Q3 2019 Earnings Call
Good morning, welcome to the web charts Corp's third quarter 29, <unk> earnings Conference call.
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I would now like to turn the conference over to Kristine Kubacki, the VP of Investor Relations. Please go ahead.
Thank you Debbie good morning, everyone and welcome to watch <unk> third quarter earnings calls with US today, our president and CEO Raphael Santana CFO , Scott do again and corporate controller Donna fillers.
Before we start I'd like to point out a change to today's call based on feedback we receive from you and our desire to drive continuous improvement will be sharing a slide presentation support our discussion today during today's call. This presentation, along with our earnings release and financial disclosures are posted on our website earlier today and can be accessed center in.
Mr Relations tab.
Okay core dotcom.
Some statements were making today are forward looking and based on our best view at the world and our business today.
More detailed risks uncertainties and assumptions relating to our forward looking statements. Please see disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully I do you consider these metrics and now I'll turn it over the call it's around here.
Thanks, Christine and good morning, everyone. Thanks for joining Josh.
Today I'll share some thoughts when our third quarter performance and strategic priorities for the remainder of the year.
Got it will go over the quarter in greater detail.
Well I was an overview of both far freight and transit segment.
And to overall market dynamics I as you can see on flight to your presentation. Our third quarter results were on track and we're well positioned to deliver different junior strong performance, which sales of over $2 billion due to strength in our service businesses.
Continued growth in our international markets as well as the transit segment.
Our aftermarket offerings, they choose to be stable and profit parts of our portfolio as well as a key differentiator how's your partner with customers over the life cycle at the airport bench.
You teach our successful modernization program, which goes to a significant milestone which was a first of a kind international March order in the third quarter. We have also seen golfing trends itself aftermarket sales, which contributed to the overall trends it sales growth year over year.
In line with BARDA goal to drive continued margin expansion.
We saw improvement in our adjusted consolidated margins as a result out of our air freight mix you an aftermarket.
Along with early traction on our synergy and cost actions.
We will continues to take action funny pre project execution, and we remain laser focused on the prioritization of resources.
Good and capital allocation.
Cost reductions and synergy actions stemming from the Watkins eutrophication merger are also had a plan.
Issues get resolved several actions, including a reduction of direct I mean direct spend they approached to consolidate over a million square feet across amorphous silicon footprint and the discontinuation of several shared service contracts with GE ahead of schedule I.
I'm encouraged by what we have accomplished so far and we remain confident that were will deliver a totaled $250 million in synergies before 2022.
Finally, we continue to deliver strong cash generation in access of $120 million for the quarter use was largely driven by higher financial performance is strong cash execution will allow us to drive increased shareholder value, while reducing our debt.
Creating the flexibility needed to fund organic could all acquisition stock buybacks and dividends.
Based on our third quarter performance important backlog.
Our assessment of key markets, we are affirming our cash flow from operations guidance for full year of approximately 900 million and we're narrowing our adjusted EPS guidance today, hi around of the range to between Four Q1 5 afford 20.
With that I'll turn it over to bad will provide you a deeper dive into the financials.
Thanks Raphael.
As you can see from our press release. This morning, we discussed both GAAP and adjusted numbers. So we encourage you to review the reconciliations that have been provided.
We continued solid momentum into the second half of the year and delivered a strong operating performance the third quarter.
We updated our today our guidance for sales.
Adjusted income from operations adjusted EBIT da adjusted EPS and affirmed gas GAAP cash flow from operations further illustrating that our business is performing well.
So turning to page four of our slide deck sales for the third quarter were $2 billion adjusted sales were about 2.1 billion.
Which includes the effect of accounting policy harmonization.
Increase jails year over year were mainly due to the merger of GE transportation.
And increased revenues in transit offset somewhat by foreign exchange impact.
As well as lower sales for railcar components electronics.
For the quarter operating income of 169 million and adjusted operating income was 317 million.
Driven by favorable OE mix.
Going out in locomotive services and the timing of the policy harmonization.
Adjusted operating income, including 63 million for non cash policy organization.
Just did with our estimates in our original guidance at the close of the GE transportation merger.
But adjusted operating income excluding pre tax expenses of 85 million.
Detailed as follows 69 million for transaction restructuring litigation costs.
16 million for onetime noncash purchase price accounting charges.
Please see our reconciliation table for the details.
In addition to these expenses. The company also had pretax expenses of 71 million for 28 cents an earnings per share for non cash was occurring purchase price accounting charges.
They were not added back to the adjusted income from operations.
So looking at some of the other detailed line items.
DNA was 292 million, including 40 million of 85 million in expenses I just discussed we expect the adjusted run rate number for SGN H.B. about 250 million per quarter going forward.
Engineering expenses increased to 59 million due to mainly the addition of GE transportation.
The amortization expense was 80 million.
Going forward, we expect the amortization expense to be about 70 million for quarter.
Now looking at our net interest expense for the quarter was 58 million it was higher due to.
Our debt balances or adjusted net interest expense was 54 million.
Going forward, we expect interest expense to be about 55 million per quarter.
Just remember that is a priority and a focus we are we are intent on generating cash to reduce our debt and our interest expense.
Income tax expense was 23 million, excluding that the tax benefit from the transaction costs of the truck transportation merger adjusted income tax expense was 67 million for adjusted effective tax rate of about 25%.
Third quarter EPS, we had GAAP earnings per diluted share of 48 cents in adjusted earnings per diluted share of a dollar three.
So to reconcile the third quarter earnings per share you can see the detailed in our press release, but just to recap we have gap.
S a 48 cents.
Add back transactions restructuring and litigation costs of 28 cents.
Include the policy harmonization, harmonization, which adds 25 cents.
Add back the onetime noncash PVA of six cents.
And then.
Reduced tax expense or adjust for tax expense for non deductible tribe transaction costs of four cents, we end up with an adjusted EPS. Excluding these items of a dollar three.
[noise] and end to end to remind me. The company also had an after tax expense of 28 cents per diluted share some noncash recurring purchase price accounting charges, which is we've not added back to the adjusted EPS is included in the GAAP numbers.
[noise] EBIT da which we define as income plus off from operations plus depreciation amortization was 292 million and adjusted EBIT da was 440 million.
Adjusted EBITDA included 63 million a policy harmonization, but excluded the pre tax expense of 85 million, which we for previously discussed.
Depreciation was 43 million versus 18 million a year ago quarter. The increase was due to the GE transportation merger and for the full year of 2019, we expect depreciation to be about 155 million.
Amortization expense with 80 million compared to 10 million in last year's quarter. The increase was also due to the merger.
For the full year 2019, we expect amortization expense to be about 245 million.
At September Thirtyth are multiyear backlog was 22 billion and our rolling 12 month backlog, which is a subset of the multiyear backlog was 5.7 billion.
Just to know the impact of foreign exchange on our total backlog number from last quarter was roughly $200 million.
Now turning to our segments I'd like to discuss the the market conditions out walk along with the segment results in more detail.
In the freight segment of our business performed well despite challenging conditions in North America.
North American carload volumes were down about 4% in third quarter and are down about 3% year to date versus last year driven largely by.
Certain macro conditions that have led to a drop in intermodal traffic and declines in critical commodities like coal and <unk> agriculture.
We continue to expect carload volumes to be down mid single digits versus last year and forecast the railcar filled to be in the low fiftys for the full year.
These assumptions are included in our guidance for the full year.
Precision scheduled railroading more PSR is having some effect on new logo orders, but continues to be offset by our modernization program.
Aftermarket service book.
We continue to work closely with all the class ones to understand their current fleet strategies and remain confident that our business model is the technology leader and critical digital and service provider is very much aligned with driving efficiency and productivity for our customers.
Across our international installed base, we continue to see strong opportunities for growth, including regions like India.
Where we will be delivering over 100 locomotives. This year is part of our 1000 locomotive contract.
And our testing to 6000 horsepower locomotives that is expected to enter revenue service center.
Across the freight segment adjusted sales increased to 1.3 billion in the third quarter.
The increase was due to the that GE transportation merger again, adding about $1 billion in sales.
Ganic sales decreased 45 million, primarily due to lower sales of freight car components and electronics.
The segment operating income was 148 million and adjusted operating income was 256 million for an adjusted.
Margin of 19%.
It is important to note that aftermarket services historically peak in the third quarter for the railroads as they prepare for winter.
Therefore, the fourth quarter is usually a lower seasonal quarter for aftermarket services.
Which presents a mix in headwind.
For the segment. We have included we haven't baked this into it we have baked that into our fourth quarter assumptions.
Finally, the segment backlog fell slightly from last quarter to 18 billion due to timing of locomotive and modernization orders.
Looking in the in the trains and sector, we continue to see steady growth in ridership an organization.
Aging fleets across Europe , and the U.S. need to be upgraded presenting unique opportunities for growth.
And increased broken infrastructure spending and emerging economies like India is driving tremendous growth opportunities for our business.
Across our segment portfolio, we affirmed multiyear backlog that will contribute to our growth.
Great that segment sales increased 3% to 706 million driven by growth in OE sales.
The increase was due to strong organic growth of about 44 million acquisitions, which contributed about 2 million.
Which more than offset the negative impact of foreign exchange.
Which cost 26 million.
This is the eighth quarter in a row, we've seen organic sales growth, which shows that our near record backlog continues to drive multiyear topline visibility.
Segment operating income was 56 million for an operating margin of 7.9%.
Excluding about 11 million in restructuring costs. The adjusted operating margin for the segment was 9.4% and improvement of about 20 basis points from last year.
We know we recognize that we must do better and segment margins and the team is focused on driving margin improvement with prudent project selection improved project execution and cost reductions.
With these efforts underway, we remain confident that transit segment margins will improve over the Companys strategic planning period.
Excluding the impact of foreign currency overall transit backlog is down slightly but still stands at near record highs.
Let's now turn to the balance sheet and our cash flow on page five of the presentation.
We generated cash from operations of about 124 million, mainly due to the higher financial results.
It's worth noting that in the quarter, we had about 40 million of cash outflows related to transaction costs included in the results from cash cash from operations. So included in the cash from operations.
Working capital at September Thirtyth had receivables of about 1.7 billion.
Then Tories were about 2 billion in payables were 1.1 billion.
We expect improvement in our working capital performance going into the fourth quarter.
Just to note our receivables included Unbilled receivables of 460 million, which were more than offset by customer by customer deposits of 671 million.
At September Thirtyth, we had 587 million in cash and cash equivalents, mostly held outside the U.S.
Total debt.
Was about 4.7 billion and net debt to adjusted EBITDA of about three times.
Our debt and cash levels at the ended the quarter were impacted by that the timing of cash received late in the quarter and the timing of our debt payments. However by year end, we're still targeting a net debt to adjusted EBITDA to be about 2.5 times.
Our capital expenditure in the quarter was 51 million compared to 25 million a year ago. The increase was due mainly to the merger.
We expect to spend about 200 million in in 2019.
Overall, our balance sheet continues to provide the financial capacity and flexibility to invest in our growth opportunities in our goal is to be an investment grade credit rating company.
Now, let's shift to the 2019 guidance for a minute as illustrated on slide six and I will turn call back over a threepl. Thanks Pat.
Based on our third quarter performance, our current backlog in our assessment of conditions, you NRT markets our guidance for adjusted sales is about 8.2 billion.
Adjusted EBITDA of about 1.6 billion adjusted income from operations of about 1.2 billion and adjusted earnings per diluted share could between Four Q1 5 to 420.
And we maintained our GAAP cash from operation guidance to be about 900 Melanie.
I also want to emphasize that we expect to see a normal positive seasonality and the cash flow generation in the fourth quarter.
Despite some uncertainty on the end markets. We continue to focus on controlling what we can end up by delivering and executing on our commitments for 2019, it's about accelerating our cost actions and synergy us into the year end.
The adjusted guidance includes that back related to noncash accounting policy harmonization, but excludes estimated expenses or did you transportation merger for transactional restructuring and litigation costs as well as onetime purchase price accounting charges.
Excluding these expenses our adjusted operating margin target for the full year is about 14% and our adjusted effective tax rate for the full year is expected to be about 24%.
I'd also like to point out that our adjusted guidance includes after tax expenses of about 88 cents per diluted share for noncash recurring.
Purchase price accounting charges.
Waterworks, we're not adding that back to our adjusted EPS guidance.
And as you model for next year any add backs from policy harmonization wont be repeated either.
Finally, we plan to all Star Analyst day in the first quarter of 2000 play we're locking down the specifics for Daddy Van and we will share your more details when they're available.
So what's your plan as soon as your words throughout the morning.
And you see on page seven Wabtec has had a solid performance in the third quarter growth in our aftermarket in services revenues demonstrates the importance of our significant install base, a cross really bulk freight and transit and the resilience of our portfolio.
Cost reductions and synergies stemming from the wants that can do transportation merger, our on targets and we fully expect to deliver a total of 250 million CMC interviews before 2022.
Second we are delivering strong cash generation, which continues to place the company in a position of strength.
And we are poised to deliver significant shareholder value, while reducing our data and creating the flexibility needed to fund future organic and inorganic up.
We remain confident on our cash flow guidance for full year of approximately 900 million and we're updating GAAP EPS guidance to be between Q five into town and we're narrowing our adjusted EPS guidance to the high end of the range between for 15 and for 20.
In addition, our.
Our significant installed base across the freight and transit markets along with our globally diverse business model provides a strong foundation for long term growth.
Finally, we continue to make solid progress on our integration efforts.
Got it or we have a strong team committed to perform.
We're building a culture really focused on execution and accountability and we're seeing that execution our results.
With that I hope you have about ourselves for what we're seeing across the company our strengths our challenges and our strategy for moving forward now we're happy to take any questions you may have operator.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys.
Try your question. Please press Star then to.
At this time, we will pause momentarily to assemble our roster roster.
The first question comes from Justin Long with Stephens. Please go ahead.
Thanks, and good morning.
Good morning.
So maybe I'll start with that question on the North American freight aftermarket business.
Is there anything you can give that that could help by size up that business today and as we think about the recent underperformance we've seen in rail volumes.
You can speak to how that business has performed in line of that and what you're kinda baking into the guidance or your thoughts going forward.
Okay.
A couple of thoughts here number one we're certainly feeling very impactful for carloads being down.
Over 3% into year also the elements of all of our thanks.
What I'm happy to say itself, we've seen strengthen our business in both transactional parts.
Multiyear service agreements, especially in international markets, where I look more fleets continue to grow and not to mention our mods program, which I think you heard me talking about our first quarter internationally, which appears to provides a significant opportunities moving forward.
It's a we like the portfolio we have been.
In North America, especially when you think of our digital and electronics portfolio. We feel like we have strong products to help our customers job you more efficient a win on fuel efficiency and.
I think.
We're progressing on that.
Okay, Great and then on synergies it was good to hear the update there.
I'm, assuming that you're seeing that number ramp over the course of this year, but could you maybe share what.
What you're assuming for synergies in the fourth quarter and if there's any initial thoughts around 2020, and that's that we could see next year that would be helpful.
Yeah, So just leases pad the.
We're still on our guidance of net synergies of about.
20 million being realized for the for the full year of 2019, there's a lot of activity that's ongoing related to.
The cost to achieve those synergies and how that how there. They are impacting us were very confident that the that that 20 million that will be realized in the.
And in the current year, and we're taking steps to in some instances too.
To take the extra.
Effort to see that we can accelerate those synergies into going into next year, where we're not going to give a lot of guidance at this time about the.
Synergy plan, but we did say that we feel very confident of the 250.
For 2022, and and continue to update people as we get into more for 2020 guidance and our investor days.
Okay, but from a high level would it be fair to say in 2020, you'll see that.
Kind of year over year step up over the course of four year implementation of the synergies.
Yes, just a if anything since I started so I feel we got more confident about our ability to drive improved in our margins where are seeing an acceleration on synergies we do expect that.
Go into 2020, I think you've seen a number of job plant consolidations that we've announced in addition to that's where I'm certainly, making the necessary adjustments for the business as we face anew realities.
Okay, Great I'll leave it at that thanks for the time.
Yes. Thank you.
The next question comes from Allison polymer with Wells Fargo. Please go ahead.
Hi, guys. Good morning Marina morning.
First I want to talk on transact.
Margins have sort of been in a sub 10% range you're buying back next last year.
Hi Tech was historically, you probably get it you know well above that theres nothing structural that you're seeing I understand there's nothing challenges. There that you guys want to be able to get to that back to that range.
So Allison a couple points number one back to the comment I made it before if anything I'm really confident about our ability to drive the margin improvement and I've got to break that into two fronts I think on the transit side a million and the team. He has added some on the old.
Leadership, and putting a new CFO , Paul there being a lot more selective in terms of the quality of the order intake and job, they're Shaw really increased accountability in the business to make sure we can choose to drive improvement.
From no doubt so too has delivered margin. So I think currently day. So some progress one way to go in that business, but we're confident there on a GAAP.
The freight side or the house I think we are really accelerating a lot of synergy actions, we're starting to see some of the benefits that mentioned a 20 million of not synergies we've guided for the year, we expect to exit the year had of dots and realized.
Greater synergies into 2020.
So I I would add to this is that the transit businesses is also part of the the overall.
You know synergy plan in restructuring and and if you look at the at the margins kind of on a quarter over quarter basis, I I feel good we're showing.
The positive trend.
Quarters that there are improving and and a in the momentum going into the fourth quarter into next year will will really start to show the the benefits of those actions.
Great and then he went and also mentioned the decline in electronics and the freight side any color you can buy is there something you need going on at least anywhere.
So a couple points so number one if you're too.
Looking to our sales these shares versus last year in the fourth excludes specifics like BTC you'd see a business that still is slightly growing a one thing, but feel oh really.
Positive and constant news, our ability to get all our orders and so far year to date, we're seeing opportunities to consistently do that as we go into 2002 way.
Hey, Thank you.
Thank you.
The next question is from Jerry Revich with Goldman Sachs. Please go ahead.
Yes, hi, good morning, everyone. Good morning, good morning.
I'm wondering if you could talk about the.
Puts and takes around the GE transportation performance in the quarter it looks like the organic growth slowed to about.
2% from better growth on a pro forma basis in the first half is that just timing.
Deliveries and that I'm also wondering if you could just expand on that 63 million dollar noncash policy harmonization point, just help us understand better too so we get comfortable with with that backed and lack of Dragon 20.
Okay, well, let me start here first a couple of points to take in consideration that third quarter. What he saw their areas. So when you think of locomotive thought weapon freight if weapons that number came down in the third quarter in terms of the shipments and that's very much tied to timing of project. So expected at the same.
Time, we saw because one revenues with regards to freight services segments and that's associated with that seasonality. That's very much expected as railroads, a really facing to some of the preparation for implement water. So those are certainly two elements that have impacted the non.
But it would have to moderate variation associated with a pause for harmonization up that's why don't you settlement on dot. So so they have the policy harmonization. The majority of that number is really related to revenue recognition policy.
And really represents a bridge from.
The the to the legacy business to where we are today. These numbers are very consistent with what we included in our original guidance. It at the date, we closed and and even with some of the numbers that were provided in the merger documents and the pro forma in the proxy statement. What it really represents is a is a.
Business processes for the GE transportation used related to there.
To their service contracts, where.
The team with focus on getting more efficient.
If you want to use the word lean lean out some of that the maintenance projects to two to understand what costs need to be incurred or not or don't need to be incurred how we can do a more efficiently how we can apply.
You know better productivity better sourcing.
More stagger some of the costs related to the projects and us in a manner that would.
I would be beneficial and take a a cumulative catch up adjustment related to those efforts the way they will manifest for us on a go forward basis is better profitability in those projects in the future years, you know that profitability will be real cash earnings.
And.
And ER and will show in the in margin expansion for those particular service contracts and in each year as we do our planning. So again, it's very consistent with what we've provided before it's a it's a number hasn't changed hasn't grown the seasonality matches, the underlying business process and in my mind.
And really represents the opportunity going forward and both are our profitability and cash.
Okay.
And then the million dollar the million square foot reduction in combined capacity can you just talk about where that is relative to.
The longer term targets, how far along are we in the facility rationalization phase and what are you folks learning as you had to.
The process.
In terms of.
ER positive and any negative surprises as you consolidate footprint. Thanks.
I think at this point so most of the announcements are really began around North America and you expect that to be a very much done within the early parts of next year.
These are schuff continues to be opportunities out there who will cost continued to be a working on I think another element to be mention.
Year to date Revalued at 84 office locations that were previously occupied and we're on track.
Blacks, it's close to 100.
Office locations by year end, so that's a very much on track and we'll continue to look into the elements of driving further efficiency with a combined portfolio. So we have.
Yeah, and I apologize, but part of the question any significant variances versus the initial plan.
It's beds, and it's being executed positive or negative.
No larger consolidation so now I'd say if anything we're just really working to accelerate some of these elements. So we can capture a more value earlier.
Thank you.
The next question is from Matt Elkott with Cowen. Please go ahead.
Good morning, Thank you.
Good morning, I felt we see if we see a.
Got it.
1% to 2%.
Traffic growth on on rail in North America next year off of a very low base this year.
What would that mean for your organic freight aftermarket business in North America Directionally.
Okay, well couple points here number one oh.
Stay up.
Turning to away from providing specific guidance in 2020, and I'd be careful with speculating on some of those changes translating immediately into the business because you do have a number of locomotives.
Part so there are shut that elements in place.
So what what I'll tell you is we're seeing a very robust international business, we're growing our fleets internationally, when we look out to elements of our.
Transactional parts and multiyear service agreements, we see growth on Bell, such you segments, and it's far to really partnering with customers for better outcomes and their fleets and element of reliability, but elsewhere and elements of efficiency as they.
The forward.
Okay.
That's helpful.
I mean, given given the current environment in a in in North America, and the pockets of opportunities internationally is that the plausible that you could grow earnings next year.
Again I'll not at this point still provide specific guidance in 2020, but we when we look at the opportunity to five lines, especially on though owned equipment side of the business I'd say about two thirds of that's coming from our international opportunities when you think of HM.
South East Asia, those are really a up part of an important growth dynamics for our business and we're tracking on number of projects into their next space and so we feel we have a strong backlog, which really provides us a visibility into more.
Sure. So as I mentioned before last few years, I think recapture a number of multiyear orders, which provide us if it's built into the next couple of years and so we feel strongly about dot it's very much the case for both the transit and the freight segment.
Got it and then just one final quick question on guidance this year.
So this whole year, we've seen rail traffic declines become more and more pronounced.
Our implementation going out according to plan, if not better actually helped by the weak traffic. Meanwhile, you guys for that for two consecutive quarters have either maintained or.
Lightly improved your guidance for the full year. So can you help us understand how youre able to maintain or slightly improve your guidance in the face of a worsening environment did you maybe start off with that.
Actually conservative guidance or.
You know I'm, just trying to kind of bridge that gap between whats happening with the environment and the fact that you your guidance has remains intact.
I'll start first I mean, I agree there's an element of controlling what we John and we've been really strong on taking the necessary actions to adjust our business proactively to new realities I think there's an element of the synergies in the framework, we've laid out earlier on and we're certainly taking advantage.
With that in terms of accelerating das and Wi.
We feel a very strong about installed base, we have the ability to really partner with customers and supports job outcomes. Our international fleets continues to grow and we're seeing some of those numbers coming through in terms of our transactional parts in terms of our multiyear service.
Agreements and I wouldn't genre estimate your skus strength of the portfolio in terms of not just elements of each national but when we look at Oh, just a diversity of the portfolio to better navigate cycles than we've ever had before.
Great. Thank you very much.
Thank you.
The next question is from Scott Group.
With Wolfe Research. Please go ahead.
Hey, Thanks morning, guys.
Want to start on the gross margins, 34% in the quarter we haven't.
I don't know if we've ever been there before.
Can you just talked about what's driving that and how sustainable. It is how you think about gross margin going for.
Yeah, Scott I mean, clearly it's a the quarter is.
Got some benefits from the mix of sales you have a higher mix of aftermarket sales, especially in afraid area and.
And the.
Coupled with the.
The policy harmonization I think it it really just lends itself to a at.
A really good margin performance here.
You know.
It's a so that that mixes the is the biggest impact.
So the to the extent, we think that are we.
Doctors continue.
You think that 34% gross margins sustainable.
No I think I think when you kind of take a step back you really need to to look at that you know that full year.
View of of sales mix, you know, we're going to probably for the full year get back to our war historic mix of about 40, 45% Oh we.
60, or 60 60, you know.
60% to 55% on the aftermarket side.
That's that's kind of our traditional mix of sales for it for a full year period and when you have we have that.
You know that kind of traditional mix, you're getting enough of the margins that are pretty consistent.
With.
Our guidance I, just think that are our third quarter, just ends up being over weighted to the aftermarket the OE side of our business for Q3 is the on especially in freight is somewhere around 30%.
Okay, well I get you don't want to talk about 2020 up maybe can you just help us with some of the accounting puts and takes that we should be thinking about for both from an earnings standpoint on a cash flow standpoint, and then have you guys made any decisions in terms of guidance next year, if it's going to be.
Adjusted earnings or cash earnings guidance just.
Visibility that yeah, no I mean, we've obviously.
And going through our IR strategy and and talking about how we how we cast and describe the business to the to you and others and we're we're going to moves more of a cash EPS kind of.
You point, obviously this theres a lot of pluses and minuses and in the in the results. It's a little gets a little bit noisy.
So we really want to try and simplify it by going to a cash EPS goal and then and then also take these accounting harmonization type things and really step back some of them because we're going to we're going to be honest on it on a policy, we're going to have a and approach and that is combining consistent across.
Ross The company and we'll just the include all those kind of.
Aspects of accounting into our guidance. So so think of it as a as a including all the accounting harmonization type things and.
Adding back for the.
The noncash kind of expenses that have occurred as part of that the transaction.
So what are the specific sort of.
Puts and takes for next year from a cash flow standpoint.
So so when you mean puts and takes for cash flow I mean, I think I think that you're going to end up.
I want to get into it I you know we agree that we don't want to talk too much about 2020, yet, but but I think that you're really a.
You know kind of describing if you look at the full year impact of these there's this thing so not including the a the policy harmonization, but not including.
The impact of the.
Recurring P. P. I think those are the kind of aspects of a modeling that we should consider.
Okay. Thank you.
Thank you.
The next question comes from Chris Wetherbee with Citigroup. Please go ahead.
Hi, guys, James Fronda going on for Chris One that's about the relationship between rail volumes and great revenue should we expect.
The your revenue to improve lockstep fun rail volumes improve or should there be a lagging between it.
And also if rail volumes continue to decelerate should we expect revenue your revenue growth to decelerate as well.
I think there's a correlation but they're certainly going to be an element of the lag, especially when you take into consideration. The number of park assets. There are currently out there Ah that's of course will affect alternative to think just about our services business, which will fill that anymore.
Direct way.
Got it but I also wanted to ask about the locomotive backlog can you give us an update there.
Last quarter was 1900.
Locomotives, and 800 months' [noise] or would that be now what's the international mix sort of trying to get an understanding of how it's changing interest cancellations things like that.
So from that number I'd say from that combined number.
The counts have come down.
Right around 3% and that's where we stand it and you've got about a very much say, a 50 percents of doubt backlog.
Sure I should say too because of that pipeline tied to international.
And about Kurt tied to North America.
Thank you.
Thank you.
The next question comes from Steve Parker with Keybanc capital markets. Please go ahead.
Hey, good morning. Good morning, do you have from the operating cash flow 900 million, which includes the 100 million or merger expense as we think about organic growth trends next year and synergies and working cap initiatives should we think about that as a target to achieve for next year or more of a Florida build on.
[laughter] it sounds like 2020 guidance to me, but yeah, you know I think the cash flow I think the cash flow.
View is continues to be strong I think you know we've talked a lot about some of the headwinds, we where were reality for the for the company as we as we combined I think it's you know I think with all cases, our target our expectation is that it could do better and so you know that 900 is.
With that type of EBITDA profile that we we provided in the on previous communications with which would indicate that it's.
We have real opportunity to improve upon it.
Got it okay, and just going back to your comment a few few minutes ago about looking to more of the cash EPS outlook. I mean that you have any sense of non cash amortization on the income stand right now so in that framework you'd be adding that back in terms and trying to get people to think about earnings profile in that context right.
I think so I think it I think it would be a you know very useful and I think it.
It goes well with that.
The EBITDA profile of the company and that's that's the plan so we're going to.
Go forward and that in terms of a 2020 guidance and describing the business.
Yeah, we include that in the.
In the numbers right, so nice step up from that.
As we think about the impact of integration synergy in the transit projects you mentioned in and their prepared remarks, you expect to drive more margin expansion from freight or transit next year.
Oh, we're certainly drive swing to a well margin expansion on both segments.
I think we're coming from Australia low base on the transit side. So we do expect a.
A broader shot of opportunities there, but it goes for both stagnant.
Yeah, Okay, and just one last one one of the cash outflows from the transaction roll off or we about done without or will we be done in calendar 2000.
Yeah. So so in terms of transaction costs. Some I think we should be pretty close to having most of those are paid here in the in the third quarter. We still have some restructuring costs that will will incur some cash some non cash.
We'll we'll be updating on those type of things and also cash to achieve or synergies will be baked into the into the into the guidance.
But you know I think that the vast majority of transact specific transaction costs like a.
Fees and professional fees and banker fees things like that have been a have been taken care of.
Right.
Thanks for the time.
Thank you.
The next question comes from Matt Brooklier with Buckingham Research. Please go ahead.
Hey, Thanks, and good morning, or any good morning.
The restructuring charges transit or.
[noise].
So we as part of the consolidation of the.
Of.
Some of the operating facilities. The you know we talked about the consolidation of.
About a million square feet of operating facilities that did have some impact on our trends transit businesses.
The the costs incurred on on moving some of that work.
It really is transaction costs that restructuring costs, rather that we that we included any add back.
Okay, so related to the merger integration process.
Going on absolutely I mean, we have we have we have facilities that but that you know.
Do both yeah exactly they do both a transit and freight work and a and as we consolidate them there's impacts the to both sides of the segments. Okay got it good to hear and then I'm going up I'm going ask about G. You know a little bit differently Rafael <unk>.
As we look at the business now what percentage of revenue.
As being derived from North America, and then you know what percentage of revenues being derived from you know.
International businesses.
I think are we continued to see international with golf tend to be up more than 50% of our business and as we look to sue I called the pipeline for growth, especially going into two when you've got wants to be a more robust pipeline in terms of daughters case.
Okay, so the more tailwinds and headwinds.
Let's say 55, 60% of the business.
Going forward.
The balances is North America, and it's it's pretty clear that you know, we had more headwinds and tailwinds in that business right now.
Yes, softer from a north America perspective versus internationally.
Okay, and then you've talked to you know the modern ization of locomotives that it sounds like its.
It's a growth business I think you.
Quantified it loosely is you're going to be doing a couple hundred.
Those units. This year is there any way to maybe give a little bit more color in terms of the magnitude of Modernizations and you know is that going to be or is that it can be a tailwind.
As we look so.
And that's one of them.
I think we have the opportunity to make God continues tailwind for US I think we spoke about the opportunity of the modernizing installed base and I think you order we got in the third quarter. A internationally is really the first one and I would certainly have.
A large installed base internationally to build from so I think with done Dot for North America, It's an opportunity moving forward.
Okay. Great appreciate the time thank you.
The next question comes from Terry Boroditsky with Jefferies. Please go ahead.
Huh Okay.
Hi, good morning.
Right.
Yeah last last call you talked about strengthen your mining business can you update us on what you're seeing in the mining industry will business today, and maybe expectations Glenn Cohen.
Well I think of the mining business I think were country to see a robust a I'll call services softness for upgrades Theres certainly a lot of changes on that market right now and so there could be elements of Oh softness as you go into 2000 twice that so.
I.
I wouldn't be same or not.
Hey, guys and then related conveying too much color on locomotive deliveries, but can you help us understand if you think about Tony Tony just seems like it's really tough comparables in the class one side of the business can you ask that these with international deliveries.
Sure I think a number one as I mentioned before I think we've got about a third of the pipelines probably associated with North America chew towards associated with international opportunities I think it's very important. The fact that we have multiyear orders that especially a work and of course the last.
Couple of years that provides visibility into.
Next couple of your shop for the business and that's true for folks to freight and transit side of business.
Okay, and then just one last thing just to ask well differently on the time policy harmonization you have a 115 million dollar benefit sales today is that all reversed out in 20 Tony.
Yeah.
Exactly so when we get into the guidance next year, we will not be taken any any of these as add backs or adjustments there will be included in our guidance.
But it will be a headwind to sales for next year. Since there are included in 2018.
Yeah, well it does I think the way to think of it is is it will be a headwind to sales, but because you know the process. The way. It was handled in the past was supposed to book. These these kind of cumulative adjustments for these projects, where it'll be a benefit or a tailwind will be the fact that it will result in in real margin expansion.
Not nearly as much because it's it's really kind of within the quarter as incurred in real cash, but but it'll be a it'll be a tailwind as these projects or what we execute on these projects and get the benefits.
No I appreciate that I'm, just trying to understand that 29 teeny tiny tiny.
<unk> revenue and Uh huh.
Thank you so much for taking my question. Thank you.
The next question comes from Ken Hoexter with Bank of America. Please go ahead.
Great Good morning, Rafale patent Christine.
I guess to revisit.
Scott's questions earlier on the on the margins, but maybe just to take it to the freight side a little bit more direct you mentioned that there is some mix impacts in the third versus fourth quarter and you expect the margin impact can you quantify that I guess shifting into the fourth quarter and I guess really looking for what's the margin pull back you're you're you're expecting because of that.
Yeah. So I think I think we talked about where we think that margins will be for the full year and it'll be roughly the 14% that we talked about.
And you know, what whereas whereas the mix, whereas the.
How does manifesting itself as you know rehab tyro, we deliveries on the on.
The on some projects for logos and and other and other OE projects, which is in and we talked about the fact that the the third quarter, especially for freight logo services is probably always the strongest part of our.
Strongest season for that at that time because of that just a bit the timing and how the how that how the class ones do their maintenance. So I think between the you know those elements and the guidance you can kind of get a sense of where the quarter to quarter EBIT margins going to be and and you know and where weve.
Included all those factors those assumptions in our full year guidance.
Okay, and then I guess, maybe just a bigger picture thought you ramped up your freight backlog for the next 12 months, but obviously it also declined long term maybe just your thoughts on on kind of your view on the market right now.
I think we continue to look so some robust opportunity internationally.
As we go round the worlds man Asia seems to certainly be a brighter spot for us what if I talk about Australia, New Zealand door, India, We certainly see a good amount of opportunities even easier as well.
As far as the transit market goes to the team is so working strongly on opportunities in both Europe , and North America as well Oh, we're falling through a number of the next phases of projects. We've done in Africa, and I think that's an exciting part of the portfolio.
Where we have the opportunity to offset some of the softness of North America.
And just a last one if I can on the UK transit contract any update on kind of when that probably rolls off and and I guess a ability to kind of.
And that margin impact overall, yeah, I mean were largely still on the same schedule that we've talked about before you know the margin is.
Very low to and and we have about $25 million.
Of revenue impact quarter every quarter, Okay, and so we're still looking as these projects wind up is at the end of 2020 with a little bit still.
Not nearly so much.
There was a 25 million anymore, but little bit still rolling into the first quarter 2021. So so we see this is that you know, it's a little bit of a margin headwind, where it's part of our you know plan to to burn off this backlog and and a and b more selective on any projects going forward. So that we don't have the same situation.
I just want to emphasize one thing about the backlog question I mean quarter to quarter, we have fluctuations so lumpy business Ward you wind projects you you a you add them and so you can have you could have some some you know kind of variability quarter to quarter and really to me. It's it's refocus on you know the order intake in.
Sure.
View.
View.
Is there any seasonality to that to kind of timing of wins are at or just.
Consistent on the fluctuations I know I like I said I. The it's it's just about the you know that your customers timing and when their winter awarding the projects and so they could have some some pretty you can have some impacts to the after the quarter to quarter on how you look at the backlog change.
Helpful. Once I appreciate it.
Thanks.
This concludes our question and answer session.
I would break to turn the conference back over Kristine Kubacki for any closing remarks.
Thank you Debbie. Thank you everyone for your participation today, we look for it is speaking P. next quarter and we'll have more details about our upcoming analyst day early next year take care. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.