Westinghouse Air Brake Technologies' (WAB) CEO Ray Betler on Q1 2016 Results - Earnings Call Transcript

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Westinghouse Air Brake Technologies Corp (NYSE:WAB) Q1 2016 Earnings Conference Call April 26, 2016 10:00 AM ET

Executives

Tim Wesley - VP, IR

Al Neupaver - Executive Chairman

Ray Betler - President & CEO

Pat Dugan - CFO

Analysts

Scott Group - Wolfe Research

Allison Poliniak - Wells Fargo Securities

Justin Long - Stephens

Matt Brooklier - Longbow Research

Mike Baudendistel - Stifel Nicolaus & Company

Jason Rodgers - Great Lakes Review

Thom Albrecht - BB&T Capital Markets

Liam Burke - Wunderlich Securities

Kristine Kubacki - Avondale Partners

Steve Barger - KeyBanc Capital Markets

Operator

Welcome to the Wabtec's First Quarter 2016 Earnings Release Conference Call. [Operator Instructions]. I would now like to turn the conference over to Tim Wesley, Vice President of Investor Relations. Please go ahead.

Tim Wesley

Thank you, Zelda. Good morning, everybody and welcome to Wabtec's 2016 first quarter earnings call. Let me introduce everybody else who's here with me in the room. Al Neupaver, our Executive Chairman; our President and CEO, Ray Betler; our CFO, Pat Dugan; and John Mastalerz, our Corporate Controller. Of course, we will make our prepared remarks as usual and then we will be happy to take your questions. And of course, during today's call we make forward-looking statements. So please review today's press release for the appropriate disclaimers. Al?

Al Neupaver

Thanks, Tim. Good morning, everyone. In the first quarter we had a good earnings performance with EPS of $1.02. Excluding $0.03 per share of expenses related to our pending acquisition of Faiveley Transport, EPS would have been $1.05. So despite ongoing headwinds in some of our markets and a sluggish global economy, I think we showed once again that the Wabtec business model works. In particular, our margin performance was strong. Despite a revenue drop of almost 6%, we recorded an operating margin of 18.4% compared to a year ago quarter of 18.1%. This truly demonstrates our ability to respond to changing marketing conditions with actions to decrease cost an increase efficiencies.

As we've said before, we're not immune to the challenges facing probably every transportation and industrial company these days. But we do believe our diversified business model gives us the ability to manage through these cycles better than most. So even as we work on reducing cost and implementing the principles of our Wabtec performance system, we continue to invest in our strategic growth initiatives. We also continue to make progress on our acquisition of Faiveley Transport which we expect to close by midyear, depending on the timing of regulatory approvals.

Today we affirmed our 2016 earnings guidance with a full year earnings per share diluted expected to be between $4.30 and $4.50. Revenues are now expected to be slightly down for the year. The midpoint of our EPS range represents growth of 7.3% compared to our 2015 results. This guidance does not include our pending acquisition of Faiveley Transport or any related expenses. I'll talk more about Faiveley in a minute. The guidance assumes the following, slow growth in the global economy, taking into account current conditions in all of our key markets. We expect some revenue growth for the year in our transit group but that will be more than offset by decreased revenues in the freight group. There are no changes in foreign exchange rates from current levels assumed.

We're assuming a tax rate of about 32% for the year. We're assuming that the diluted shares outstanding will be around $91 million for the year for EPS calculation purposes. We expect our 2016 quarterly results to improve sequentially during the year as we realized the benefits of ongoing cost reduction initiatives and as delayed projects that we're already in the backlog begin to ramp up. So this is a challenging environment. We will do what we always do. We like to control what we can and that means being disciplined when it comes to costs and being focused on generating cash to invest in growth opportunities.

Now a little bit about the acquisition of Faiveley. During the first quarter we continued to make progress on our planned acquisition of Faiveley Transport, a leading global provider of value-added integrated systems and services for the rail industry with annual sales of about $1.2 billion. We're working through the various regulatory steps in the U.S. and in Europe, but we can't predict the timing. We still expect to close by midyear based on expected timing of regulatory approvals. Once we receive the approvals, we can complete the purchase of the Faiveley family block of shares which represent about 51% of the company's outstanding stock. After that, we will begin a tender offer for the remaining public shares. This opportunity probably has the most compelling strategic rationale of any acquisition that we ever made.

We will be recombining the original WABCO rail divisions to create one of the world's largest public rail equipment companies with total revenues for the Company of about $4.5 billion in the worldwide freight rail and passenger transit industry. It provides complimentary geographies with minimal overlap and further diversifies our in-market offerings, extents our product and service capabilities, enhances our technology in innovation initiatives, expands our relationship with blue chip global customers and provides synergies to drive growth. These synergies we expect long term annual synergies of about EUR40 million to be achieved through enhanced revenue growth, supply chain efficiencies, operational efficiencies and cost savings and by leveraging our SG&A capabilities.

We will benefit from complementary geographic presence and products. Also the combined global scale in freight and transit rail equipment will help drive operational excellence. Once completed, we could better provide safety productivity and efficiency enhancements to our global rail markets. Faiveley announced its nine month sales figures in January and the results were positive. Sales growth of about 8% compared to the prior year period, including double-digit growth in their services and after-market business. They announced several significant new projects with their order book growing about 6%. Some of these projects included HVAC systems for the Paris Metro, platform screen doors for metro stations in China, brake systems for passenger coaches in India.

Also in India, brake systems, door systems, pantographs and HVAC for cars being built by Bombardier. So we're excited about the future growth opportunities provided by this acquisition and we're working hard to get it completed. In the meantime, we remain focused on running our business.

Ray, you can cover our current markets in growth strategies, please.

Ray Betler

Thanks, Al. So let's talk about freight rail and note the freight rail traffic was down about 6% in the first quarter with decreases in commodity carloads, more than offsetting a slight increase in intermodal traffic. The traffic comparisons will start to get easier as we go through the year but that doesn't change the fact that the markets are very tough right now for our customers. So we will continue to monitor this trend very closely. For 2016, our NAFTA assumptions include freight car delivery, so somewhere between 60,000 and 65,000 and locomotive deliveries of around 1000.

We now expect rail traffic to be down low single digits for the year. Together, these factors represent a headwind of about $150 million in revenue compared to 2015. Freight traffic in some of our global markets is also challenged, especially in the commodity driven markets of Australia and Brazil, as an example. Some of these headwinds could represent secular changes in our markets and some may be recessionary. But either way, we have reacted and will continue to react to these changes. Despite the current challenges, we believe the freight market around the world will grow over time which is why we continue to increase our global footprint and our product offerings beyond our traditional NAFTA market. Keep in mind that about 75% of the installed base of locomotives and freight cars are outside of NAFTA and we're well positioned to benefit when the market conditions improve Let's turn to transit.

Our transit markets remained fairly stable, both in the U.S. and abroad. In the U.S. and Canada, ridership was down about 1% last year while Germany and the UK saw increases. This year we're expecting North America transit car deliveries to be up about 4% with bus deliveries about the same as last year. We have seen some transit projects delayed in recent quarters and we expect some of them to start ramping up as we go through the year. Transit funding in the U.S. is projected to grow in FY '16 as the government has finally at past the multi-year transportation bill. The bill includes much needed funding for positive train control and other new technologies. Due in part to this increased funding, we see increased bidding activities for new projects that we expect will turn into orders over the next several years. Reflecting some of this activity, our transit backlog boasts multi-year and 12 months is at a record high.

And remember, just as with the freight market, we're focused on global growth and increasing our product offerings because international markets are much larger than NAFTA. We estimate the global installed base for transit cars to be around 330,000 with 95% of the fleet outside of NAFTA. Faiveley's global footprint in transit is much larger than ours which is another reason why the acquisition makes tremendous sense for Wabtec. Let's turn to cost reductions. Before I discuss growth initiatives, I'd like to first talk about our cost reduction programs which enable us to manage successfully through challenging times like these. As is almost always the case, some of our business units compete in markets that are growing while other markets where the overall demand is much more challenging and that's not unusual.

So we're well equipped to respond to these market conditions and have gone through these kind of situations before. In this case, we've taken the following actions. Thus far we've reduced total employment by more than 7% in the last two quarters. We will continue to adjust our headcount as necessary going forward. We've stepped up our expense reduction programs both at the corporate level and across the total business units across our worldwide business. And we set more aggressive targets for activities associated with our Wabtec performance system which includes our lean supply management and quality initiatives.

The total cost savings from these actions are expected to exceed $30 million and are included in today's guidance We continue to focus on growth in cash generation. In the quarter we generated $76 million of cash flow from operations which is a good first quarter performance. And we expect that pace to continue and to pick up as we go through the year. Our priorities for allocating free cash have not changed to fund internal development and growth programs, including product development and CapEx, to focus on acquisitions where we have ample opportunities to deploy capital in this area and to return money to our shareholders through a combination of dividends and stock buybacks. During first quarter, we bought back about 1.95 million shares for about $134 million and at leaves about $216 million on the $350 million buyback authorization that was given to us by the board.

We remain focused on increasing free cash by managing cost, driving down working capital and controlling capital expenditures. Our growth strategies also remain the same, global and market expansion, after-market expansion, new products and technologies acquisitions. So let's address each of these growth strategies. On the global market expansion side, for the quarter, sales outside the U.S. were $367 million, down about 8% due mainly to decreases in Brazil and Australia but we continue to find pockets of good activity. For instance, in Italy we received an order for brake discs, in Vietnam an order for a third rail conductors, at Fandstan we've received several signaling projects, project orders in Australia and even in Brazil we've received orders for two different freight car builders for brakes, draft gears and truck components.

On the after-market expansion side, our sales for the quarter were $475 million, also down about 8%. We signed a long term frame agreement with the European car builder for brake discs. In London we're in the final stages of negotiating a contract for overall vehicles for a longtime customer. So opportunities continued to be pursued in the after-market area. On the new products side, we have many ongoing internal development projects in process. We've developed an intercooler for a large OEM for the part generation market that will be deployed worldwide. We continue to develop and qualify products for the Russian freight market and we've added a couple important brake components there.

We've talked before about plans to expand further into train control and signaling and we continue to make progress. When the PTC deployment began in 2008, we only had capabilities to provide the onboard equipment which represented only about 10% of the industry's total PTC spending. But over the years, through both organic initiatives and strategic acquisitions, we've been able to significantly expand our capabilities which has positioned us to play in other areas of train control and signaling. Globally, that market is $22 billion annually and we continue to explore profitable niches within that market.

So while we're focused on the U.S. deployment of PTC and on building a long term after-market business around that, at the same time we're going our signaling and communication expertise in our business to round out our capabilities in that area. In the first quarter, our PTC revenues were about $85 million, a bit lower than last year's first quarter as expected with customers fine-tuning their spending plans for the new PTC deadline of 2018.

Our signaling revenues were higher in the first quarter, reflecting the expansion I talked about earlier in two other product areas. If you include signaling along with PTC related revenues, we had about $110 million of revenue in the first quarter. For the year, we expect PTC revenues will be less than last year, again, due to the deadline change. But we expect most of the decrease will be offset by growth in other signaling projects and other signaling areas. In the meantime, we continue to booked new PTC projects. We recently announced a $30 million contract with the Northern Indiana Commuter Railroad and expect others to follow shortly.

On the acquisition side, our pipeline continues to be active. We're pleased with the opportunity that we're reviewing and pursuing. Although we can't predict the timing, we would expect to announce a few in the very near future. And those are, again, beyond the Faiveley acquisition.

So, Pat, can you talk about some financial details on the first quarter please?

Pat Dugan

Sure. Thanks, Ray. Sales for the first quarter were $772 million which is about 6% lower than last year's quarter. About half of the decrease or about $18 million, was due to changes in foreign exchange rates. For the quarter, we had revenues from acquisitions of about $20 million. Now looking at our segments, freight sales decreased 14%, mostly due to a reduction in organic sales of about $78 million and from FX of about $6 million. But that was offset by the benefit of acquisitions, about $14 million. Looking at our transit segment sales, they increased 7% driven by organic sales growth of about 10% or $29 million and acquisitions of about $6 million. That was offset by negative effects of changes in FX rates or about $12 million or about 4%. So for 2016, just to recap, we expect transit segment sales to grow.

Looking at our operating income for the quarter, it was about $142 million or 18.4% of sales. In 2015 our fourth quarter offering margin was 18.2. So despite the lower sales, we continue to find ways to improve. SG&A for the first quarter was about $90 million which is about $5 million higher than the year-ago quarter, mostly due to acquisitions. I want to mentioned that included in the results is about $3.6 million of expenses related to the pending Faiveley acquisition. So our operating margin was actually slightly better if you want to add that back. Engineering expense was up slightly as we continue to invest in product development and amortization was about the same as the prior-year quarter.

Our interest expense for the quarter was $4.9 million, slightly more than the year-ago quarter due to our higher debt balance. In the other expense and income lines, we had a small benefit during the quarter, mainly from non-cash foreign currency translation gains. In the year-ago quarter, we had an expense of about $2.9 million for the same reason. Our effective tax rate for the quarter was 31.5% compared to 31.9% in the year-ago quarter. We expect for the year, for 2016, the annual rate to be about 32%. And I'll just remind you that's an annual forecast and the quarters will vary due to timing of any discrete items. Our earnings per diluted share were $1.02 for the quarter and excluding $0.03 for diluted share for the Faiveley related expense, we would have had an EPS of $1.05.

Looking at our balance sheet, it remains strong providing financial capacity and flexibility to invest in our growth opportunities. We have an investment-grade credit rating and our goal is to maintain it. Working capital at March 31, we had receivables of $620 million, inventories of $479 million and payables of $304 million. Cash on hand at March 31, $263 million, mostly held outside the United States. At the end of last year we had $226 million of cash at December 31. That March 31 balance I gave you does not include $213 million of cash that we're holding in escrow related to the Faiveley transaction. Debt at March 31 was $802 million compared to $691 million at the end of last year. This is increased mainly due to our funding and our use of cash for stock repurchases during the first quarter.

Cash from operations, we generated $76 million for the quarter. And that's a good performance because cash generation from operations for Wabtec typically starts the year slowly due to payments for incentive comp, taxes and other annual items. For the year, we continue to expect to generate more cash from operations than net income, that's always our goal. Just a couple miscellaneous items that we always outlined for the call, depreciation for the quarter about $10.9 million which is about the same as last year's quarter. Amortization was about 5.3 [indiscernible] of the quarters and our CapEx or capital expenditures, about $8.5 million for both quarters. Just as a reminder, we expect for the year our capital expenditures to be about $50 million.

Moving on to our backlog, at March 31, our multi-year backlog was $2.1 billion, slightly lower than at the end of the fourth quarter. Transit backlog increased for the fourth quarter in a row to a record $1.5 billion, our freight backlog about $590 million. Changes in FX rates reduced the backlog by about $50 million compared to a year ago. Our rolling 12 month backlog which is a subset of the multi-year backlog I just gave you, was at $1.3 billion compared to about $1.2 billion in the fourth quarter. Transit was a record $797 million and freight about $514 million.

The total backlog figures I just gave you do not include about $200 million of pending orders and contract options. They're not counted in the backlog until customer exercises those options or executes those pending orders.

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

Al Neupaver

Thanks a lot, Pat. Well once again we had a good earnings performance in the first quarter despite challenging market conditions. In this environment we will stay focused on what we can control and that is managing our cost and generating cash. And remember that we're still expecting another record year with EPS guidance of between $4.30 to $4.50 even though revenues are now expected to be slightly down. We're also pleased with our strategic progress on the long term growth opportunities that we see, especially with the expected closing of Faiveley Transport acquisition.

With that, we'll be happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from Scott Group with Wolfe Research. Please go ahead.

Scott Group

So I know we don't usually get this until the [indiscernible] but any chance you can give us the operating margins among the different segments or talk about just directionally the margin changes that you had in the quarter?

Al Neupaver

Yes. We can give you direction. We can't give you the absolute number until the publication comes out. But in general, we operated better in the transit area than normal. And I think freight was where we thought it would be.

Scott Group

So I guess what I am trying to get at is when you have such a big drop in freight revenue and increase in transit revenue, you'd think that there'd be pressure on kind of consolidated gross profit margins and operating margins. And we didn't see that this quarter. And I guess question is, is there something that maybe was unusual about this quarter helping the margins or is this something that you think you can sustain?

Al Neupaver

Well what I would like to say to that question really, Scott, is that I think Ray Betler and his management team saw what was coming and they reacted as they saw necessary. And I think the reactions that they made and he talked a little bit about some of the things that were done to just give you a relative look at it. I think they reacted very well and I think that reflects in the results.

Scott Group

Does something with that change going forward if PTC sales start declining as you're expecting? Do you think you can sustain that kind of margin expansion in the face of lower freight and, in particular, PTC sales?

Al Neupaver

No I think the first quarter speaks for itself. If you look fourth quarter to first quarter, the change in both of those were significant and we maintained the margin at the 18.4%. I think the fourth quarter margin -- what was it -- do we have that some more Scott

Ray Betler

It was about 32%.

Al Neupaver

No.

Pat Dugan

18.2% in the fourth quarter.

Al Neupaver

18.2%. So we actually improved with both of those revenues coming down.

Scott Group

Okay. And then just last question. So on Faiveley, I know you're seeing midyear. Any color you can give us on kind of what you're hearing from the regulatory agencies and any more color just on timing there? And what can you guys do in the interim while you're waiting to hear from the regulator just in terms of planning? And I guess what I'm trying to get at is do the -- can the synergies come earlier or not, given the amount of time you've got now to plan for this?

Al Neupaver

Okay. I really can't comment on the process. Right now we're right in the middle of the thick of things. I can tell you that I've learned what the word patience means. We were warned on how long it would take by our European friends as well as the -- our legal departments and our outside lawyers. So we're working through it. Again, I just want to emphasize it is not a matter of if, it's just when it will close.

As far as what we're able to do at this time, we're somewhat limited because the regulatory process is ongoing. But we're working extremely hard on our integration plan and doing all the planning work that can't be done without sharing any kind of information that would be impacted by the regulatory review. So we're working hard. We'll be prepared day one when that happens.

Operator

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

Allison Poliniak

Al, just going back to one of your comments in the beginning, you talk about your confidence in the outlook this year just based on some of these delayed projects moving forward. I'm assuming it's transit. What's your confidence in this environment that those will get executed this year.

Al Neupaver

I think Ray could probably better answer those. He's closer to those projects.

Ray Betler

So Allison, we've talked about that dynamic in the transit market before. There's frequently projects are delayed for a whole host of reasons, funding, cars are built slow on the initial build. And so our subsystems are delayed in terms of shipment to the car builders, revenue recognitions. So there's a whole set of dynamics in the transit area that causes delays. But the good thing is that there are projects moving forward. We talked about MBPA last year receiving that order. Chicago has been decided but is being protested so there is an example of a delay. The Chinese were identified as the winner. The Bombardier folks are challenging that decision. I don't think it's going to holdup but who knows what impact it is going to have.

As far as starting a contract, we have bid to both car builders so I think we're in a pretty good position in either case. There's new projects coming along. The next one will be LA, the one after that New York. And now there's long term funding in place. So I think the dynamic on the transit side actually should improve, especially here in North America.

Al Neupaver

Yes. One thing I would like to point out, if you look at transit by itself and remember that we've talked time and time again about why we feel it's important that we have a balance between freight and transit. And we really feel that these markets are kind of cyclic. And if you take a look at our growth, 2015 to 2016 in transit, it's about 9.4%. The backlog has increased from last quarter by at least 2%. We're at a record high. Now, the real question is when do these projects that we're talking about here, when do they hit? We have no control over that and there's one thing for sure is that there's always delays and we're used to it.

Hopefully when we look at our plan going forward, we've put in some conservatism as far as when those particular projects hit. Anything you look at -- we're doing what we said we would do. And that is that we have a counter cyclic balance in our business model and we focus real hard on the margins in that area because the dynamic of the mix effect on your margins. So were trying to execute. We said that's the thing we have control of and that's the thing we stay focused on.

Ray Betler

Allison, the other area where we've seen some delays as we mentioned before, PTC. Scott asked question and while there have been some delays because the railroads cut back their CapEx and they're trying to manage to the new deadline, the deadlines only 2018. That's not that far away. So we don't anticipate a big issue on the PTC side over the next few years. Say it has to be totally built-out, totally installed and then integrated and qualified and commissioned. So there's a lot of work left to do. So we're not anticipating major delays on the PTC side.

Allison Poliniak

And that kind of goes to my next question, understandably, PTC is sort of at a pause this year. I guess that's not the right word but there's no real reason that it should down in 2017 just based on this sort of aggressive timeline to 2018. Is that correct?

Ray Betler

Yes. I think we have reasonably good visibility on the PTC revenue over the next three years. And we're still talking about $85 million this quarter alone. So it's not an inactive product line for us. There's a lot of activity still in progress.

Operator

The next question comes from Justin Long with Stephens. Please go ahead.

Justin Long

So I wanted to follow up on one of the earlier questions. Operating margins improved despite the revenue decline and negative mix. So I was wondering if you could talk about the magnitude of the cost saves in the first quarter. I know you said at least $30 million for the full year. But I'm curious how much of that amount was recognized in the first quarter?

Al Neupaver

I think it's pretty much proportional. And I think if you look at the -- I think the right word -- I'm being told that decremental is the right word. I didn't know that was a word but I'm learning. We had a 13% -- what I call negative contribution margin and I think that typically when you go down -- that amount of volume which is I think quarter-to quarter, 2015 to 2016, was almost $50 million -- you would expect that it would have an impact.

Our normal is 20% on the way up and usually on the way down you're penalized more than that. So I think if you just look at it that way, you're probably look at -- we probably got anywhere from $5 million to $8 million of savings that were reflected in the first quarter numbers. Pat, is that right?

Pat Dugan

Yes, no I agree.

Justin Long

And secondly, I was wondering if you could talk about how your North American freight after-market business trended in the quarter. I think a lot of people saw the decline in rail volume. You mentioned it down 6%. And we're wondering how that business would be impacted. So could you just talk about the performance of that operation in the first quarter and your expectation for how that revenue progresses over the remainder of the year.

Al Neupaver

First of all, I think that's one area that we were probably way too aggressive when we talked about it in our year plan the last time we had a call. And what we're seeing is it's directly proportional to the drop in traffic pick. And that's the reason why the impact we see from the car build and the locomotive build as well as the after-market went up by about $50 million or so.

Justin Long

And then maybe one last quick follow-up on PTC, I know you expected or you said you expected to be down this year in terms of PTC related revenue. But is there any order of magnitude you could share on that? And then also I was wondering what PTC related revenue represents in your backlog today.

Al Neupaver

Yes, I think that there's about $100 million of PTC in the backlog. Is that right?

Pat Dugan

Yes.

Al Neupaver

And from a down, I would say we don't have an accurate number at this point. We probably -- the next quarter would be more accurate. But the dynamic is such that it will be less. I think that you saw the drop here. We have no reason to believe it would be less than that on an annual basis.

And as people figure out their spending plan and get more aggressive going forward, we could see actually an improvement at the year goes on. And that's probably our best analysis of that right now.

Tim Wesley

Justin, this is Tim. I'll add a little bit of color on the backlog. So the traditional sort of PTC work about $100 million or so in the backlog, but as we've expanded into the signaling and communications arena, certainly we have backlog there. So the total of the train control and signaling in the backlog is probably more like $300 million. So, just to give you kind of an order of magnitude of the size of that additional signaling and communications work.

Al Neupaver

And then I think it's because I think that the important thing. There's no doubt that the class ones go out to 2018 and they've completed their PTC which I have every reason to believe they're going to be able to do that. Our business model and we've tried to explain this time and time again, gets to be train control and signaling. And we view this as our opportunity, not just the initial install, but you have an after-market business, a service business as well as enhancements and other signaling projects and that's what we're focused on.

And that's why we say over time that our train control and signaling business is going to grow. And we're trying to give a little more color on that by giving an indication in the first quarter that although it was $85 million on strictly PTC, if you add in the signaling business, it takes it up to what? $110 million.

Justin Long

Do you think the signaling business can be bigger than your PTC business today?

Al Neupaver

You're looking at a $22 billion market globally. Now, we're not focused on the total market. But we're focused on the niche areas of those markets that's probably 20% of that total market. So yes, if we're successful in executing our strategy and our business plan, it will be. It'll be train control and signaling business, that's really our focus.

Operator

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

Matt Brooklier

You talked about the targeted cost savings. Al, I think you quantified it for the quarter at maybe $5 million to $7 million is providing a little bit of cushion in terms of the margin with your rev and rev down and the mixed headwind. Is there anything else you can talk to that was meaningful in terms of helping you maintain your margins during the quarter?

I think you talked to maybe the improvement on your prior acquisitions, the operating improvement and margin improvement there. But I'm just try to get a sense for if there's other things that are enabling you to kind of weather the cycle starting to fade here.

Al Neupaver

Yes, actually on the contrary. Keep in mind that we didn't talk about the one-time expenses related to get those savings. So not only did we get the results but, at the end of the day, we didn't use the cost and expense as an excuse. So that's why we said sequentially. As these cost reductions take better effect, we have a little more confidence in how we're going to perform. Those cost savings are not free.

Matt Brooklier

Okay. And I guess for the year, you've adopted your -- the targeted cost savings. The headwind year-on-year at freight went from 100 to 150 so it looks like you're going to be able to potentially fully mitigate the cycle headwinds. I'm just trying to get a sense for if that 150 headwind -- if it's more like 200 or potentially a bigger number. Is there more cost you can potentially take out moving forward?

Al Neupaver

If we have to, we will. So we'll take a look at -- these are your assumptions that we have right now. And we're continuing to look at it every month, every quarter.

Matt Brooklier

Okay. And then are you able to provide the positive train control revenue numbers? You gave the consolidated I think at 85 but how that broke out between the freight and the transit businesses.

Al Neupaver

Yes, freight was about 75% of that.

Matt Brooklier

Okay. And then just finally, the change from looking for slight PTC revenue growth this year to I think down a little bit, can you talk to your expectations and your respective businesses? Or you think both freight and transit are going to be down? Is it more freight than transit? I'm just trying to get a sense for what's contributing to the decline this year per those two different markets thanks.

Al Neupaver

On PT, are you're asking specifically what PTC meant?

Matt Brooklier

Yes, I'm just try to get a sense for your consolidated number.

Al Neupaver

It's basically freight. You've got class ones that have cut back there CapEx budgets by 30%, 35%. So they've cut back on not only insulation, they've cut back on construction, they've cut back on qualifications. So they basically have pulled back significantly, that's why they've performed so well, by the way. Kudos to them. They've all performed well and they've all dealt with the current downfall or shortfall, in their businesses. Yes, you don't see it so much in transit because those are programmed out. And if we have it, it's going to be in freight.

Matt Brooklier

Okay, so it's the freights that headwind this year.

Al Neupaver

Yes.

Operator

The next question comes from Mike Baudendistel with Stifel. Please go ahead.

Mike Baudendistel

Sounds like you had a lot of good opportunities in the acquisition front in your pipeline. And you also said that you wanted to maintain your investment grade credit ratings. Can you just tell us how much debt you think you could assume for acquisitions and still maintain that rating?

Pat Dugan

Yes, just in talking to the rating agencies, we focus on about a two times as sort of the upper limit of what the debt can be. As long as we -- but to exceed that would be okay as long as we have a plan to deleverage pretty quickly. So right now we've also talked an awful lot with these ratings agencies about weathering cycles and the economy as it is. So right now we seem to have everybody's confidence and as long as we don't get much past that two times without a deleveraging plan, we would be fine.

Mike Baudendistel

And then one other question is on the change in revenue guidance, understand that there's lower after-market revenue now expected because the rail volumes have been disappointing. Is there anything more to it than that or was it really concentrated in that area?

Al Neupaver

That's just in that area.

Operator

The next question comes from Jason Rodgers with Great Lakes Review. Please go ahead.

Jason Rodgers

Just had one question, the others are answered. Just wanted to clarify that your EPS guidance for the year -- does that include or exclude the $0.03 per share in Faiveley expenses you had this quarter?

Tim Wesley

Jason, that excludes. We've said that there's nothing in the guidance for Faiveley, whether that would be revenues or expenses

Operator

The next question comes from Thom Albrecht with BB&T. Please go ahead.

Thom Albrecht

A lot of my questions have been answered but I did want to go back to a couple things. Ray, you gave a figure -- you were giving a number of things and you said something about $470 million or $475 million, down 8%. What was that?

Ray Betler

Just one second, Thom, that was after-market sales for the Company.

Thom Albrecht

Okay. All right, down 8%. And refresh my memory, I think it was late October, early November -- wasn't there a huge transit award in India? Several billion dollars? And bring us up to speed with that and whether you might be a participant in that.

Ray Betler

I think the order you're referring to, Thom, was a locomotive order in India.

Al Neupaver

Thom, we mentioned the Bombardier order from Faiveley. Is that the one he's talking about?

Ray Betler

I don't know what -- you're asking about an order we bid on. That was a locomotive order in India for 1000 locomotives. So Faiveley has a big business in India. They have won several projects in India. But on our side, our focus was on locomotive order. There was a [indiscernible] called locomotives, Thom.

Thom Albrecht

And then have you given some thought to where railcar deliveries might be in 2017? I know that's a ways off but 60 to 65 might be a little optimistic for 2016 certainly looking into 2017 it could be a little bit more negative than even current forecast suggest.

Ray Betler

Yes, we really don't have any better information than what's out there. We do know the backlog is 95,000. So it would carry the current rate well into the year. But I think someone, if you look at it, it looks like there was a small cancellation of some sort compared to the orders coming in, deliveries in the backlog. So we hope that the economy turns around because it's driven by the economy in car loading.

Al Neupaver

So the answer to your question is, yes. We think about it every day. That's why we were able to hit the [indiscernible]. So believe me, we're thinking about it.

Thom Albrecht

No, I hear you. I think it was a lot of small cube [ph] hoppers there were canceled. I think Al was too nice to say the category but I think that's what it was. Okay, that's all I had. Thank you.

Operator

The next question comes from Liam Burke with Wunderlich Securities. Please go ahead.

Liam Burke

Ray, in the freight side of the business, are you seeing any change in pricing with CapEx budgets coming in?

Ray Betler

No, we haven't seen significant changes.

Liam Burke

Okay. And on the signaling communications side, you've got a big opportunity. How do you see growing the business? Is it more internally developed or acquisition or how does it divide up?

Ray Betler

Yes, really both. We're working hard on a lot of enhancements because there's a lot of other people working on them as well. That now that there's a computer onboard the locomotive, you got a smart train and trying to take advantage of that capability. So will be focused on internal development as well as acquisitions.

Liam Burke

So having that background on locomotive-based PTC, there should be an advantage to you taking the next step into the communications and signaling side or expanding that expertise.

Ray Betler

Yes. And remember, Liam, we bought a communication company a little bit more than a year ago. And that company really has performed well for us. It was called CCI. As a result of that acquisition, received a sizable contract for MTA in New York to provide a communications system for the PTC access system on their network. So that capability [indiscernible] exists in our portfolio and that is one of the areas we're trying to grow. We're trying to grow other areas like our video communications, wireless crossings, there's a whole host of areas we're working on.

Al Neupaver

Yes and there's ample opportunities. There's only so many things that we work on and be expert at that

Operator

The next question comes from Kristine Kubacki with Avondale Partners. Please go ahead.

Kristine Kubacki

Al and Ray, I guess I was just wondering, in terms of the guidance, $4.30 to $4.50, it still seems pretty wide. And I get that there's a lot of uncertainty out there whether it's car build or after-market. I guess just trying to give a little bit of confidence, where in terms of your guidance do you feel like there's the most risk where we'd end up at the bottom end? Is it transit projects being delayed or is it further weakening in the after-market on the freight side? I was just hoping you could give us a little color there.

Al Neupaver

I would think there's probably multiple potential risks. I think you identified one, Kristine, is that the freight markets continued to weaken and they aren't stabilized as the year goes on. I think that transit products delay. I think capital spending in train control and signaling, you got a look at -- we do have a significant international business.

There has been some recovery in the iron ore price but that has driven our business. Oil and gas -- we have 15% of our businesses outside of rail and some of that is related to power generation and oil and gas. So we have this diverse business model and what we hope to do is we have -- our model is somewhat counter cyclic and diversified that minimizes the impact, but everyone of those are things that we talk about continuously and stay focused on. And we have multiple divisions, multiple groups that are asked to react as they see their market change.

Kristine Kubacki

And then I was just wondering a little bit more on the capital allocation side, obviously pretty heavy quarter on the share repurchase side and you gave us a little color on the debt side so I appreciate that. But you did also talk about maybe some acquisitions coming. I mean the stock has had a pretty big rebound here the first quarter. I was kind of wondering if -- and given the marketplace, have valuations come down or should we see more of a capital allocation toward acquisitions again? Or how do you expect the share repurchase to also unfold at the same time?

Al Neupaver

I don't think we -- Ray went through the priorities and I think our priorities -- we'll maintain those. We've been successful. The most profitable way to grow is through internal development and where staying focused on that. Second is acquisitions. Third is the dividend and the share buyback. So I think it'll be the same priorities. What changes those priorities is the opportunity. We're opportunistic. You can't predict acquisitions. So we have to adjust the priorities based on what's available and we'll continue to do that. But we're focused in all those areas in that list of priorities.

Ray Betler

Kristine, just to give you a little bit of insight into other parts of our business, there's been a huge capital improvement plan announced for ports in this country -- under $55 billion investment. And Fandstan sells these big festoon railing systems to have port to ship power.

So we've actually received several contracts in places like Singapore and Shanghai and anticipate opportunities in Los Angeles, Miami, other places in the states for that kind of technology. So if you look across the business and the diversification opportunities we have, while freight is definitely a concern, the trend, there's other parts of our business that are supplementing and offsetting those reductions.

Al Neupaver

Ray, you might want to talk about the capital project related to power generation that we're investing in.

Ray Betler

Yes. I think I mentioned in my remarks that we have a major investment that we were selected for supply of an intercooler which is a similar -- it's an aligned technology from our tier 4 radiator technology for locomotives. And we supplied this technology into power generation and power disruption areas. And we're literally building a plant right now in China because of the opportunity in this market. We've received 12 orders so far for new intercoolers. That's greater than we originally anticipated in the business plan. And that business, we think, eventually when it matures is going to bring about a $50 million revenue stream every year.

Al Neupaver

What's one unit ballpark price?

Ray Betler

Each unit, it's very different unit to unit -- can range anywhere from about $1.5 million, $2 million up to $4.5 million depending on its size.

Operator

The next question comes from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Steve Barger

Al, you said there were some expenses associated with the cost savings. What was the impact from that in the quarter and can you talk about how -- what that'll look like as the year progresses?

Pat Dugan

So restructuring costs or severance costs included in that would be about $2 million in the quarter. And those are obviously dictated by location and what kind of restructuring actions we take. So I wouldn't call that as things that would be recurring or to be anticipated--

Al Neupaver

Depending on the marketplace--

Pat Dugan

Yes, you could have additional costs related to some kind of actions we might take going forward.

Steve Barger

But the expectation is the $30 million benefit is net of all the expenses through the year?

Pat Dugan

Right.

Steve Barger

And just one more question on that subject. Is that all employee related or were there any expenses related to a more permanent changes like plant closings or consolidation?

Pat Dugan

They were mostly focused on employees and reducing costs there. There were no plant shutdowns or asset impairments or anything like that.

Steve Barger

And it sounds like you expect free cash flow will be up this year versus the $400 million from last year. I'm trying to think about the impact of Faiveley, do you expect that contributes free cash flow out of the gate or will the cash cost of restructuring make that a drag?

Al Neupaver

We really haven't put any pro forma out at this point and will probably best -- whenever we close we'll come out and have a conference call and go through the pro forma. So is probably a little premature. But our goal is to always have more cash flow than net income.

Pat Dugan

Right.

Operator

[Operator Instructions]. This concludes our question and answer session. I would like to turn the conference back over to Al Neupaver for any closing remarks.

Al Neupaver

We'll talk to you soon. Thanks a lot.

Ray Betler

Thank you.

Operator

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

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