ability and stability, more gross opportunities in both organic and through acquisitions, and improved margins as we benefit from increased scale and market share and as aftermarket revenues increase. Let's now move to our freight train business, which has continued to pick up due to strong market activity. Our freight backlog is now at its highest level in two years, and our second quarter freight revenues were the highest in more than two years. In NAFTA, freight train traffic is up more than 5% year-to-date and stock and storage continue to come down. As a result, we are seeing growth in our freight aftermarket revenues along with more enquiries for competent servicing and repair and locomotive overall project. Demands for new locomotives and freight charges are also improving, and we have seen good volumes in our maintenance business with orders of both sales in the first half of the year. Meanwhile, our non-rail business is benefiting from the growth in the oil and gas market. As an example, our of [Indiscernible] business saw orders, outpace sales in the second quarter. 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. For new locomotives, we see a slight increase worldwide down in NAFTA, but it's looking like 2018 will be --. For new freight cars, NAFTA is expected to be slightly up. In Freight, our long-term investment into the facility in Turkey for freight cars products, and new products in electronics and in train controls. I would like to mention that one of our long-time customers, Rio Tinto in Australia just completed its first delivery of Renault by an autonomous driverless train, which included equipment supply by Wabtec. It is just another sign that third worlds continue to be very interested in technology solutions. Ray?

Thank you, Stephane. I'll conclude our prepared remarks by talking about our long-term outlook. At our Investor Day, in early May we talked about our five-year plan which meets our long-term financial goals to average double-digit growth in revenues, and our earnings due to business cycle with improving margins. To achieve these goals, we have growth initiatives in each of our major product lines which are consistent with our forward growth strategies. After we complete our merger with General Electric Transportation, we will of course update our strategic plan. From our initial analysis in due diligence, we are confident the merger improves our ability to deliver on our long-term growth targets. So just reiterate some of my comments at the beginning of the call, we had a good first half in 2018. We exceeded slightly our plan for the second quarter and increased our guidance for the year. We saw a year-on-year revenue growth in both of our segments for the third quarter in a row. Even with strong revenue growth, our backlog remains near-record high. And the freight market continues to improve. So we expect to build on these accomplishments throughout 2018 based on the improvements we are seeing in our freight business, and on our Wabtec excellence program which gives us the ability to generate cash and to increase margins over time. With that we will be happy to answer your questions. Operator?

[Operator Instructions] The first question comes from Justin Long with Stephens. Please go ahead.

Thanks and good morning. So maybe to start with a question on the transit side of the business, I was wondering if you could help us think through where transit margins should exit this year based on that your current guidance, just curious how we should be thinking about the improvement once we start to lap these are-- or get rid of these UK contracts, and some of the restructuring that you've talked about is complete?

So Justin, I guess, I don't we have really given individual transit freight segment guidance margins, but I think it's safe to say that when we look at the first half of the year for 2018, for the whole Wabtec that we have-- we have some pretty significant revenue that's flowing through the results with less than normal margins and that's really having a dampening effect on the overall margin and in particular it's really impacting transit. So, think that you could you-- when you look at your results that you would see us start these contracts-- these projects to run off and then we would get back to a more typical margin profile as you have seen in the past for Wabtec on the transit segment.

Okay, and Pat I think you made the comment that both segments should post year-over-year margin improvement, I am assuming that's on an adjusted basis and so would you mind giving the comparison you are using for 2017-- there just have been so many charges and adjustments, I want to make sure we had the right numbers to be using for last year.

It was about 10% [Multiple Speakers]

And what was that number for freight?

Freight was about 20.

Okay. That's helpful. And then, I guess second question, I wanted to ask about your locomotive overhaul business, is there any way you could speak to the amount of overhaul work that was delayed during the past down-cycle and how much of that has come back at this point, I just want to understand where we are in terms of that recovery?

Justin, we took as you know adjustment last year for about $250 million, I think it was second quarter in revenue one-- a lot of that was associated with overhaul-- locomotive overhaul-- the locomotive overhaul business is coming back slow. We are in the process bidding some small-- smaller projects, but there's been nothing significant in terms of new opportunities in the market to date.

The next question comes from Scott Group with Wolfe Research. Please go ahead.

Hey, thanks. Good morning guys. I wanted to start with the revenue guidance that --so you have guys done to give or take $2.2 billion of revenue first half of the year. Pretty much we always see better revenue in the second half than the first half when you've got a backlog like this. So, you know you should be doing north of 5.4 or higher when guidance is $4.2 billion-- how many bridge the gap there and what might be getting worse in the back half for the year?

I think the guidance is contemplating the seasonality that we-- that we see with Q3 especially I guess it's more impactful than it has been in the past because so much work business is in Europe now. But we definitely have customers that go through shutdown and summer slowdowns and Q3 can really show revenue that is less than normal. So we have that contemplate in our results. But you know the other thing is that there is a certain amount of conservatism especially in the areas where the-- where the increases have been strong in freight.

Okay. And then I want to go back to the margins because I think that's an important question right, so if you did 12.5% give or take in the first half and 13.5% for the year so we got to get to 14.5% margins in the back of the year or maybe can you help us kind of put some parameters where you think about the third and fourth quarters, and so I guess the implication is that we are going to be north of 14.5% in the fourth quarter on operating margin. Is there anything about that that feels unusual or unsustainable as we think about operating margins for 2019?

Yes, well I think that we don't typically give any kind of guidance on margins especially going in the 2019, but I think you are right here, your feeling is that you are going to have an improving margin percentage that goes into the second half for the year, that's going to be driven by a couple of things, it's definitely expect to see some of these projects to wind down, and come out of our mix of revenue and then you also have-- and we have seen this especially in the past couple of years where our fourth quarter mix of sales can be a better-- better mix more profitable and that really contributes to an overall margin for the year and for our guidance.

Okay and then just last one on the margin side. So we just did a 21% margin adjusted in freight; we've gotten as high as, I don't know 23.5% or 24%, but that was with a lot of PTC, how good do you think freight margins can get to as long as the freight cycle remains strong?

I mean our goal is to continue to improve the margins every-- every quarter-- every year clearly mix is-- has an impact that you pointed out you know PTC and the strength of the freight market, but so our goal is to continue to improve.

The next question comes from Allison Poliniak with Wells Fargo. Please go ahead.

Okay guys, good morning. Just want to touch on a little bit what Scott and Justin had just asked, on the transit, you know you talked about the lower margin contracts rolling off, could you remind, I think I mean are those primarily behind the scene a little bit flow through in Q3 than in Q4, I mean how should we think about cadence of that roll off for 2018?

So, there were -- if you go back to third or fourth quarter 2017, there were contract adjustments and really if you think about project accounting and project results you reduced your margins on a cumulative catch up, but you are now at a point where the revenues comes through at a zero margin and those projects are completed. You know what we have described in the past is that we-- these projects are-- they are in the UK and will-- probably the largest one essentially winds up in the late third quarter, and maybe stretching a little bit in the fourth quarter of 2018, and we have a couple that will also stretch into the first half of 2019.

So Allison it may be since Justin and Scott and you all have some margins, so let me just take a minute to talk about the margins in transit gain. To remind you, we went through this wedding process to re-baseline our total project portfolio when Faiveley and Wabtec businesses were put together. We explained it-- we sis identify some significant project issues and adjustments that we had to make in our project portfolio, and we also communicated later in the year that a lot of our focus was on projects in the UK which were weaker overhaul projects that were three, four, five years in nature, and are coming to a close. So some of those, the biggest one will come to close at the end of this year and then the beginning of next year through mid year, the second largest. So, those projects are starting to be completed. They are starting to be replaced with backlog revenue with higher margins although the transit project margins historically are lower than other projects, other projects like in freight or in electronics. So what we have done is to focus on those projects, focus on opportunities, and project by project to do monthly reviews and incrementally improve the projects. Secondly, on a portfolio basis, we have tried to focus on other margin improvement opportunities and Stephane has put together a corporate-wide margin improvement program at the request of the board and that was reviewed this last week. We had our board meeting, July Board Meeting. And so there’s other initiatives that are being taken across our total business, some are related to customer project, some are related to pure operating production activity, some are relating to elimination of one time issues. And others are relating to what we would traditionally call continuous improvement in our lead. So there’s a lot of sensitivity in progress internally on margin improvement, I want you folks to understand that, it’s not an issue that we -- we’re taking lightly or cavalier about the position we’re in relative to the deterioration at transit margins. So it’s a very serious thing for us. We’re addressing it, and we’re addressing it both at the transit level as well as the overall corporate level.

Great. Thanks, it’s helpful. And then just on Faiveley, you talked about in a success from the cost synergies but you also talked about a number of projects that you are winning. Could you talk to your sense of, is the combination of Faiveley and Wabtec giving you a greater share of the wins that maybe either of you could have gotten on your own? Any sense of what you're seeing there?

Actually may be I'm going to take this one, Stephane speaking, yes we, the combination of the two companies is a very helpful to win more project. We have the widest portfolio of products in industry now in certain segments, as you know we are the number one or number two position, we have very complementary products. I can just give you an example of the largest commuter project in Europe, which was awarded last year, has been won with a combination of Wabtec legacy and Faiveley product, the most of the control electronics were European base were coming from the Faiveley part and the automatic equipment were originally coming from Faiveley, while these were the -- to the famous segmented discs of Poli coming from the Wabtec legacy side. And without this combination, I think we would not have been in a position to be as successful on this major project. So, so yes I mean the combination has helped us tremendously to improve our capacity to bundle products and to have a more competitive technology.

The next question comes from Matt Elkott with Cowen. Please go ahead.

Good morning, thank you for taking my question. So, Ray, we're seeing this tightness in the locomotive market and I was wondering if it's translating into anything any maybe increased level of conversation with your customers or enquiries. And if so, for those that are not GE of your customers how much is a GE deal coming up in the conversation. And I'm just trying to gauge if there's a level of concern by your non GE customers about future supply agreements.

Yes. So it's come up Matt obviously in our discussions, we've talked with all the customers, we've also talked to the progress, chat folks about supply agreements and long term relationships. So the customers are certainly sensitive about the competitive environment. And I think we've tried to reassure them that our plan is to support both current customers long term into the future GE as well as at Cat EMD. And we're willing to commit to long-term supply agreements to demonstrate that.

That's fair, so you raised, still think that the revenue optimization potential from merging with GE will well offset any type of potential revenue losses to their competitors.

Yes, it is not. We’ll be fine there, I don't think that's something that we could really talk well this is our new - speaking I think that we're getting a little ahead of ourselves, you know, we feel that we'll be able to supply the market extremely well, and we think we'll have a great product and a great team that's going to be able to deliver whatever is needed in the marketplace.

Got it, and Ray last quarter I think when you guys gave guidance, I think you suggested that there was a bit of a conservatism built into the guidance, now you've raised the EPS guidance is very slightly partly be attributable to the beat in the quarter. So you still feel like the same level of conservatism is built into the second half guidance if the environment does not change materially from the current trends?

Yes, I feel pretty good about our opportunities going forward Matt, we're --we try to be conservative and at the same time responsible about our projections but I think that trends in market are very positive right now, and if they continue there’s certainly a lot of things that could impact them, crazy politics and the other things that are going on all around the world. It's hard to analyze what the impact of tariffs and all the other things may have on our economy, but economy is right now strong. And we're anticipating it's going to continue to be that way. And we think there's upside opportunity there.

The next question comes from Saree Boroditsky with Deutsche Bank. Please go ahead.

Good morning. So obviously really strong results in freight, could you provide some color on what you saw in the quarter from aftermarket versus OE demands. And then just giving your commentary on the conservatives embedded in the outlook, how you're thinking about the growth driver in freight for the remainder of the year?

One second Saree, as far as the growth drivers go certainly the new car builds and the cars being depleted in storage both on a freight side, the locomotive side, the aftermarket, sales being up in a repair centers, those are some of the drivers, commodities, gas prices again are all trended in the right way the coal situation in the eastern railroads, all were in our favor. So those are some of the drivers.

Yes. So in terms of freight aftermarket sales, first quarter to second quarter increased about 5% in the second quarter. And about the same over year, year-over-year quarter.

Another thing Saree was just keep in mind in freight we reported PTC, so don't forget the regulatory requirement at the end of the year for deployment then there's a big push by the FRA and the federal government to make sure that six of railroads not just the class ones but all roads that are complied. So that's another big driver.

Could you quantify the impact of PTC and freight in the quarter?

Yes. We don't break it down by freight and transit but I can tell you that for the company for consolidated PTC was about $71 million in the second quarter, signaling about $37 million. So combined that's about $109 million.

Okay and then just quickly, just focusing a little bit on the bigger picture, one of the most exciting opportunities I think with the GE Transportation merger, the combination of your digital platforms. Could you just talk about how you're thinking about the combination of technologies? And then if there's any overlap today with -- GE's trip optimizer or any other technologies?

No there's no overlap with the trip optimizer and as far as the combination goes, there's I think I mentioned in the last call, if you superimpose our product roadmap over theirs or vice versa, there's a lot of complementary product and technologies that the combined business will be able to leverage. So I think in terms of our opportunities going forward they're pretty significant in terms of being able to hopefully reduce R&D costs. And at the same time get to market faster with competitive product. And we do not - we're not communicating that autonomous, it’s a one step process, it's a multi-step process that we think will go through a phased approaches with maybe a reduction of one driver or one attendant in the cab, something like that. So I think in terms of technology evolution the opportunities are very significant.

The next question comes from Matt Brooklier with Buckingham Research. Please go ahead.

Yes, thanks, good morning. So question for Pat. I think your SG&A guidance is up about $5 million if I look at what you provided on the call versus the last go-around, maybe can you talk to what's contributing to an increase in SG&A in the second half of the year?

Well, there's two things you know, FX does impact our SG&A cost, so the absolute dollar number kind of comes up a little bit. You also have full quarter impact from acquisitions we would have done, but we're definitely with, with the higher growth of revenue that you know, we compared to previous years and quarters. We do have a little bit of extra cost and those are being reflected in the SG&A.

Okay, that's helpful and then you disclose the old PTC number for 2Q I think that's up, pretty meaningfully from first quarter. I think your guidance for the year a call before about 5% growth and the combined PTC signaling category with most the growth coming from PTC just curious if you have updated thoughts on that guidance, given that looks like the first half of the years off to the stronger start?

Yes. I think the PTC and signaling revenues are probably about higher about 10 % from what the original numbers were. So about 10% higher than last year.

Okay, so I guess 5% becomes a 10% growth numbers is that right we are saying for 2018?

Right.

The next question comes from Liam Burke with B. Riley FBR. Please go ahead.

Thank you, good morning. Ray on the PTC front on the transit side how has that business been rolling out? And how much is that influencing your outlook for transit margins?

So that business to large extent the PTC Hardware net business is relatively small but the project-based business is relatively large. So we have a pretty significant portfolio of projects that we're executing right now, we actually have about 20 projects in total at various stages of completion. And for the most part the margins are good.

Okay and we could see the freight volumes on the class ones are improving. Could you give us a sense on how the outlook is on the international front for Freight?

So I think the international front is also improving for the most part but it's I think a lot slower, Liam, than what we see here, you know, in some countries like China for three years there were now new freight cars being produced. They are at about-- running at about 40,000 a year right now, while India’s started to pick up slightly, Australia's come back. So they're, they're picking up around the world but slower but in Brazil, it looked like it was picking up and dropped again. So well, I think that's a reflection of the economy, it will come back there I believe but the overall growth is much slower the impact in North America.

The next question comes from Willard Milby with Seaport Global. Please go ahead.

Hey, good morning, everybody. I just wanted to touch back on the revenue guidance. And Pat I know you talked a little bit about cadence with the seasonal European slowdown in Q3, that's mainly focused on the transit business, right? Is there any reason to think that there should be an outsize slow down at freight?

Well I think yes, I think the answer is yes, I mean we specially see and in the years I've been here is that the some of the services business, the main entity, the refurbished products that we will do will definitely have seasonality. Just kind of off top my head, it’s usually France is the first fourth quarter, the strongest and second and next and the third the least. It's just it's not as it's because it's a smaller percentage of the overall revenue, it's just not as noticeable but there is freight impact on seasonality.

And with that was there any kind of pull forward of business here into Q2 as freight volumes increased in the congestion continued as we look domestically?

I don't think so. And I think if you look at the backlog, it's remained strong, you would kind of see it show up and reduced backlog so --

The one area we did get a little bit of a lift was in PTC because these railroads are trying to finish deployment. And we did see a little bit of hardware pull forward to do that, we had anticipated in Q3, so we're obviously going to watch how that involves through the rest of the year.

All right, thanks and just one housekeeping item, did you'll give a depreciation number fourth-quarter?

Yes, look at my sheet, it was $16 million for the quarter, and amortization was 10, yes, 16 and amortization was 10.

Next question comes from Steve Barger with KeyBanc Capital Market. Please go ahead.

Thanks, good morning. Ray, you talked through a whole lot of puts and takes on the near term for those transit margins as you describe that recent presentation to the board, can you just give us your current thinking on how you see structural transit margin over the next few years? And what can that segment generate in terms of normalized incremental margin once you get everything where you want it?

And so well at the Investor Conference, we talked about a goal 1% improvement year-on-year, on the bottom-line and that's our goal. And I think that with a lot of diligence cost reductions focus on the bottom-line we'll be able to achieve that, it takes a while in that business because of the long term nature of projects, but that's why the focus on the cost is so critical in addition to execution, another big impact is that we did jobs more effectively and if we don't take on jobs that we don't believe can perform, when we do take on jobs, we structured them properly in terms of financial structure when we do the bid. I think overall as far as where those margins can end up I think we talked about the margins will never be as high as strength in transit as in freight, but we think that if -- with good performance we could get the margin profile with the mix of aftermarket and an OEM up to about 15 %.

And so do you think in terms of structuring the contracts and moving through these low margin contracts all that work gets done on the back half of 2018 to the point where you're tracking towards that goal in 2019?

No it's a -- what we can focus on short term will have the biggest impact its cost, process improvements will take much longer to have an impact, Steve, because these are running projects, we have hundreds if not thousands of projects that we are in the process of executing. So I think the process improvements are things that roll out over the course of our start period, the cost impacts will have more short-term impact.

Thanks and just one quick one for Pat, thinking about free cash flow for the remainder of the year, will you continue to incur extra expenses for the transaction cost or the financing or is a lot of that spending behind you now?

Well, so overall the plan is that we will -- we have to replace the bridge with permanent capital and the timing of that is still kind of to be determined. So kind of obviously we have the time line, but nothing that we can announce. And so the answer is there will be cost that will be incurred and as we progress on that plan.

The next question is a follow-up from Scott Group with Wolfe Research, please go ahead.

Hey, thanks guys, just quick follow-up here can you maybe share the revenue expectations for freight and transit for the year within the guidance? I'm just trying to understand how much of this margin ramp is just a better mix of freight versus transit revenue?

Yes, Scott, I mean we don't usually give this split, I think that, I think you're just going to have to look at it, make some assumptions. Yes, we said the revenue - the guidance we gave was that the segments would grow in 2018 verses 2017 and that’s part of the revenue comment and operating or income from operations comment but we didn't give specific segment guidance for revenues.

Okay, the margin issue, the contract issue, is that more of a gross margin or an operating margin issue?

I guess I would answer it as more of a contribution margin so you know it has impact on both.

Okay, and then my last thing on this rate, it sounds like your point is, we're going to cycle through some of this but not all of it by the end of this year, we stop a little bit that lingers into the beginning of next year? How much of this do you think we get through by the end of this year? I'm just again trying to understand like what the run rate margin is once we get through this? Are you -- you're saying it's 14.5% in the back half of the year, even with some of this margin overhang. So I'm just, how much, I guess I'm trying to figure how much better it can get from that once we fully cycle through this?

So as far as the projects that are going through, Scott, the largest project will be completed, it is scheduled to be completed by the end of this year, that's the largest project in the UK that we refer to several times over previous discussion. So there will be revenue with low margin next year, the overall portfolio of transit OEM projects as we discussed at Investor Day is, it is traditionally low. So our focus has got to be obviously in parallel with improving our project margins to improve our cost structure, to be able to get make the impact that we need to achieve our overall profitability.

This concludes our question-and-answer session. I would like to turn the conference back over to Tim Wesley for any closing remarks.

Okay, thanks Anita, thanks everybody for joining us. And we'll talk to you in about three months if we don't see it between now and then. Thank you.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.