Westinghouse Air Brake Technologies Corporation

Good morning and welcome to the Wabtec fourth quarter 2018 earnings release conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Tim Wesley, Vice President of Investor Relations. Please go ahead.

Thank you, Sean. Good morning, everybody, and it is a good morning. The sun is shining here in Wilmerding. Welcome to WAPTEC's Investor Call. We're going to discuss a lot this morning, our 2018 fourth quarter and full year results, our guidance for 2019, and, of course, the closing of our transaction with GE Transportation. Along with our press release, we've also provided slides for our presentation this morning. You can find those on our website at www.webtech.com. Go to the Investor Relations tab. Click on the link for the February 25 investor presentation. And as Sean mentioned, of course, following our remarks, we will do a Q&A session. We do ask that you limit yourself to one question and one follow-up. If we can't get to everyone's questions in the allotted time, we will be reaching out following the call. And again, as a reminder, the call is being recorded for replay purposes. We will make forward-looking statements during the call, so I would just ask that you review today's press release and slide one of the presentation for the appropriate disclaimers. During the call, we will also discuss non-GAAP financial metrics and performance measures. I encourage you to read the bottom of slide one before considering those metrics. With that, if you would turn to slide two, I'm going to introduce you to the others who are here with me in Wilmerding and will be presenting during the prepared remarks this morning. Al Newpaver, our executive chairman, our president and CEO, Ray Bettler, our CFO, Pat Dugan, and Rafael Santana, president and CEO of our freight segment. Also here is John Massilers, our corporate controller. With that, let me turn the call over to Al for some comments and an overview of our agenda this morning. Okay, thanks, Tim, and good morning to everyone. Today is a very, very important day for the new Wabtec. We started this process well over a year ago, and before we get into the presentation, I want to take this time to really acknowledge and thank the entire team for all their hard work and dedication to get to this point. And I especially want to identify the people in this room who were just introduced, as well as Dave DeNino, our general counsel, that has spent endless hours trying to get us to where we're at today. So, we're really excited about the opportunity, but it didn't get here without a tremendous amount of effort and work by a great team. Today, we're even more convinced in the strategic logic and the value of this transaction. The combination of our uniquely complementary capabilities creates new opportunities for growth well into the future. We have the ability to advance technologies to improve the safety, the efficiencies, and the productivity of both the freight and transit industries. will be better positioned to perform through the business cycle with expanded margins and expected double-digit earnings growth supported by a run rate of synergies of $250 million by the fourth year of this combination. Overall, we couldn't be more excited about the future of Wabtec. As you can see on slide two, Ray and Raphael will discuss in more detail the new Wabtec and our future plans. Pat will follow up and provide a review of our fourth quarter and full year 2018 performance, followed by our 2019 outlook. I now turn it over to Ray Bettler, our president and CEO. Okay, thank you.

So, folks, we're really excited and happy to be here at this point today. to finally be completing this merger so that we can focus on the future. The merger brings together two companies with rich heritages in many areas, engineering, manufacturing, technology, innovation, and over 4,400 years of combined experience within this industry. It brings together a corporation that will be a diversified global leader that's ideally positioned to address the opportunities, needs of the future in transportation worldwide. Our company will be a Fortune 500 company with business operations in over 50 countries around the world. We'll be listed on the S&P 500 index. So if you look at page four, you can see the complementarity of the companies. The companies have both demonstrated historically strong financial performance. Wabtec has a comprehensive technology-based portfolio that leads in many sectors of the market in which we operate, freight car products, locomotive electronics, brakes, heat exchangers, and so on. We also have a very strong market share position worldwide in transit. We have a successful track record financially and a diversified revenue base with extremely strong aftermarket positions in our core businesses. And as you know, we have a leadership position in positive train control and finally, a very strong backlog across our total business. GE Transportation is also a leader in their market segment. into this merger leadership position in freight rail technology. They're a diversified engineering company just like us. They have state-of-the-art diesel freight locomotives globally. They've demonstrated strong financial performance with a robust aftermarket business, and they have a diversified electronics digital portfolio. with a demonstrated history in innovation. It's important to note here that our combined business will have over 60 percent aftermarket, and we will have about 55 percent of our business internationally. So we really are well positioned for the future. If you turn to page five, we can talk a little bit about the strategic rationale and benefits of this merger for our shareholders. Our existing shareholders of Wabtec will now own 50.8 percent of the combined entity. GE and its shareholders will receive 49.2 percent of Wabtec shares. So, GE will receive 24.9 percent ownership, and its shareholders directly will own 24.3 percent at the time of closing. WAPTEC, under the final agreement, will issue 3.3 million shares fewer than at the time of the announcement earlier this year. And GE will receive $2.9 billion in cash. As you can see from the table in the middle of slide five, GE will complete the sale of their ownership by the end of year three. Our company will be called Wabtec, will be headquartered in Pittsburgh. I will remain president and CEO of the combined company and in the interim president and CEO of our worldwide transit group. I spent 41 years of my career in transit and joined Wabtec, as you know, in 2008 when I headed up the transit group. So I know that part of our business and our customers very well, as well as the freight part of our business. Rafael Santana will be the new president and CEO of the freight segment. Rafael has worked now for about 30 years of his life. He's been with GE for almost two decades. He's been with GE Transportation for a decade and has been in executive management for a dozen years. So Rafael, is a very strong executive with international experience and capability, and he brings with him an extremely strong expert team in his management team. We also are fortunate to continue to have Al remain as our executive chairman. While Al didn't mention it in the introductory comments, he led this overall negotiation and ultimate merger process along with Pat and Dave and other senior members of our executive team. If you go to page six, you'll see, as we explained in May, that the strategic rationale and the financial logic for this deal are quite Our belief in the now has only increased since we announced in May, and we want to reiterate a few of those points. From a strategic perspective, we're more diverse in global business than we were prior to this merger. Both companies are. We have significantly enhanced our overall electronic and digital portfolio. and we're well positioned to approach our customers to continue to support them in terms of increasing their ability to improve their safety, productivity, and efficiency. We also believe we're well positioned to leverage our collective position in the overall PTC business to start to grow a phased approach toward full automation in the rail industry. Financially, we have very strong portfolios and are targeting a synergy run rate of $250 million with significant tax benefits and expect to generate strong free cash flow that will enable us to deliver our company and to maintain our dividend and investment grade rating. We continue to view this as a highly attractive opportunity because of where both companies are in the cycle. We're both experiencing teal winds on the freight and locomotive side of our business. So there's a lot of reasons for why we brought this organization together under this merger. And we have a 150-year history we're celebrating this year, and we strongly believe that there's great opportunity for every employee in this company to enjoy an equal opportunity for another 150 years in the future. So with that, I want to turn it over to Rafael to make some detailed comments about the freight segments.

Thank you, Ray, and good morning. The GE Transportation team and I are incredibly excited to be part of WTAC and the start of this new chapter. I'm very proud to be leading the freight segment, which is really the combination of the former GE Transportation business with the WTAC freight business. As a leading OEM, we're not just the largest global producer of diesel electric locomotives, but we also produce components for freight cars, railroad track, for signal products, and in addition, we manufacture propulsion systems for mining, a range of engines, and electric motors utilized both in marine and in drilling. If you turn to slide seven, you can see we have a large install base with approximately 23,000 locomotives. which provides long-term revenue opportunities for our services and digital segments. Our services segment maintains and modernizes fleets at various stages through the life of these assets. The combination of reliable, available, and fuel-efficient products really place a high value on the maintenance and the overall services that we provide to our customers, generating recurring revenue opportunities. We also have significant contractual coverage of our fleet, with the majority of locomotives covered under long-term contracts. Today, approximately 70% of our install base are under long-term service contracts, which is roughly two-thirds of our backlog. This fleet will continue to be used and is a strong foundation for the growth of our business. Our fleet is relatively young, with an average age of 10 years, This is a competitive advantage, and we are strongly positioned to drive a better total cost of ownership view for our customers. This drives better performance, better reliability, and better fuel efficiency. We have approximately 11,000 units that are upgrade opportunities with an average of 10 to 20 years in service. We finished 2018 with a strong backlog for upgrades that will deliver a significant outcome for our customers. As for the bottom of the page, we are in an attractive point in the cycle. While the new locomotive deliveries have always been cyclical, we're coming out of the trough. We had a strong orders performance in 2018, and we ended the year with a total backlog of approximately $19 billion. Again, this supports our volume growth in the coming years. But hey, our freight business also produces a number of solutions for automation. Combining the Wabtec electronics business with the legacy GE transportation digital business. This is a significant part of our business, and it includes some of the most impactful solutions that optimize performance, increase operational savings, and improve safety. If you turn to slide eight, you'll see that Wabtec's uniquely positioned to put railroads on a path to advanced automation and to really meet the rapidly growing demand for improved rail performance. Automation will have the single biggest impact for railroad productivity in the next decade. This has the potential to unlock significant annual savings across freight rail for customers and operators. We're seeing an increasing demand for a combined portfolio of products and services, and we share a commitment to innovation that will ensure that we continue to meet the growing need. With that, Ray Battler will share with you some more details with you on our integration.

Okay, so folks, you can see why I'm excited because this guy is a superstar, and we're certainly excited to have Rafael on our executive management team. So if you move to slide nine, you can see that we're making good progress on our synergy plan. We committed to 250 million of run rate synergies by 2022. And since we announced in May, our executive team under the leadership of Al and the steering committee that included Al Raphael, myself, have been meeting with senior members of our management team and functional leaders to focus on specific work streams or process streams within our organization. In addition, we had external candidates to add rigor to the process in terms of tracking, in terms of monitoring progress as well as talented evaluation. We're able to actively review our progress and actions on a monthly basis, and we have regular integration and steering team meetings to do that. If you look at the five areas, the synergies that we focused on, we're focused on opportunities in sourcing. We think there's tremendous opportunities in both direct and indirect spend. In SG&A, opportunities for reductions in cost, insured services, as well as corporate costs. We mentioned TSAs that are in place with GE Corp that we will manage to eliminate as quickly as possible and to insource those support services. IT is one of those services. That's an area of great opportunity as we rationalize our systems and our networks. We have consolidation opportunities for our facilities, both in terms of office consolidation as well as factory consolidation worldwide. And finally, we have good revenue synergies that we believe exist not only in the electronics area but across the locomotive market. We talked about insourcing opportunities previously that will be associated with the components and subsystems that WebTech has within our portfolio that can be sold into and integrated into complete locomotives. We also have opportunities within our aftermarket business to combine aftermarket service and support into some of the MSAs that exist in the current GE portfolio. And with that, I want to turn it over to Pat Dugan, our CFO. Thanks, Ray.

So I'm going to take the opportunity now to just talk about the Wabtec Q4, and then we'll move on to guidance for 2019. So when you look at our Q4, we had a strong end to the year with sales of about $1.1 billion. That represents a 4% growth year over year, driven by organic sales growth, roughly $47 million, and from acquisitions of about $28 million. That more than offset the negative effect from changes in foreign currency exchange rates on the sales line of about $33 million. I want to emphasize at this point our good performance related to cash from operations. On a GAAP basis, in the quarter, we generated about $277 million cash from operations, and for the year, $314 million, better than what we had guided to in Q3. So, why did we have this good performance? We had a focus on reduction on receivables, on our inventories in the quarter, as well as increased cash flow from our customers. and better management of our payables and liabilities. I just want to make one final point on those numbers. The cash performance that I just talked about is on a GAAP basis, and if you look at some of the impact of the GE transaction costs and any restructuring activities, it was about a $50 million negative impact to our cash from operations for the year. For the full year, our sales were about $4.4 billion, which represents about a 12% growth year over year. And again, this increase was driven by organic sales growth of about $285 million, sales from acquisitions of about $135 million, and a positive effect from the changes. So while it was negative in the fourth quarter overall for the year, had a positive impact from foreign currency exchange rates of about 62 million. Our earnings per share for the quarter on an adjusted basis was 97 cents. Not excluded or included in that 97 cents is about a 3 cent negative impact from foreign exchange. So foreign exchange made the 97 cents worse. than what would have normally have been occurred. We reported earnings per share of 36 cents. The adjustments or the impacts come from the GE acquisition and deal costs, certain discrete restructuring programs due to changing and consolidating of certain transit businesses, and discrete pension litigation and tax charges. Our 2018 full year adjusted EPS was 381, and our reported earnings per share was 305. Our income statement for Q4, just some of the normal disclosures that we would give in our call. For the quarter, the operating income was 93 million, or 8.4% of sales, including transaction costs related to the GE transportation merger, restructuring expenses of about $31 million and $9 million related to certain litigation and tax GST costs. Excluding those items, our operating margin was 12.6% and consistent with the full year adjusted operating margin. Other items that impacted our quarter, I talked about the FX item of about $5 million and certain discrete items related to the operations. Our full year 2018 adjusted operating margin target is now about 13% and it's slightly lower than our initial guidance due to tariffs and as we continue to work through some of our lower margin contracts in the UK. Our SG&A was $168 million. This increase is mainly due to the expense items I mentioned and from acquisitions. Engineering expense was $26 million and amortization expense was about $10 million. and both are consistent with our prior year periods. Interest expense for the quarter, $36 million in the fourth quarter. Absent the capital structure that we did put in place in the middle of the third quarter, late third quarter, for the GE transportation merger, our interest expense would have been about $14.5 or $15 million lower. Other income and expense was less than a million. Actually, other income was less than $1 million, which is lower than previous periods, reflecting some costs that came through related to pension settlement charges, which were about $3 million. Our income tax expense, our tax rate for the quarter was about 39%. a lot of different discrete items flowing through that number, but on an adjusted basis, it would have been 22.5%. When you look at our segments for the quarter, we had a good segment growth with freight revenue growing 12% and transit revenue growing greater than 13%. Our adjusted operating margins for the full year was 12.6%. Our restructuring initiatives in the UK, North America, and in several international operations impacting those results are expected to drive our margin expansion and cash generation into next year. Backlog for the year. Total backlog was a near record high of $4.5 billion for Wabtec, with our 12-month backlog increasing 12% in the fourth quarter versus the third quarter. We are pleased to report that our recent new orders included all major product lines and all key geographies. And as we look ahead, we see favorable market trends heading into 2019 with freight traffic volumes growing and transit spending increases. Okay, to talk to 2019, I point you to page 13. And I just want to highlight some of the key assumptions for our 2019 plan. Assumptions include a global economic growth of about 2% to 3% or FX at about current rates. We have assumed major tariffs in the current rates. We are assuming low single-digit rail traffic growth in NAFTA. We're assuming about 10 months of the GE transportation results in our adjusted guidance, in our full guidance. we expected global locomotive and freight car deliveries to be up versus 2018, transit car deliveries to be up versus 2018 for Wabtec, and an effective tax rate of about 24%. Page 14, we've done a number of different comparisons to help you look at the numbers on an apples to apple or like to like basis. So if you look at page 14, This is essentially a pro forma view as if Wabtec and GET were combined for the full 12 months without any of the topside adjustments that will come through related to items like purchase price accounting or accounting harmonization. These would be numbers that would be comparable to what we discussed in May and in our various regulatory filings throughout the interim period since May. We have about $9.2 billion in combined revenue, an EBITDA of about $1.7 billion, and income from operations of about $1.4 billion. Turning to the next page, which is page 15 of our deck, you would see that we've adjusted these numbers for what I would call recurring PPA and amortization, so costs that will will have impacts into the future periods, reducing our income from operations by about 200 million, yeah, 200 million, 0.2 billion. And then factoring in a combination of the partial year of the GET operations and some of the accounting eliminations that we would need to do for intercompany sales, we end up with a guidance of about 8.4 billion of revenue, EBITDA of about 1.6 billion, income from operations of about 1.2. Using our fully diluted weighted average shares outstanding of about 177 million shares, that gives us an earnings per share range that we're guiding everybody to of about four to 420. Moving to page 16, just some final adjustments to get you to what would be a comparable numbers on a GAAP basis. We take this adjusted guidance and we factor in our current estimate of transaction costs, the one-time purchase price accounting that would be associated with inventory and backlog, and the accounting harmonization of view of the impact on revenue recognition and some other costs that are incurred, and we have differences in how they're capitalized and amortized, we end up with a revenue guidance of about $8.4 billion, EBITDA of about $1.3 billion, income from operations of about $900 million, our budget for both organizations about $200 million, 200 million of capital spending for the year. And again, on that 177 million of outstanding shares on a weighted average basis, we end up with a range of earnings per share, $3 to $3.20. I just want to take a moment and highlight that we have included various reconciliations and comparisons so that with a little more detail in case you want to dig in and review those schedules. So to recap, on page 17, on a pro forma basis, on a like-to-like basis of 18 to 19, you see revenue increasing 8.3 billion to 9.2, or adjusted EBITDA from 1.5 to 1.7, with maintaining an EBITDA margin of roughly 18%. income from operations increasing from $1.2 billion to $1.4 billion, with a margin increase of about 100 basis points, or 14% to 15%, and CapEx steady at $200 million, excuse me, $0.2 billion. Page 18, just an update on where we are in terms of debt and our leverage ratios. Clearly, these numbers are impacted by the partial year when you compare this sheet to previous estimates that we would have given you. But the partial year and some of the own cash generation from Wabtec and reflecting the deal costs and the other costs that did incur for the second half of the year, we expected our debt at close, about $2 billion. adding $2.9 billion of transaction debt for a total debt estimate of about 4.9, net debt about 4.8, giving us a gross leverage ratio of 3.3 times on an adjusted basis, pro forma basis, with a net leverage ratio of about 3.2. Our current estimates with our cash flow, cash from operations goals, we expect to see this leverage go from 3.3% at close to a 2.8 by the end of the calendar year of 2019. So just a couple of points I want to emphasize with this cash flow. We expect to have a strong free cash flow profile. We expect to see this leverage ratio come down. Our financial policy remains the same. We are committed to our investment-grade ratings. We're committed to de-lever the company, and that's a key part of the investment-grade rating. But we also will be investing in our growth strategy as we go forward. Again, I'll point you to all the reconciliations later in the deck, and at this point, I'd like to turn it back over to Ray.

Thanks, Ted. So let me one more time tell you why we're so excited about this new combination and confident in our future. It truly is a once-in-a-lifetime opportunity for all of us. It's a milestone event in the history of rail transportation in the world. And if you look at the strategic rationale, The strengths associated with this new combination start with our focus on technology and innovation. We'll be a very highly diversified engineering and product portfolio company. And we'll have products that can reach customers in 100 countries plus all over the world. We'll have over 5,000 engineers. of all different functional capabilities and backgrounds and disciplines to serve our customers and our product portfolio. One of the areas we believe is extremely strong is our position in electronics. And while we're not a full-fledged signaling company, we are a very strong niche player in the areas that we do serve. And the beautiful thing about those areas, as I've explained before, is when we superimposed the product roadmap for automation that we had with that, which GE had, what we found was that the voids that existed in each were filled by the other company. So getting started on that opportunity in earnest is very exciting to us. We don't expect for automation to occur in a single step, but we do expect it to occur in a phase process, each phase representing an opportunity for us to generate high margin revenues. Some of those revenues will come in the aftermarket. The aftermarket opportunity in electronics, in locomotives, in freight car and transit are significant in our position today. It's significant. It gives us a great foundation and platform to build on. And we think there's opportunities for us to leverage the complementarity of our existing positions in the aftermarket, as well as the expertise that exists across the total corporation in transit and freight. We have a very strong pro forma financial profile, as Pat noted. And we're hitting this combination at a great time in the cycle. A year ago, we came out of the freight cycle, the downturn, and this year, the GE transportation folks are experiencing the same in the locomotive side. And we have an extremely strong backlog to support the tailwinds that we believe exist in the market. Our opportunities to generate Synergies are significant, they're worldwide, and we've defined those as 250 million on a run rate basis with significant tax benefits that will drive value creation. And I honestly believe that as we explore in more detail our opportunities around the world, we'll find more opportunities through the creative and capable management team that we have in place. And finally, our cash flow profile. As Pat said, we had a really good fourth quarter. We believe that we'll be able to build on that position to continue to generate strong cash flow throughout 2019, which will allow us to further deliver this company and eventually position us to look for new opportunities to invest. So if you look across the business, if you knew the people that the way I do now after having the opportunity to start to become familiar with the management team on the GE side, having worked for over a decade with the management team on the web tech side, we're really putting together a powerful organization, proven leadership that is going to allow us to grow and to manage through the cycles. across all of our businesses in the future. And with that, I'll turn it over to Tim.

Okay. Thanks, Ray. So, Sean, you can go ahead and poll for questions. And, again, let me remind you that if you can limit yourself to one question and maybe one follow-up so that everybody has an opportunity, we would appreciate that. Go ahead, Sean.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. Our first question comes from Justin Long with Stevens.

Please go ahead. Thanks. Good morning, and congrats on closing the transaction.

Thanks, Justin.

So maybe, Pat, we could start with a couple questions on the guidance for you. I just want to clarify some things that would help us make a comparison, an apples-to-apples comparison of this guidance because there are a lot of moving pieces. So on the adjusted EPS guidance of $4 to $4.20, does that include the recurring – PP&A accounting. I just wanted to clarify that. And then I also believe on the share count, you said the assumption is that's $177 million. Just wanted to make sure I heard that correctly as well.

Yeah, exactly. The share count is $177 million for all these. That's an annual number for all these purposes because of the the first quarter, you only have the shares outstanding from today on. So you'll have, but that's a weighted average share count based on our current calculation. And then the recurring PPA, right there on page 15.

Back to that share count, why don't you explain how that happens because by the end of the year,

we will get back up to the total amount which is more like what 193 million yeah so so the q1 outstanding shares are right now our our estimate is 130 million shares outstanding that's like a weighted average calc q2 three and four would be 193 million shares so you end up with an annual weighted average of 177 and then of course when you start again in 2020 you would be at the full 193.

Okay, great. And then on the PP&A?

Yeah, so the PP&A is, if you look at page 15, that's the very first column. That's the negative purchase price accounting amortization that is, you know, related to intangibles that we do amortize.

And what is the EPS impact, the negative EPS impact from that? Is it right around 70 cents or so?

Yes, exactly.

Yeah, I think that's right. Yeah, I have $0.70.

$0.70, okay. That's really helpful. And then I wanted to circle back to the synergy commentary, Ray, that you made. And I wanted to ask first, what's the assumption for synergies within the 2019 guidance? And then Also, if you could help us think about the annual cadence of these synergies. I think previously you had talked about them being more weighted towards the out years, years three and four, but is there potential that we see some of those synergies pulled forward as you've done a little bit more diligence on the business?

I think there's always potential. So you know our orientation is to always push, so we're going to be pushing our folks. to accelerate as much as possible, but our best look right now is about $20 million net synergy effect for 2019, and it will be obviously heavier-weighted toward the out years.

Okay, great. I'll leave it at that. Thanks again for the time. Thanks, Justin.

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

Hi, guys. Good morning. Good morning. And just talking on the broader digital platform, I mean, obviously a bigger area for you now, could you help us understand the implied growth maybe for 2019 and the out years and any color on the margin opportunity there?

So as far as the growth, We're gonna probably change a little bit going forward, Alison, as we transition from reporting purely on PTC to reporting on what Tim has defined as trend control to reporting on our overall electronics digital business, first of all. So our mix of products and our product capability and ability to address a market is gonna be a little bit different in the future compared to what it is today. So if we just look back historically on last year, we exceeded significantly our forecast in the PTC area. The reason for that was there were additional projects that came in to complete the overall implementation of PTC. There are still, hard to believe, but there are still projects that we're booking. They're small, single-digit numbers, but there still are a few projects that will yet come in, turnkey projects to implement PTC for commuter lines. But for the most part, the overall delivery of PTC has been completed. The system integration and commissioning is underway. Our focus for 19 and 20 will be on reliability, on supporting our customers to literally deploy across their total system PTC, so to obtain a safety case as well as full deployment. So a lot of the work is not going to be significant revenues in terms of of opportunities. It'll be more associated with service enhancements and support. But as we start to combine our capabilities, we have products like Movement Planner, Trip Optimizer, Road Control from the GE side that are already being used to interface with customers to address some operational efficiency issues. So there's a lot of talk across the industry about precision railroading. Our belief is that full automation is the ultimate solution to optimize precision railroading. So we're trying to work with the railroads to start to focus on fuel efficiency, speed optimization, and things like that. So we will have growth within our business. We believe our overall electronics digital business will grow this year and will be our highest growth opportunity in the future.

Great. That's awesome. Scott?

I'll just add that, I mean, we do expect growth to be coming from this segment. The combination of what the two companies bring together will really be an accelerator here for automation. And as I had mentioned, we see automation having the single biggest impact for railroad productivity, very much aligned with precision railroading and some of the efforts our customers currently have.

That was Tim, in case you didn't recognize him before. Thanks.

And then just lastly on transit, obviously a number of operational challenges in 18. Can you give us a perspective of where we are? Are those challenges behind us that we should have a smoother, better visibility in 19? Any color there?

The question raised is that transit, we've had a lot of issues in the transit business, and obviously, again, in the fourth quarter, low margin. Yeah, low margin, speak to it. And is some of that behind the question?

So thanks, Alison. I just missed the first part of the question. So the answer to your question, Alison, is yeah, we continue to improve our overall performance within the transit sector. We had, as you know, a lot of write-offs associated with large projects, particularly in the UK over the last two years. Those projects are starting to be completed. The largest one literally has just finished its delivery first quarter of this year. We've been able to, I was spent a week over in the UK at the end of last year and I'll be back over there at the end of this quarter to meet with every one of our customers. So, yeah, the business is under control. We're starting to close down those projects, and we don't anticipate any significant problems as we've experienced in the past. For the overall transit business, we still have a significant backlog, about $4 billion. We're in a good position. We've grown that business about two times market share on a worldwide basis. and the margins within the individual product areas are continuing to improve year on year, and we have productivity and operational performance objectives in place to accomplish that again this year.

Great. Thank you.

Thanks, Allison.

Our next question comes from Matt Elcott with Cowan. Please go ahead.

Good morning, thank you, and congratulations on closing the deal. Ray and Raphael, in 2018, I think your initial guidance for locomotive deliveries was 272, or actually it was 300, and you did 272. Can you give us an idea on what the difference to the guidance was? Was it timing of deliveries? And also, what's baked into your 2019 guidance?

So, as we look into 2018, what I'll tell you is we had a very strong 2018 with regards to locomotive orders. We closed the year with, again, a total backlog of $19 billion. I think it was different in that year. We've been able to get what I'll call multi-year service agreements and multi-year locomotive agreements, which really translates into a base load. that really supports what I'll call a strong foundation for growth ahead for us. We had deliveries of 272 units. Some of those delays were associated with the timing on which we started to deliver locomotives in India. I'm very happy to say we have been delivering already north of 48 units as part of that contract last year. And this year, just on the last couple weeks, we've delivered the first locomotives being manufactured in-country, including NAC6000, so moving very well as per plan.

And, Rafael, the number that's baked into the 2019 guidance?

Well, we have a strong growth in 2019. What I'll tell you is... When I look at our backlog, we've got more than 90% of the necessary coverage for 2019, which is a significant improvement versus last year. On the top of that, I'll tell you that our pipeline of opportunities, more than two-thirds of those associated with I'll call international opportunities, so we feel very strong about the year.

Yeah, we do not plan on providing an exact number for 2019 as far as locomotive builds. for various reasons. But I think that the general trend and the backlog and everything else gives you a good feel that we're counting on an increase, but we're not going to provide the absolute number.

Okay. And just a quick follow-up, if I could. If we just take a longer-term view in your forecast through 2021, obviously you're expecting strong growth in locomotive deliveries. Can you just talk about the different drivers of this growth by geography, and how much of this demand is replacement demand versus new demand?

Back to what I had told you before, I think we've been successful in getting multi-year agreements, which really build off on the demand from our customers. We currently have approximately 2,000 new locomotives in our backlog, And that's, again, I'd say a significant phase load for the years ahead of us. The demand doesn't stop with regards to new locomotive only. One of the things that I think I've highlighted is the opportunity for upgrade opportunities that we have. And we currently have in our backlog more than approximately 900 locomotives for modernizations in backlog.

Thank you very much.

Thanks for that.

Our next question comes from Scott Groot with Wolf Research. Please go ahead.

Hey, thanks. Morning, guys. So I wanted to just start on the core legacy Wabtec margins. It looks like you're guiding to around 13% for the year. I think when we talked last year, once we got through the transit contract issues that we'd be on a run rate closer to 15%. Can you help us understand the delta here?

So I think your 13th is a little low, but the increase year over year that we're expecting is really going to be driven by the fact that we have these projects which haven't performed so well Winding down, as Ray was talking about earlier, so as you replace those projects with more typical performing transit projects, you have the improvement. But the rest of the margin improvement is going to come from, as we expect, from our typical sources as we focus on sourcing opportunities that we already had in place or were in process before we closed this deal from from our lean efforts to drive costs out of our plants and our operations. And lastly, the benefits of some of these restructuring programs that we took charges related to redundancies or other severance or other asset combinations as we put plants together. So all those things add up to an improving margin profile for 19.

Yeah, and without a doubt, Scott, we're disappointed in the margins in transit in 2018, and it will be a focus point. We made great progress in certain business areas and not the progress we expected, but if you look at the freight margins, they really were maintained and improved, so that we're happy about. We're not happy about The margins in transit, and I can tell you that going forward, it will be a focus point along with the integration of these businesses.

Okay. Pat, in the slides, you've got recurring PPA and one-time PPA. Can you just help explain the differences? And then the recurring piece, that $200 million, how should we think about that number in 2020? 20. Is it still there? Does it go away? I guess it's just not clear to me.

Yeah, so that's our current estimate based on the valuations for purchase price accounting for the recurring. That is a multi-year number. Once finalized, it shouldn't change. It's specific to the additional depreciation expense on assets that have been fair valued on on intangible assets that have a life that we have to amortize to. So that number is a non-cash DNA that's going to have multi-year impact, and that should be fairly stable. The one time is related to the accounting rules that we have to step up inventory values closer to its fair value and on some of the value that we have to attach to backlog. This is our current estimate of what we think that amount will be and we'll turn over. Typically, that's a 12-month process as we consume, use, and sell the inventory we have on hand at close and we and we deliver the backlog that has value attached to it. So recurring is multi-year. Non-recurring should be around 12 months.

Okay, very helpful. If I can actually just ask one more, maybe for Raphael. So the long-term guidance on LOCO deliveries hasn't changed since May, and obviously we've got more rails doing precision rail running, so there's some sort of skepticism about that. Maybe can you help? You talked about multi-year agreements and the backlog. How much of that backlog is coming from outside of the U.S.? Maybe that can help us gain some more confidence in the double-digit CAGR and LOCO deliveries.

So I'm not going to give you the breakdown, international versus North America, but what I'll tell you is, again, when I look at last year, we grew our backlog significantly. And that backlog comes with multi-year locomotive agreements. We've got more than 90% of the coverage for this year. As I look into 20, we're also significantly ahead from where we were a year ago. And I'll just give you a number from a total backlog perspective for 19. We're north of 74%, which is at least six points better than we were a year ago. So it feels strong about 2019, and we're well positioned for 2019 with a strong pipeline of opportunities internationally. When you think of precision railroading, I think the other thing to keep in mind is there is continued demand for reliable and available power. So the fact that locomotives could get parked, there's still a demand for modernizing that fleet, which we're capturing on, And there is the opportunity to make sure you ultimately have reliable and available power running in your key corridors. And we're certainly capitalizing on those opportunities, not to mention all the discussion we had around automation, which really aligns very well with better performance, better reliability, and better fuel efficiency for our customers. So we really like how we're positioned here in terms of the next few years. and recurring nature of some of the services in our fleet. Very helpful. Thank you, guys.

Our next question comes from Matt Brooklyer with Buckingham Research. Please go ahead.

Hey, thanks. Good morning, and congratulations. Thank you. So I wanted to go back to the $250 million of expected synergies over four years. You had nice, you know, detail on the slide, but wanted to give this, you know, kind of a sense and more color in terms of how much of those synergies are expected from, you know, the cost side of things, and then, you know, how much of the 250 is potentially driven by, you know, the sales synergies.

Yeah, so Matt, the way I would answer that is that the majority of the 250 is coming from the cost side. We do have a little bit of revenue and associated EBIT that's been considered in the combination of the digital and electronics business. But typically, in our synergy plans, we have focused on cost. It doesn't mean we don't think that there's great opportunity in those digital electronics combinations. But for the purposes of this integration, we have focused on cost.

Especially in the short term, the cost items are what we would expect to see the synergies on. As we go further out, that's where the revenue synergies will kick in.

Okay, that's helpful. And just to clarify, year one expected synergies, I think I heard a $20 million net number. Is that correct?

Yeah.

Yeah, that's the number. Okay, that's great. Thanks for the time. Thanks, Matt.

Our next question comes from Sari Boroditsky with Jefferies. Please go ahead.

Good morning, and thanks for taking my question. So within freight, I know you don't want to give any exact numbers out, but could you just help us understand within different buckets between aftermarket, original equipment, and digital, kind of where you're seeing the highest growth for 2019 and maybe the lowest?

So we are seeing, again, growth across. When I look at the freight segment, we're seeing growth really cutting across all segments. It's certainly stronger when I look at our automation portfolio and when I look at the locomotive deliveries. But we're growing our services business. It's a business. So when I look at the former GE portfolio, it's going to be in the worth of $2 billion of revenues.

Okay. And then in your recent filing, there was a comment about the backlog being pushed out slightly. I guess, could you provide color on what caused that change and then maybe a little bit on how much flexibility customers have to push out orders?

Yeah. Well, you're referring to the latest – registration statements and had proxy and had pro formas and numbers in there. We did highlight that when you compared to those numbers that were originally generated over a year ago that there was some impact from some shifting of backlog. That's what you're referring to. So in terms of GE, that comes down to the customer timing, the estimated... the estimated moment where we think that the orders will come in, all those things factor in. I would emphasize that the backlog coverage for Wabtec and for GE going forward is at a very high level, and we're confident of those numbers.

Yeah, and I think it's fair to point out that when the initial forecast was given. That's almost a year ago. And all we're trying to do is we updated it on what transferred in the marketplace over that almost 10 to 11 months. And there absolutely was some movement of those orders that went from one period to the next and some change in the marketplace. But we still have the strong backlog and I think the One important statistic is the fact that right now Raphael talks about 70 plus percent of the is already coverage. So that's higher than he's used to seeing in the business.

I would just say in every one of our surf markets, that's a common phenomenon for customers for a host of reasons. to push or delay the start of new orders. It's really not unusual at all.

OK, that's helpful. So I guess, would it be fair to say that that was more of a function of the gut of the pro forma numbers being, or forecast being, I guess, a while away? And in the near term, you should see kind of less of that?

Yeah, I think so.

Thank you so much. Thank you.

Our next question comes from Mike Bowden-Fistel with Stifel. Please go ahead.

Thank you. I think you said that you expect your tax rate to be 24%. That doesn't seem to include any benefit from the tax advantage. I guess it's because it accrues to GE in the early years. Am I thinking about that right, and can you remind us of how that changes in the coming years?

Yeah, yeah. So the tax benefit is a cash-only benefit. It has to, you know, and not to get into accounting for deferred income taxes, but yeah, so it has a limited impact to the ETR and it's really only on a cash basis. The first, and you're right, the first few years that GE gets that benefit and it just comes through as additional consideration to GE. but then we would realize the benefit of those tax items on a go-forward basis.

Got it. And can you also talk about maybe the opportunity for putting more web tech components on a GE locomotive? I mean, do you see that as being more of just a vertically integrated solution going forward, and do you think much is going to change there?

Yeah, I think over time, Mike, that opportunity will come up. So For the existing orders that Rafael is currently filling with this locomotive, he obviously already has suppliers determined and fixed and approved by customers. But if you think about the $2 billion of aftermarket opportunities that he supports every year, there's flexibility to some extent in the supply base. So on a short term, I'd say the best opportunity is associated with the aftermarket and in the medium term on the new OEM business if he starts to bid on new opportunities.

So our installed fleet of 23,000 locomotives I think provides really a significant opportunity here to look at a channel to sell our combined portfolio. and especially internationally with some of the strong relationships we have, we see a very good opportunity to grow market penetration as we bring the two portfolios together.

One thing I would say about that is you can just imagine the benefits, efficiencies that you get when you're doing a complete system integration under one roof. You don't have communication issues in terms of understanding what the requirements are and expectations. You know, you have one team of engineers that are basically designing from the locomotive down and from the component up. That's a huge advantage and opportunity for everyone.

Got it. That makes a lot of sense. And maybe just since no one's asked it, can you give us a status? There were some reports in the recent days about labor agreements and so forth. Can you just give us a status update on those things?

Yeah, I'd be happy to. We've settled with all but one of the unionized facilities associated with GE's business. If you recall, we did not accept a labor agreement, so we've had to renegotiate all those wherein negotiations with the folks up in Erie. Our view is very simple. We want to integrate that workforce into our organization. They have an agreement now such that what we've committed was a two-tiered wage structure that would allow us to be competitive internationally that would not impact the wages of any of the existing legacy employees, and that's probably the biggest sensitivity that exists. So we're working through that with the union, and we believe we'll be able to settle that agreement hopefully in their turn.

Great. Thanks very much.

You're welcome. As a reminder, if you would like to ask a question, it is star then 1. Our next question comes from Willard Milby with Seaport Global Securities. Please go ahead.

Hey, good morning, everyone. Pat, if I look at the debt, the $4.9 billion, what's the current average rate on that? And as far as the split floating versus fixed, where do you stand currently?

I think the average interest rate on the whole debt is 4%. And... and then the split is roughly 60% fixed.

And you mentioned in the presentation the appropriate mix of permanent and prepaid. Do you have that percent prepaid number? And I've got to follow up to that one.

Sorry, ask the question again?

The amount of, I guess, prepayable debt that you mentioned in the slide 18, appropriate mix, permanent and prepayable.

Yeah, I'm sorry. Yeah, okay. So I'm going to say that we probably have – bear with me. I would say prepayable we have the $500 related to the short-term bonds, and then we probably have about $600 related to the line of credit. And then we have other maturities that are, you know, five years out.

Right, right. Bigger picture question now that you've got the whole of GE Transportation under the WebTech umbrella. When you look at all the business lines, does GE Transportation in its current, I guess, form make sense for WebTech to retain ownership of all those businesses, or are there opportunities to maybe find new homes for certain segments of GE Transportation's business?

Yeah, right now the portfolio fits ideally with the Wabtec portfolio, and it was really constructed in a way there's tremendous amount of synergies between the various groups. So right now we do not see that. However, you know, we're always looking for what our portfolio needs to be, and there will be a lot of effort over the next year of developing a – a strategy together that makes sense for the combined business.

All right. Thanks, gentlemen. I appreciate the time. Thanks, brother.

Our final question comes from Steve Barger with KeyBank Capital Markets. Please go ahead.

Hey, good morning, guys. Just a follow-up. Ray, you talked about this being an attractive point in the cycle, and the industry saw nearly 100% step up in rail car orders in 2018 versus 2017, which makes for a tough comp this year. But do you think rolling stock is further along in the cycle than locomotives in North America, or just how do you compare legacy freight versus locomotive right now?

I think it's a little bit like what Rafael said. I think rolling stock is – a little bit ahead of locomotives, but then you have to get into the details and granular definition of rolling stock. So there's different trends for different types of cars right now, as you know, Steve, and right now we still have a significant backlog. We have within our plan, our budget for this year, a significant increased 18 to 19. So far we're seeing that and hopefully it's going to continue throughout the year. Included in that are international growth opportunities. So more and more rolling stock providers, North American providers are setting up shop in international communities. We're following those folks and supporting them, partnering with them. In addition to our North America growth, we have growth opportunities in the international side.

Understood. Thanks very much.

Thanks.

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

Thank you, Sean. Well, we appreciate everybody's attention this morning, and we look forward to talking to you or seeing you over the next weeks and months. Thanks very much. Have a good day. Thank you.

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