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Edited Transcript of WAB earnings conference call or presentation 25-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Westinghouse Air Brake Technologies Corp Earnings Call

WILMERDING Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Westinghouse Air Brake Technologies Corp earnings conference call or presentation Tuesday, April 25, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Albert J. Neupaver

Westinghouse Air Brake Technologies Corporation - Executive Chairman of the Board

* Patrick D. Dugan

Westinghouse Air Brake Technologies Corporation - CFO and EVP of Finance

* Raymond T. Betler

Westinghouse Air Brake Technologies Corporation - CEO, President and Director

* Timothy R. Wesley

Westinghouse Air Brake Technologies Corporation - VP of IR and Corporate Communications

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Conference Call Participants

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* Allison Poliniak-Cusic

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Jason Andrew Rodgers

Great Lakes Review - VP

* Justin Trennon Long

Stephens Inc., Research Division - Research Analyst

* Michael James Baudendistel

Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Analyst

* Samuel Heiden Eisner

Goldman Sachs Group Inc., Research Division - VP

* Saree Emily Boroditsky

Deutsche Bank AG, Research Division - Research Analyst

* Scott H. Group

Wolfe Research, LLC - MD and Senior Transportation Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Wabtec's First Quarter 2017 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, please go ahead.

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Timothy R. Wesley, Westinghouse Air Brake Technologies Corporation - VP of IR and Corporate Communications [2]

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Thank you, Kate. Good morning, everybody, and welcome to our 2017 First Quarter Earnings Call. Let me introduce the others who are here with me in the room: Al Neupaver, our Executive Chairman; Ray Betler, our President and CEO; Pat Dugan, our CFO; and John Mastalerz, our Corporate Controller.

We'll be happy to take your questions after we make our prepared remarks and, of course, during the call, we will make some forward-looking statements, so we ask that you review today's press release for the appropriate disclaimers. Al, you want to get started?

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Albert J. Neupaver, Westinghouse Air Brake Technologies Corporation - Executive Chairman of the Board [3]

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Yes, thanks a lot, Tim. Good morning, everyone. Our first quarter adjusted earnings were in line with expectations, with growth in our Transit business offsetting lower revenues in our freight business. We expect our sales and earnings to improve each quarter this year. And today, we affirmed the guidance we issued in February. Ray and Pat will discuss our results and operations in detail shortly. But before I turn it over to Ray, I'd like to comment about the progress we've been making on the integration of our acquisition of Faiveley Transport, an acquisition we completed only a few months ago. After completing the purchase of the family stake in December, we began a tender offer for the remaining public shares. By late March, we had acquired more than 95% ownership, which enabled us to move forward with a squeeze-out process to complete the transaction in late March. As we've said before, this acquisition represents the most strategic acquisition we've made to date and we're very excited about the growth opportunities and the synergies. We now have a strong position in the global transit market that provides increased diversity of our revenue base across markets, across products and across geographies to offset the cyclicality of the U.S. freight market. We also have a strong established platform of products and service capabilities in Europe and in Asia Pacific, the 2 largest transit markets in the world with a full range of technologies to serve these as well as other global markets. Let me give you a little update on the synergy activities. We estimate synergies to be about $15 million to $20 million in 2017, and we expect long-term annual synergies of at least $50 million be achieved by year 3 from revenue growth through supply-chain efficiencies, operational excellence and cost-savings and by leveraging our engineering and administrative capabilities.

In total, we're tracking more than 100 synergy projects. We have active projects in every operational and functional area. We're generating early successes in sourcing, new product development optimization, tax planning, and reduced redundant activities and resources. Work on longer-term synergies is also proceeding with a focus on facility consolidation, global and market expansion and new product development. So once again, just a few weeks into the integration process, we're pleased with the progress so far and excited with the long-term opportunities and benefits we expect to achieve. I'll turn it over to Ray now.

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [4]

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Thanks, Al. Financially, our performance in the first quarter met earnings expectations with an adjusted EPS of $0.84. Al will cover the adjustments later in his remarks. During the quarter, our backlog increased 2% compared to the fourth quarter backlog and our book-to-bill was 1.1, which is a positive indicator. We're still facing challenging conditions in some of our freight markets and we continue to reduce costs as necessary. Although, we saw freight aftermarket revenues increase for the second quarter in a row, which is another positive. During the quarter, we purchased the remaining shares of Faiveley. We've made good progress on the integration. We acquired Arrow

Transportation Products, ATP, a manufacturer of hatch covers and outlet gates for freight cars with annual sales of about $40 million. We announced the signing of a $97 million contract to provide Signaling and Communication services to TEX rail. And then earlier this month, we acquired Thermal Transfer, a manufacturer of heat exchangers in industrial markets with annual sales of about $25 million and we acquired Semvac, a European-based manufacturer of sanitation systems for transit vehicles with annual sales of about $15 million. So we've been busy running the company day-to-day and making strategic investments for the future. Based on our first quarter performance, to date, we affirmed our 2017 guidance. For the year, we expect revenues to be about $4.1 billion with earnings per diluted share between $3.95 and $4.15, excluding restructuring and transaction charges and noncontrolling interest related to the Faiveley acquisition. The midpoint of the EPS range represents growth of about 6% to 7% compared to the 2016 adjusted results.

Due to the ramp up of projects already in the backlog and the timing of synergies from the Faiveley acquisition, we expect our revenues and adjusted EPS to improve sequentially during the year with more acceleration in the second half. Accretion from Faiveley will increase during the year as projects and synergies kick in. Other assumptions include the following: revenue growth for the year will come from our Transit Group with the Freight Group expected to be slightly down; Faiveley will be accretive but its financial impact will be reduced by expenses for additional interest and a higher share count along with purchase price accounting charges. We're assuming foreign exchange headwinds of about USD 55 million at current rates, and our tax rate is now expected to be about 27.5% for the year. We're now assuming diluted shares outstanding of about 96 million for EPS calculation purposes, that's a bit higher than the 95 million we were previously assuming.

Our goals in 2017 remain the same as we discussed earlier in the year. Those goals are to meet our financial plan, to rightsize our business and remain disciplined when it comes to controlling cost, to generate cash, to invest in growth opportunities while strengthening our balance sheet and to ensure smooth and effective integration process with Faiveley and to capture the synergies and growth we expect. As always, we will strive to control what we can and manage our business effectively.

Our transit markets remain stable, both in the U.S. and abroad with new projects expected to ramp up this year and good bidding activity to continue overall. Reflecting this activity, our transit backlog remains at a record high. During the quarter, we won orders for air-conditioning equipment in Sweden, brakes and couplers in Italy, brake systems in Dubai, and in particular, our orders for aftermarket services were strong, which certainly helps our margin outlook. Over the next several years, the strongest market growth is expected to be in Western Europe, Germany, France and U.K. as well as Asia Pacific, India, and Australia. While talk of infrastructure-focused spending in the U.S. could also provide additional opportunities. We're bidding on several significant future projects in the U.S, France and Australia and expect to announce some of these project wins as we go forward through this year. In addition to sales growth, we are focused on improving margins in transit. Many of the synergy projects that Al mentioned involve plans that we believe will drive significant margin improvement over time and we're committed to delivering on those plans.

Let's turn to the freight markets. In NAFTA, freight rail traffic is rebounding after being down for 2 consecutive years. Through mid-April, total traffic was up about 4%. As a result, we are seeing a slight pickup in our aftermarket business, and we should see more benefits as we go through the year if the rail traffic continues to improve. We see no change to our 2017 freight assumptions. Railroad CapEx, which declined about 15% in 2016, is expected to be down again in 2017. Locomotives down about 6% worldwide, including down about 30% in NAFTA. Freight cars down about 10% worldwide, including about 30% in NAFTA. Combined, that represents a headwind of about $120 million in revenue. We have opportunities to offset most of these headwinds because of our growth strategies and diversified business model.

Aftermarket in the U.S. and elsewhere, international projects in places like India, acquisitions we've completed in 2016, which will add incremental revenues of about $100 million through Graham-White, Unitrac, Pride Bodies, Workhorse are all positives to offset the headwinds.

We continue to focus on growth. Our priorities for allocating free cash did not change, although we also expect to reduce that during the year. So our use of free cash will be to fund internal growth programs including product development and CapEx, to pursue acquisitions which are strategic and have ample opportunities to deploy capital in this area, and thirdly, to return money to shareholders through a combination of dividends and stock buybacks, our current share repurchase optimization program, which still exists. So we remain focused on increasing free cash flow by managing cost and driving down working capital, controlling capital expenditures. Our corporate strategic growth initiatives continue to be the same. We're focused on new products and technologies. We're focused on global expansion. We're focused on aftermarket expansion and on strategic acquisitions. So let's talk about each of these.

In the area of new products, we have always viewed our mission as helping customers to increase their safety, productivity and efficiency. So our future product roadmap is focused on just that, whether it's data analytics through electronics and sensors or train control automation using onboard computers, we have an extensive pipeline of innovation in both freight and transit around the world. We're also working on a number of green initiatives, which are environmentally friendly product developments such as charging systems for electric buses and ferries, low energy consumption HVAC systems and a compact low-weight door mechanism.

On a global market expansion front, for the quarter, sales outside of the U.S. were $590 million or 65% of our total revenues. Examples of recent orders include ECP brake systems and other freight components in Australia, sensors and wayside monitoring equipment in India and pantographs in South Africa.

In the area of aftermarket expansion, sales for the quarter were $519 million or 57% of our total. As I mentioned, we have started to see some slight pickup in our freight aftermarket business due to increased rail traffic in the U.S. If freight traffic continues, we expect to see more benefits.

Now let's talk about Train Control and Signaling. Train Control and Signaling, we mentioned, is an important part of our long-term growth opportunities, although it's part of the reason why our freight revenues were down in the first quarter. In the first quarter, revenues from Train Control and Signaling were about $68 million. For the year, we expect them to be flat to slightly up. We have been selected for several PTC projects in transit and hope to announce details of those soon. Some of which are expected to begin later this year. Long-term, we expect PTC and Signaling will be a growth business for Wabtec based on the following opportunities: multiyear maintenance and service agreements, which include software and product enhancements, international projects and continued growth in Signaling through organic investments and acquisitions. We're beginning to see some evidence that our long-term strategy is working. We signed a $97 million contract to provide Signaling and Communication services to TEX rail for a new commuter rail line in the Fort Worth, Texas area. We signed several maintenance and service agreements related to train control but once again, our new product roadmap includes considerable activity in this particular product area. On the acquisition front, our pipeline continues to be active and we're pleased with the opportunities we're reviewing. This year so far, we have acquired Arrow Transportation Products, a manufacturer of hatch covers and outlet gates for freight cars with annual sales of about $40 million, which increases our market share. Thermal transfer, a manufacturer of heat exchangers for industrial markets, with annual sales of $25 million would provide synergies with our existing heat exchanger businesses and we acquired Semvac, a European-based manufacturer of sanitation equipment and systems for the transit market with annual sales of about $15 million, which fits with our existing Microphor business here in the U.S. So each company meets our strategic criteria, either with new products, more geographical coverage or strong aftermarket opportunities. So with that, I'd like to ask Pat to talk about some of the financial details.

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Patrick D. Dugan, Westinghouse Air Brake Technologies Corporation - CFO and EVP of Finance [5]

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Okay. Thanks, Ray. So sales for the first quarter were $916 million, and when you look at the breakdown between the segments, Transit segment sales increased 72%, mostly driven by the Faiveley acquisition. Acquisitions contributed about $270 million of additional sales. FX was a drag actually reducing our Transit segment sales by about $23 million and the rest was flat organic sales for the quarter. Looking at the Freight segment, those sales decreased about 21%. We had lower organic sales mainly from PTC, from Freight OE and aftermarket businesses, that was down about $130 million, and had a small FX impact of about $2 million and that was offset by some acquisitions of about $37 million positive. In a positive sign, freight sales were higher than the prior quarter for the first time in nearly 2 years, and if rail traffic continues to increase, we would expect that trend to continue. Our operating income for the quarter was $115 million. This included transaction expenses of about $8.9 million related to the Faiveley acquisition. Of this, $3.4 million was a onetime purchase price accounting adjustment and included in cost of sales and the rest is reflected in the SG&A line. If you exclude these expenses, operating income was $124 million and about 13.5% of sales. Going forward, we expect SG&A to be about $120 million for the quarter.

Engineering expense and amortization were up mainly due to the Faiveley acquisition and we expect similar run rates for the rest of the year. Interest and other expense which is a net number, was about $15 million for the first quarter. The higher interest expense was due to the borrowings for the acquisition. And going forward, we expect a similar run rate for interest and other expense, although we are focused on generating cash and reducing our debt and the related interest expense throughout the year. Income tax expense, our effective tax rate for the quarter was 27.6% and this included an expense of about $2.1 million for an adjusted related to the opening balance sheet for the Faiveley acquisition. Going forward, we expect our annual effective tax rate to be about 27.5% and I'll always remind you that that's an annual forecast and our quarters may vary due to timing of any discrete items.

Just to help a little bit on the earnings per share and to help you reconcile, just some more information here. Our GAAP earnings per diluted share for the first quarter, about $0.77. The effect of the restructuring and transaction expenses, the tax adjustment and our noncontrolling interest related to the Faiveley acquisition reduced EPS by about $0.07, so adding that back, our adjusted earnings per share was $0.84. Just to put some numbers and some -- to this, net income per diluted share, $0.77 in accordance with GAAP. You add back our onetime PPA and the cost of sales line that was about $0.03. You add back the restructuring and transaction expenses in SG&A about $0.04. You add back our tax expense item I referred to, that's about $0.02, and then a deduction because the noncontrolling interest was actually a positive income item, was $0.02. That reconciles to $0.84 on an adjusted basis.

So moving to our balance sheet. Our balance sheet remained strong. It provides the financial capacity and flexibility to invest in our growth opportunities as Ray outlined them. And we just always remind you that we have an investment grade credit rating and our goal is to maintain that rating. Working capital at March 31, we've receivables of about $704 million, inventories were about $704 million and accounts payable were $565 million. Cash on hand at the end of the quarter, $280 million, mostly held outside the U.S. And our debt at the end of the quarter, $1,870,000,000 and it consisted of $750 million of 10-year senior notes due in 2026, $250 million of bonds due in 2023, a $400 million term loan, that's a 5-year expiration, and then a -- I'm sorry, that's a 3-year expiration, and a revolver for $400 million, that's a 5-year expiration. Looking at the balance sheet, you can see that our net debt to EBITDA is about $2.7 million.

Just a couple of miscellaneous items for the questions we always get. Our depreciation for the quarter, about $16 million compared to $11 million of last year's quarter. For the full year, we expect depreciation to be about $65 million. Our amortization for the quarter, $8 million compared to $5.3 million in last year's quarter, and for the full year, we expect it to be about $38 million. And our CapEx for the quarter, $19 million compared to an $8.5 million. For the year, we are budgeting about $110 million. We tend to lag our budget a little bit every year. Our backlog at the end of the quarter, we have a multiyear backlog, was a record $4.1 billion, including $2 billion from Faiveley, and our book-to-bill was about 1:1. The transit backlog was $3.5 billion, and Freight, $582 million. Our rolling 12-month backlog, which is a subset of the multiyear backlog was $2 billion. Transit was $1.6 billion and freight about $400 million. So with these comments, I'll turn it back to Ray.

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [6]

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Thanks, Pat. So to summarize, our first quarter earnings were in line with expectations and we affirmed our guidance for the year. Even though we continue to face some challenging conditions in the freight market, we continue to stay focused on controlling what we can and on investing in growth opportunities. We're pleased with the progress we're making on integrating Faiveley and on our synergy planning. We're confident that our diversified business model and our balanced growth strategies will enable us to respond to both long-term opportunities as well as short-term challenges. And with that, we'd be happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Allison Poliniak of Wells Fargo.

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Allison Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [2]

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When we look at the revenue assumption for '17 of $4.1 billion, I think last we spoke, you talked about potentially a low single digit organic growth assumption embedded in that based on sort of where we started in Q1. Are you still comfortable with that low single digit or sort of the components of that $4.1 billion assumption change?

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [3]

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Yes, we're still comfortable with that, Allison. We're not surprised by the slow start for the year. We anticipated that coming into 2017, our expectations are that freight traffic is going to continue to grow and that we're going to pick up in the aftermarket area later -- in the latter part of the year or second half was where our expectations were focused.

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Albert J. Neupaver, Westinghouse Air Brake Technologies Corporation - Executive Chairman of the Board [4]

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Most of the drive in revenue will still come from the transit area. Keep in mind that our transit projects, as we tried to explain on the last call, a lot of these projects are queued up and we'll see revenue recognition getting greater in the second quarter and then with more acceleration in the third and fourth quarter.

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [5]

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Yes, so that's a good point, what Al explained, Allison, these projects are 3 years to 5 year in length. So you literally have those programs into the revenue plan and with the great backlog that we have and continue to build that revenue stream, we'll systematically build as a result.

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Allison Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [6]

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Great, thanks. And then on the PTC and Signaling, you still talk about flat, but you also noted a number in the new contract. Should we assume it is primarily probably for 2018 and beyond? I mean, how should we think of the ramp of this, and I guess, are you hearing any delays, push out still in the near term?

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [7]

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Actually the phenomena in the PTC and Signaling area -- on the Signaling side, it's similar to what Al just described for transit projects. You know as you book those big projects, they're 3 years, 4 years, 5 years in length to execute. The first part of the project normally is relatively low revenue recognition because it's associated with engineering. So you don't start to get equipment revenues and delivery revenues until second year, third year. So, yes, those will start to influence us in terms of added revenue more in 2-year, 3-year time period. As far as PTC goes, the hardware actually by -- was up in Q1. I think that was fundamentally a pickup or a catch-up associated with the shortfall that existed in '16. We expect most of our hardware for PTC to be bought up this year. There may be slight amounts left for '18, but commissioning will probably -- and integration will probably take place over this year and next year. So PTC, as you've known, over the last 4 years, 5 years, is going to change from hardware to maintenance and service contracts and enhancements and then we're going to get more and more of these -- hopefully get more and more of these Train Control and Signaling projects, which we continue to win.

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Operator [8]

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The next question is from Jason Rodgers of Great Lakes.

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Jason Andrew Rodgers, Great Lakes Review - VP [9]

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Yes, just a follow-up on that last question on PTC, given the shift in mix from hardware to maintenance and service for 2018. Would you expect the overall revenues to be higher in '18 versus '17?

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [10]

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No. PTC, lets pick on each component, PTC hardware will not be higher in '18 than '17. On Signaling projects, they will continue to generate revenue, we're saying for this year, we expect the revenue to be about flat. Obviously next year's revenue is going to be influenced by how many new projects we can win. We have several new projects that we're bidding on and we're relatively confident that we're going to win. So that will influence the revenue stream for next year. In the MSA revenue, we've booked and added into contracts with the majority of the cost once, there's still a couple left that we're negotiating with, and that revenue stream will build over time. On -- in the first year, it will taper up, it'll grow, and then it will reach annual flat revenue base, which we've given numbers of about 5% to 10% compared to the installed base that we have on PTC hardware.

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Albert J. Neupaver, Westinghouse Air Brake Technologies Corporation - Executive Chairman of the Board [11]

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I think it's awful early. It's early for us to really comment specifically on '18. But I think it's important to note that this is really the focus, not only for us, but it's really the focus of the freight and transit railroads around the world and that's to improve the safety, efficiency, and productivity. And that's exactly what Ray talked about when he was talking about his roadmap and that is we see a lot of opportunities in the Signaling area, in the Onboard Train Control area, in the enhancements, and ways of finding to take our installed base of the onboard computer and add features to that, that will help in the efficiency and the productivity for the railroads. So long term, this is definitely a growth area for us. It's a segment that we're really excited about, and one of the areas that we will see growth as far as specifically looking at 2018, we'll know more as the year goes on, but we're pretty sure right now based on the backlog and what projects we're aware of that our sales should be flat from '16 to '17, and possibly even slightly up. We could win some more projects than we can get them going.

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Jason Andrew Rodgers, Great Lakes Review - VP [12]

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All right, that's helpful. And then looking at your forecast for your freight business for 2017, are you assuming that freight traffic continues to grow at around that 4% level or what are the expectations there?

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [13]

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Yes, we -- that's our assumption. We don't have any information to assume anything else. It seems to be fairly consistent, it goes up and down week by week, but seems to be fairly consistent since the beginning of the year.

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Albert J. Neupaver, Westinghouse Air Brake Technologies Corporation - Executive Chairman of the Board [14]

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Yes. And it depends a lot on the comparison. And the net number really is a comparison number. So what we are planning is that the volume and the car loadings will improve as the year goes on, whether that percentage does or not depends on the comparisons, whether they're tougher or easier.

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Jason Andrew Rodgers, Great Lakes Review - VP [15]

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And then finally, it sounds like you've got some positive early signs with the Faiveley acquisition. I was just wondering if you've seen any material employee turnover, increased competition or any other short-term disruptions from the acquisition?

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [16]

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No, we have not. The integration is going very well. We haven't seen any unexpected losses of key personnel or anything like that. I think people are pretty excited in all areas of our Corporation about the future.

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Operator [17]

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The next question is from Scott Group of Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD and Senior Transportation Analyst [18]

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Can we start just on Faiveley? Is there any way where you can give us a number for how much revenue in the quarter was from Faiveley and maybe how much operating income or pretax income is from Faiveley and then of the -- about $15 million of $20 million of synergies, how much you've realized so far?

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Albert J. Neupaver, Westinghouse Air Brake Technologies Corporation - Executive Chairman of the Board [19]

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If you looked at the numbers that Pat gave, most of the increased revenues that we have in the transit area is coming from that acquisition. So that comes out about USD 270 million or so. Other than that, the internal growth rate is, we had a flat business other than that, and there was another small acquisition added to that number. As far as commenting on the margins, we typically do not provide that and we're going to stay heed to that. You have to realize right now there's a lot of different things happening. We're integrating businesses, so it's very -- it's a complex analysis. We are in the startup phase as far as getting and realizing synergies. You take advantage of some sourcing, as I said, we're trying to take a look at tax planning, we're getting synergies there, we're getting synergies as far as duplication of engineering projects. We've got some duplication of actual headcount. And we're tracking all those. We have about 100, as I said, 100 different synergy projects that we're tracking almost on a 2- to 3-week basis and we've got the whole team involved on it. Those synergies, the realization of them, it will take time and it will grow as the year goes on and into 2018, keeping in mind that we still think that after the run rate in the third year, we should be at a $50 million synergy addition to our current business plan. So we're pleased where it's at, we've got a lot of work to do, and we're really pretty focused on a lot of different areas.

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Scott H. Group, Wolfe Research, LLC - MD and Senior Transportation Analyst [20]

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Just so I am clear on the way you guys are talking about synergies, is the $15 million to $20 million a full-year '17 number or a run rate synergies by the end of the year?

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [21]

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Full year. Assuming the synergy cost not in there.

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Scott H. Group, Wolfe Research, LLC - MD and Senior Transportation Analyst [22]

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Okay, okay. From a full-year guidance standpoint, I know you talk about a sequential ramp in earnings. If you look at first quarter as a percent of a typical year, it implies something, a good amount below your guidance. So maybe it would be helpful -- at least it would be helpful for me, like can you help us think about the sequential progression that you're thinking in terms of second quarter and then third quarter and fourth quarter and what kind of sequential earnings increases you're thinking about? Just because it's -- the model is a little tough right now.

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Albert J. Neupaver, Westinghouse Air Brake Technologies Corporation - Executive Chairman of the Board [23]

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Yes. We've never given quarterly guidance and we really don't want to do it. I think that the statements that we made is that we will sequentially get better with more acceleration in the second half. There is -- the business model has changed quite a bit. I think traditionally, we normally had, if you go back to history, the first quarter has always been a pretty good quarter, the second quarter was, very -- usually had seasonalization than the third quarter because of the European impact, and the fourth quarter was bang -- going gang busters. And we still expect to see a pullback in that third quarter because of the European effect from a general business level, but I don't think we'll see much different than the fact that now, we are a project-based business with large tranche of projects that we know are in our backlog and will kick in as the year goes on. And that's the big change. The model has changed, we were a 60% freight business and a 40% transit business in its flip-flopped.

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Scott H. Group, Wolfe Research, LLC - MD and Senior Transportation Analyst [24]

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Okay, okay. And then just last question, just going back to PTC, sometimes I'm just confused with the numbers in terms of PTC versus total Signaling. Can you give us the breakdown of -- like the $250 million of sales last year, how much of that was PTC hardware? How much was Signaling? And then maybe what you're thinking for this year's PTC versus Signaling if that's the right way to break it down?

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Timothy R. Wesley, Westinghouse Air Brake Technologies Corporation - VP of IR and Corporate Communications [25]

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Scott, this is Tim. So last year, we did about $350 million in Train Control and Signaling, and that was about $250 million in Train Control and a little under $100 million in Signaling. And what we'll see then -- and that's the extent of the breakdown. We're not going to get into the details of all the other different line items within those. And then this year, what we've said is we expect that about $350 million for Train Control and Signaling to be flat to slightly up. We could see the Train Control piece down a little bit and the Signaling up a little bit.

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Scott H. Group, Wolfe Research, LLC - MD and Senior Transportation Analyst [26]

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Okay. And then the first quarter number that you gave of 65 -- I think it was $65 million. What was that? Was that a total Signaling or just PTC.

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Timothy R. Wesley, Westinghouse Air Brake Technologies Corporation - VP of IR and Corporate Communications [27]

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It was $68 million, and that's both. So that's Train Control and Signaling, so that's consistent with the -- about $350 million of those 2 that we did last year -- total last year.

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Operator [28]

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The next question is from Justin Long of Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - Research Analyst [29]

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Just wanted to ask first about transit revenue. It seemed like it was a little bit light in the quarter relative to Street expectations. And I just wanted to clarify, was there anything that surprised you in the transit business year-to-date, or as you talked about before, is it just a timing issue due to the projects that ramp more significantly over the next several quarters?

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [30]

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It is definitely nothing that surprised us, Justin. We -- again, we have these projects programmed in there, its hard-core revenue. The only thing that would impact our forecast over the year would be if a project would get canceled, which is extremely unusual in a transit market and/or delayed, which is not unusual in the transit market. But once the projects start up, normally, the projects are not delayed in process. So the delays normally come at the front end of a project, once -- so you might delay revenue for transit projects case-by-case. But once those projects start to ramp up and generate revenue, it's pretty much a continuous flow. And the project execution, again, really, if you get into the details of when these transit projects are very, very predictable. So all I can tell you is that we have, to your point, to Scott's point, we have a very detailed forecast and a revenue plan and it supports our expectations for the year.

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Justin Trennon Long, Stephens Inc., Research Division - Research Analyst [31]

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Okay. Great. And maybe on those transit projects that are ramping, could you give some more color on whether those are OE-related or aftermarket-related or maybe a combination of both? Just trying to figure out how that ramp in the top line will kind of flow-through to margins?

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [32]

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So the majority are OE-related, and its projects like German high-speed trains, where we have brake stores, air-conditioning. We have double-deck trains in France, where we have brake stores, air-conditioning, auxiliary power supplies, pantographs. In France, we have brake stores, electronics. In the U.S, we have R-179. We have PTC projects in the transit area, which are -- where also there's a lot of OE. But we continue to build our aftermarket. The beautiful thing about transit market is, we've talked before is, once you have that installed base and we're expanding geographically, we're about to book some very significant orders in the markets I talked about. And once you have that installed base, you're there for 40, 50 years and that aftermarket business is a good margin business. It's equal to the aftermarket margins in the freight side. So what you're seeing on a top line basis is dominated by OE business but we are building our aftermarket.

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Justin Trennon Long, Stephens Inc., Research Division - Research Analyst [33]

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That's helpful. And maybe one last question. Longer-term, I just wanted to get your view on the outlook for locomotive and -- the locomotive and rail car cycles in North America. And if you think we're in a situation where we remain below replacement levels for multiple years, are there more aggressive restructuring or cost-cutting efforts that you could start to deploy?

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [34]

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Yes, so to be honest, Justin, we haven't stopped the cost cutting and restructuring efforts. So the freight build -- freight car build is down, that's why our locomotive build is down this year. And down significantly. If you look at locomotives, I just had a meeting with the GE folks last weekend, and we volunteered to forecast on a worldwide basis, we're talking about a significant drop by, I mentioned, 30% in my comments. In this country, the build may be only around 500. In worldwide maybe 600, so car builds down to 40. Where it's headed, the GE folks, I can tell you, are focused on international, we're focused on international, that's a benefit of us expanding our geographical footprint over the years, now we can localize and support projects there. So as far as the trend goes on the freight car side for this year, we still are looking at about 40,000, I think the build was 10,200 or something like that in Q1. And next year, the back-off there is deteriorated next year. It could drop again. We've said that before, it could drop to 20, it could drop to 30. Right now, we don't have enough visibility to predict but we're not anticipating freight car builds going on next year and we're not anticipating locomotive builds going up. So we're managing based on the facts we have in front of us which means we got to cut costs and we got to continue to restructure our business and that's what we're doing.

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Operator [35]

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The next question is from Saree Boroditsky of Deutsche Bank.

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Saree Emily Boroditsky, Deutsche Bank AG, Research Division - Research Analyst [36]

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I just wanted to follow up on the questions regarding guidance. So you maintain the guidance of around $4.1 billion despite the bolt-on acquisitions and then lower FX headwinds. So I just wanted to see if there's anything else that changed in your outlook that offset those?

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [37]

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No, the bolt-on acquisitions are -- they're relatively smaller in revenue, but they're nice strategic acquisitions. Faiveley was -- we closed last year, so it was in our plan already. So no, it's again, we have a very detailed forecast. It supports our revenue guidance.

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Saree Emily Boroditsky, Deutsche Bank AG, Research Division - Research Analyst [38]

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Okay. And then I guess, there's still a fairly wide range in your EPS forecast, so I was just wondering if you could just help us understand what needs to happen to reach the higher end of that versus the lower end?

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [39]

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Okay. I feel badly for Pat, so I'm going to let him answer this question.

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Patrick D. Dugan, Westinghouse Air Brake Technologies Corporation - CFO and EVP of Finance [40]

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I think the guidance -- the range and the EPS guidance really comes down to some of the seasonality, some of the revenue volumes, and when they hit and lastly, just being cautious on the recovery in the aftermarket business for North America freight. So -- I think we've got a lot of moving hedges, the question has sort of focused on correctly. Lot of moving parts, a lot of changes that are occurring with the business. We're assuming some recovery in North America aftermarket business and also some restructuring and synergies that are coming with the acquisition. So a lot of things moving and so we're putting a range up there to be careful.

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Operator [41]

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And the next question is from Mike Baudendistel.

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Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Analyst [42]

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Just wanted to see, can you provide any comments at all for -- on the potential for Siemens Rail and Bombardier merging? What impact would that have on you? Can you give us a sense for how big of a customer has Bombardier or how big of a direct competitor is Siemens Rail. Any types of those comments would be great.

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [43]

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They're both big customers of ours and they're one of the big 4 -- big 3 being European, at CRC in the industry, one of the big 4 worldwide. We have no insight into what is going on or might go on between Siemens and Bombardier other than what we read in the paper, there's been a lot of consolidation in the industry over 4 decades, I've been in the industry and I suspect it's going to continue. So what those 2 decide to do in the end, we'll adjust accordingly. The Bombardier, as you know, has been rumored to be combined with several other companies in the past, so these could just be rumors or superficial discussions, who knows? But, we certainly have no influence or insight.

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Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Analyst [44]

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Got it. I just also want to ask you just on the income statement, you talked about interest expense and other income as sort of net of those amount. But you sort of -- you look at them separately, and it looks like the other income was a $2.3 million favorable impact that you really haven't had the last few quarters. I'm just wondering is that something that's sustainable or any specific reason for that?

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Patrick D. Dugan, Westinghouse Air Brake Technologies Corporation - CFO and EVP of Finance [45]

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Yes. When we do our guidance, we really are anticipating that's a relatively flat number. Now those are a variety of things, including gains from FX translation, gains and losses on foreign exchange. And so, we have, on occasion, have losses, income there, and it's just with the change in some of the base currencies for us that we have a slight gain this quarter. So going forward, we're expecting it to be neutral and the interest expense to improve as we bring cash and repay debt.

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Operator [46]

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And the next question is from Sam Eisner of Goldman Sachs.

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Samuel Heiden Eisner, Goldman Sachs Group Inc., Research Division - VP [47]

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Maybe just to start off with, can you talk a little bit about the business through the first 25 days of the quarter here? Just 2Q trends across how you guys want to slice across the segments, across the components of the segments. Just curious how the second quarter is looking for you?

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Patrick D. Dugan, Westinghouse Air Brake Technologies Corporation - CFO and EVP of Finance [48]

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I think it's in line with what our guidance has been, and I don't think there's any big surprises. But clearly, at 25 days, we continue to focus on all the same things we've talked about, which are integrating the businesses and making sure we're hitting our -- we're hitting all our targets. So on that, I don't think there's a lot more we could talk about.

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Albert J. Neupaver, Westinghouse Air Brake Technologies Corporation - Executive Chairman of the Board [49]

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The only thing I would say, we just had an awful lot of pending closure on orders in the breakdown. That's probably a positive and we're not seeing anything drastically different in the first quarter or the second quarter. There's little pick up that we're seeing in freight car loadings. Now that continues, but there's nothing else that's drastically changed other than the amount of, I think, large projects that we're trying to finalize here.

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Samuel Heiden Eisner, Goldman Sachs Group Inc., Research Division - VP [50]

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That's helpful. And maybe continuing on that line, can you talk about -- you mentioned, obviously, aftermarket is starting to accelerate. Is there a way to talk about within the first quarter what the growth was within the aftermarket portion of freight?

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Timothy R. Wesley, Westinghouse Air Brake Technologies Corporation - VP of IR and Corporate Communications [51]

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Sam, this is Tim. We saw about -- if you look at fourth quarter versus first, we saw about $25 million of aftermarket revenue growth in freight from the fourth quarter to the first quarter. Probably about half of that was acquisition and then the rest was organic. So we have started to see some slight pick up there like we talked about.

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Samuel Heiden Eisner, Goldman Sachs Group Inc., Research Division - VP [52]

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But still down year-on-year?

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Timothy R. Wesley, Westinghouse Air Brake Technologies Corporation - VP of IR and Corporate Communications [53]

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Yes, yes. Still down year-on-year. Comparing the first quarter of this year to the first quarter of last year, yes, still down.

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Samuel Heiden Eisner, Goldman Sachs Group Inc., Research Division - VP [54]

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Okay. And maybe a few other housekeeping items. I think you went through a little bit before of the cash flow items. I don't know if you commented about what total cash from operations was in the quarter?

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Patrick D. Dugan, Westinghouse Air Brake Technologies Corporation - CFO and EVP of Finance [55]

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Well, cash from operations was actually a negative. It was about $26 million negative. But that's sort of -- you've got to adjust that number because an awful lot of our deal costs, which were accrued for in the fourth quarter were paid, okay? So when you back out the onetime items, you -- it's about $30 million worth of deal costs that were paid in the first quarter that were accrued for at the end of 2016. Now the -- then when you look at the kind of normalized performance in terms of cash flow, we usually have -- first quarter is a challenge for us. On top of that, we have the kind of the normal things that get paid in the first quarter, some benefits and incentive-related accruals, tax, interest, a number of items. And so we typically have a -- our weakest performance in the first quarter and then it improves throughout the year. So -- nothing that I don't think is kind of normal and we remain on our budget and plan for the full year, once you take into account the items that we paid for related to the acquisition.

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Samuel Heiden Eisner, Goldman Sachs Group Inc., Research Division - VP [56]

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That's super helpful. And maybe just 2 other quick questions here. Just on your non-rail business, I think this in a few pieces of M&A within kind of the historical non-rail portion of your Freight segment. How was that performing throughout the course of the quarter? How is that performing versus the fourth quarter? Certainly there's a lot of positive data points on kind of general industrial market. So just curious what you're seeing on that kind of non-rail business?

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [57]

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I seem to note the industrial business, the overall business is improving. We're seeing some improvements in elastomer and rubber business, we're seeing some improvements in the heat exchanger business. So I think, in generally, it's trending along with the economy. So it's not dramatic improvement, but we are seeing some slight improvement, in all seriousness.

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Samuel Heiden Eisner, Goldman Sachs Group Inc., Research Division - VP [58]

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And if I can sneak one more in here, I'm sorry. Just on the 2016 versus 2017 for PTC, you commented that maintenance revenue is going to be growing, at least the software revenue is going to be growing. I'm curious as a percentage of that $350 million, what was it in '16 and what are you anticipating for '17?

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [59]

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So the revenue in '16 was, have we've given the number? It's a relatively small number for '16, Sam, because we were literally just booking those contracts. So the contracts will ramp up over a year period, and then it will reach a steady state. So overall, the -- are you okay with giving that number? No.

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Patrick D. Dugan, Westinghouse Air Brake Technologies Corporation - CFO and EVP of Finance [60]

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No, relative.

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [61]

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No. Okay. Overall, this year -- these guys don't want me to disclose the details of the service agreements. But what will happen is, we have 2, 3 months service agreements to book. We're in the process of negotiating now. So throughout the course of this year, we'll reach kind of steady state on the service agreements. So those service agreements are fixed -- basically fixed fees agreements with opportunities then for enhancement revenue, which will be incremental. So the fixed fee opportunity is 5% to 10% of our installed base that we talked about before, and then what we're trying to concentrate on now is, where can we generate enhancement opportunity? So there's upgrades and other things like data analytics and software enhancements, productivity improvements. We're speaking with the Class I's. And then longer-term comes the focus on the product roadmap that I talked about. And that focus really, if you look at it out 5 years, 10 years, our focus is on fully automated railroads.

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Albert J. Neupaver, Westinghouse Air Brake Technologies Corporation - Executive Chairman of the Board [62]

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Excuse me, this is a relative number. We expect that particular line item out of all the -- when you add them all up to be almost 3x, 4x of what we were -- 3 or 4x than we accomplished in 2016. So it's significant, yes.

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Operator [63]

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(Operator Instructions) There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Tim Wesley for closing remarks.

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Timothy R. Wesley, Westinghouse Air Brake Technologies Corporation - VP of IR and Corporate Communications [64]

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Okay. Thanks, Kate. Thanks everybody for being on the call and we will talk to you in about 3 months. Have a great day. Thank you.

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Raymond T. Betler, Westinghouse Air Brake Technologies Corporation - CEO, President and Director [65]

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Bye.

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Operator [66]

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