Q4 2019 Earnings Call

I'm statement. Where?

Making our forward-looking and our best and our best view of the world and our business today for more detailed risks uncertainties and assumptions relating to our forward-looking statements. Please see the disclosures in our earnings release and reputation. We will also discuss non-gaap Financial metrics and encourage you to read our disclosures and Reconciliation tables carefully as you consider these metrics and now I will turn the call over to them. Okay. Thanks Christine and good morning everyone. Thanks for joining us today. I'll share some thoughts on the fourth quarter and overall 2019 performance. We will discuss the rail Transportation Market as well as provide an outlook for 2020 then that will cover the quarter in Greater detail during his light three. You can see that we deliver the strong financial results 2019 in particular. We had a solid cash generation of more than a billion dollars which exceeded our guidance driven by strong working Capital Performance wage.

This allowed us to strengthen the balance sheet.

By reducing that by over $500 since the end of the first quarter which creates the flexibility needed to fund future strategic organic and inorganic growth in life with our goal to drive continued margin expansion adjusted operating margins for the full year. We're roughly at 14% as we continue to live on cost management actions home and see energy is stemming from the wild. I can G Transportation merger

Go to adjusted income from operations for the quarter was $313 driven in Parts by year over year growth in both Freight and Transit. I'd like to emphasize the total backlog increased in the fourth quarter driven by International freight services in a significant digital electronic order that will drive enhanced Network optimization for a class one railroad each provided a strong foundation for visibility in growth in the future. Finally. We ended the year with adjusted EPS with our prior guidance range of about 4:17. We hit roughly 30 million dollars in that synergies for the year, which exceeded our net twenty million dollar stores and but shows on a path to deliver a total of $250 million in synergies before 22

looking to 2020

We will continue to take actions on improved project execution particularly in transit and we remain focused on the prioritization of resources, including allocation.

We expect market conditions to continue to be challenging primarily in the North American Freight Market, but our Diversified Global portfolio significant install base and back off will help us navigate this headwinds.

With this factors in mind with forecasts that 2020 revenues will be about eight point seven billion dollars margins will grow about a hundred basis points driven by synergies Home Improvement in the transit segment EPS will grow and we'll have another strong cash generating year allowing us to further strengthen the balance sheet. Finally Thursday morning the company announced a $500 million share repurchase authorization the program reinforces our confidence in the company our ability to generate strong cash flows through the cycle deliver shareholder value.

as we trying to

Flight for like to pull over market conditions. We're seeing across the freight and Transit segments. Let me start with Freight our business performed. Well despite continued challenging conditions in North America North American Car loads were down about 7% in the fourth quarter, and we're down about 4% for the full year versus 2018, but it was driven largely by trade uncertainty week Global natural conditions that have led to drop in Intermodal traffic declines in Commodities, like call and agriculture month. We expect Carlos volumes in 2020 to be flat to slightly down versus last year and we forecast that the rail car built to be about 40000 rail cars versus about 58,000 in 2019.

And we anticipate the locomotive deliveries to be down double-digits versus 2019 driven by North America. These assumptions are included in our 2020 guidance counselors shared on previous calls lower carload volumes along with Precision scale railroading are having an impact on your work orders. However, the impact when she had to be partially offset by International orders good often services, including our modernization program and after market sales, we remain calm alliance with our customers in driving efficiency and productivity across their operations through advanced technology digital Solutions and unique service offerings.

Electronics business solid momentum with backlog up double-digits in 2019. This gives us further confidence that the business can grow in average faster than the overall Freight segment across our International install base. We continue to see strong opportunities for growth. Especially across Asia in regions like Paca Australia any idea where we've delivered over a hundred locomotives in 2019 as part of our thousand locomotive contract.

In the transit segment, we can change to see steady growth in ridership and organization investments in transit rail systems across Europe the UK and am in in certain markets are presenting unique opportunities for growth. This includes growth in infrastructure spanning in established economies, like Germany where rail spanning totally increasing due to the shift to green and emerging economies like India where we were uniquely positioned to win in the fourth quarter. We're able to take advantage of trans with notably orders in brakes and doors across India Europe us and Asia.

and across four segments portfolio we have

Firm multi-year backlog that will contribute to growth with that and I'm going to turn it over to patch will provide a deeper dive into the financials. Thanks Raphael. Please remember you can see that we close 2019 on a solid note and build good momentum to more than offset. The challenges in the North America Freight market sales for the fourth quarter were two point four billion that increased year-over-year sales were mainly due to the merger of GE Transportation bio emacs and increased Revenue in intransit offset somewhat by like foreign exchange as well as lower sales for Railcar components to provide improve transparency starting this quarter. We have recast or segment sales in a new product line disclosures. You can find additional details describing the new product lines in appendix app to our press release issued this morning. You can also see all Gap in a month.

the numbers for the year in the reconciling

That we also have provided.

For the quarter operating income was $226 million and adjusted operating income was 313 million mainly driven by continued strong performance in services along with locomotive deliveries adjusted operating income included 16 million for non-cash policy harmonization. That number is consistent with estimates in our original guidance at close of the GE Transportation merger. However, this excluded pre-tax expense of about $71 million for transaction restructuring and litigation cost. Please see appendix D in our press release for the reconciliation of these details. So now looking at some of the detailed line items our sg&a was 325 million including sixty 1 million of the seventy 1 million and expenses. I just discussed we expect the adjusted run-rate number to be about two hundred seventy million dollars per quarter going off.

engineering

Expenses increased to sixty million do mainly to the addition of GE transportation.

In the amortization expenses were sixty five million for the quarter net interest expense of $58 million was due to the higher debt balance and the adjusted net interest expense was fifty thousand million.

I always want to emphasize that we are focused on generating cash to reduce our debt balance in and reduce our interest expense going forward. We expect interest expense to be about fifty million per quarter wage.

Income tax expense was $38 million, excluding the net tax benefit from transaction costs for the GE Transportation merger adjusted income tax expense with 60,000 for an adjusted effective tax rate of about 24% in the fourth quarter. We had Gap earnings per diluted share of seventy-one cents wage adjusted earnings per diluted share of a dollar for the details bridging gaap EPS to the adjusted EPS of a dollar for can be found attached to our press release.

Which web take the funds is income from operations plus depreciation and amortization was 337 million and adjusted ebitda was $424 Million wage adjusted ebitda included the 16 million of policy harmonization, but excluded the pre-tax expense of 71 million, which I had previously discussed with depreciation was $45 million versus fifteen million in the year-ago quarter the increase obviously due to the GE Transportation merger for 2020. We expect appreciation expense to be about a hundred and eighty million dollars.

Amortization expense was 66 million for the quarter compared to ten million in last year's quarter. This increases also due to the merger for 2020. We expect a murder amortization expect to be about $280 million which in 2020 will be excluded from our adjusted results as part of our cash EPS as of December 31st. I want to emphasize her multi-year backlog was roughly $22 billion and are rolling 12-month backlog, which is a subset of that multi-year backlog was 5.6 billion or backlog remains a solid foundation and will allow us to continue to navigate to Market headwinds that we're facing.

Now turning to the segments. It is important to note that the Recaps of our segments and product lines has resulted in some businesses reclassified to different segments. This is cause the prior-year said it results to be revised and those results can be found in in into two areas appendices g&h attached to our press release.

Looking at the freight segment sales increased to 1.7 billion in the fourth quarter. This increase was due to the GE Transportation merger again adding one point three billion worth of sales decreased twenty two million primarily due to lower sales of free car components and Industrial Products segment operating income was $239 and adjusted operating income was 270 million for an adjusted margin of 16.1% for twenty twenty. We had have good visibility into our office deliveries through the multi-year backlog.

finally

Segment backlog grew slightly from last quarter to $19 billion on new international orders.

I'm looking at our Transit segment sales increased slightly to 701 million primarily driven by growth in aftermarket sales. This increase was due to organic growth which woke up 19 million and Acquisitions adding about 2 million, which more than off said a negative effects of 16 million.

The 4th quarter Mark the 9th quarter in a row that we have delivered organic sales growth which shows that are near record backlog continues to drive multi-year top-line visibility.

Take me to operating income was thirty nine million for an operating margin of 5.6% excluding about eleven million in restructuring expenses and including additional charges related to UK refurbishment projects. The adjusted operating margin for the segment was 7.1%

As it relates to the UK projects, we have made several changes in recent months. This includes changes in Key Management and taking prudent action on driving better project governance Thursday. We are no longer taking on these type of projects as for the existing backlog. We have completed about 75% of those refurbishment projects in the UK and have a strategy in place to accelerate the rest going forward for the transit segment. We will continue to enhance our efforts to drive a lean culture with cost out improvements.

Have better delivery and better quality and our confidence that we can drive about a hundred basis points of margin expansion across the transit segment in 2020.

Now let's turn to the balance sheet and cash flow as described on slide six.

We exceeded prior guidance for the year in generated about a billion dollars in cash from operations. This was the result of better Financial results improved working Capital Performance in the timing of cash payments received not a touch on the components of our working capital as of December 31st receivables where 1.7 billion which is consistent with the third quarter inventories were about one point five million compared to two billion at the end of the last quarter and payables were one point two billion or about flat with the prior quarter receivables include unbilled receivables of $514 million dollars, which were more than offset by customer deposits that we receive of about 604 million.

as of

December 31st, we had 604 million in cash mostly held outside the US total debt of about 4.4 billion and net debt to an adjusted ebitda of about 2.6 times, which was on track with our year-end leverage Target.

Longer-term we are still targeting and net debt-to-ebitda to be about 2 to 2 and 1/2 x capex for the year was $185 million versus 93,000 last year the increase due mainly to the merger.

And going forward we expect to spend about two hundred million in 2020, which is about 2% of sales.

Overall our balance sheet continues to provide the financial capacity and flexibility to invest in our growth opportunities. And our goal is to be is to be at and remain a investment-grade crash rating before I hand it over to Raphael discuss the The 20/20 guidance in more detail. I do want to take a moment to to bridge or a 2019 adjusted results on Thursday 7 to a pro form of you that would help you model our 2020 guidance on a like-for-like basis the pro form of you includes four important notable changes. The first is that the pro forma is inclusive of the two additional months of GE Transportation results interest charges second we have described

I'm sorry as we have.

Discuss we will no longer have the adjustment for policy harmonization. So the revenue recognition policy harmonization, in other areas of policy organization will not be be be discussed third wage now adding back the non-recurring PPA and finally we have model the year with a a fully diluted share count of 192 million shares.

I would note that on a full-year pro-forma. There is a $0.34 impact which you can see in on the page that takes you from the 460 426.

One last point to emphasize is that the two months of GE Transportation results were impacted by the timing of of locomotive deliveries cash payments and receipts during the quarter when you look at it in total the the G ET contribution in the in the 1-month period of the first quarter the results in margins are very consistent with the segment the overall Freight segment for webtech off. Now, let's shift to the 2020 guidance is Illustrated on slide 8 and I'll turn it back over the rap you out. Thanks. So based on the operating momentum with built in nineteen our current backlog and an assessment of key market conditions our 2020 guidance for sales about eight point seven billion dollars adjusted a bit of about 1.6 billion in a life income from operations of about 1.4 billion and adjusted earnings per diluted share to be between $400 and $40. We expect gaap cash from operations to be dead.

nine hundred million just in

It's roughly a hundred million in prior-year restructuring transaction in litigation cash outflows in the first quarter of 2020. We expect sales adjusted net income adjusted a bit and adjusted earnings per diluted share to be lower when compared to the remainder of twenty-twenty. This is due to the seasonality and project scheduling doubts. We expect product mix to improve throughout the year in line with this Dynamics.

Building on a solid 2019 we expect to deliver over a hundred and fifty million dollars in that synergies in twenty-twenty and we're on track to deliver $250,000 incentive jeeze before 2020 to finally are adjusted guidance for 2029 includes all add-backs related to non-cash ra-kang purchase price accounting charges ordeal related organization and excludes estimated expenses related to restructuring in transactional expensive.

His expenses are adjusted operating margin Target for the full year is about 16% in our adjusted effective tax rate for the full year is expected Thursday about 25.5%

to ask you hurts to the call this morning and you see on slide 9 had a solid performance in the fourth quarter and it's stronger overall. We continue to see growth after market and services revenues farther demonstrating the importance of our install base across both for the freight and Transit segments as well as the resilience of our portfolio. We've strengthened our International Footprints with significant orders in critical markets around Asia like Russia, and she is in India, and we should be seated expectations on cost reductions and synergies stemming from the web back injury Transportation larger looking forward with fully expect to deliver a total of $250 million dollars in synergies before 2022.

2019 we delivered strong cash generation placing the company in a position of strength and we're poised to execute a focused Capital deployment strategy to further grow shareholder value patting 20/20. We expect to see continued headwinds, especially in North America, but we're confident that our install base are strong aftermarket reach in our globally diverse business model will help us manage through another challenging cycle. We will take action that improved project execution in margin expansion. And as always we remain laser focused on the privatization of resources and prudent Capital allocation.

We look forward to sharing more on our outlook for 2020 on our technology strategy in our focus on long-term growth doing our upcoming investor conference, which will be held on March 10th in New York with thats. I want a tank the entire wat that team for strong 2019 and with that all open up to any questions you may have used.

Will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then to our first question comes from Justice Justin long from Stephen Colbert.

Go ahead. Thanks and good morning. Good morning, Justin. So maybe to start with the 20/20 operating cash flow guidance. Could you just talk about the Assumption for working capital? That's getting baked into that. And also how you're you're going to be accounting for the tax benefit that's paid out to GE within a month cash flow statement. And and then also would love to get your thoughts on the magnitude of of debt pay-down that you anticipate this year. Right? So what month is the starting with the how how we're treating the tax tax item obviously comes through and as a as a benefit to us, it is a part of cash from operations, but we then offset it with a with a payment almost like a it's an investing activity. So you got the negative of that coming through age.

Yeah in the different line items.

Cash flow statement. Okay, we're still going through we we feel very good about the overall benefit and the to us but the the year one month pay for 2019 is still being being evaluated along with the GE teme the when I look at the guidance. I mean, I I'm kind of the way I've looked at it. In fact is I think an easy way to look at it is Annie but the a which is about 11.6 and then you you have interest other and taxes that are reducing it to about one one we mentioned. This is a gap number we're mentioning the fact that we have restructuring overhang or headwind that's going to hurt us into into twenty-twenty things that we've added back in nineteen that will have to pay in 2020 of about a hundred and and I think we're we're trying to to look at our working capital. We with a strong second-half.

Could be a little bit of working capital pressure.

Which would put us to the 900 Gap cash from operations guidance that we gave everybody?

Okay, it's terms of debt repayment was your last question. I think part of the correct is that you know, we're going to we're targeting debt paydown that'll get us into a month, you know that 2 to 2 and 1/2 x leverage ratio, but we're also looking at you know, our overall Capital allocation plan where we continue to invest in the company name make sure that we're opportunistic in in in the in right m&a situation and and then look at how we can return cash to shareholders all suck.

Okay, and and just to clarify in the working capital point is the assumption that you will have a head win this year. And is there any numbers you can put around the magnitude of that head off? Well, I think it kind of did the math it's probably maybe about a hundred million dollars of of working capital pressure that with a strong second half of the year that we're we're we're considering in the guidance office obviously working on on plans to do better mitigate. Look at other tools. Look at look at you know, customer deposits and and things that could be a positive but in managing our receivables managing our payables, but you know, that's that's what we've kind of considered in our guys right now.

Okay, great and and then just to help from a modeling perspective.

And there are a lot of adjustments in in the model right now. So I was wondering you know, when when you talk about a hundred basis points of of margin Improvement, and it sounds like you'll see a a similar magnitude of those segments. Can you give us the comparable adjust adjusted operating margins for both the freight and the transit segment in in 2019?

Yeah, we haven't done that. I think that we're we're we haven't disclosed that what we're kind of looking at is over all that hundred basis point to be, you know, more more waited the transit side a little bit less than the freight side. But but about the same on average between both segments.

Okay, and then lastly and maybe this is the two-part question and then I'll hop back in the queue. You mentioned the first quarter will be the low point of the year. Is there any color you can give us on the month early Cadence of of earnings you anticipate or at least what's baked into the 2020 guidance? So maybe that one's for you Pat and then Raphael just taking a big step back and and looking at the business office right. Now. What what's your confidence that this year's the trough given what we're seeing in the in the free market. I mean, do you have confidence that 20/20 is the trough for earnings for this business or did you just talk about the quarter guidance? And then I'll hand it over the you know, we don't give quarter guidance, but we are trying to you know, kind of give a nod to the name of the business. So if you just look at Q3 to Q4 and and other periods, the services element of our of our product lines is is is Meaningful. It has wage.

Is margins that can can make things?

Shift and so with a with a first-quarter which which tends to be a a slow start because of Transit Freight and after market and and the timing of some of the underlying home projects, we just wanted to make sure everybody understood that the that the first quarter was was was going to be slightly different. So that's that was important. But but as for the unique quarter-by-quarter guidance, we were we're we're not going to be doing that just to know if the year I mean we certainly have many elements of trough here and this year, but I'll stay away from a from that will continue to monitor the markets we operate in and we really very much focused on the things we control we're taking the necessary actions to adjust our business to change. The reality is we face and the guidance we're putting out forward it certainly contemplates. I'll call new locomotives down double-digits for the year in terms of deliveries and Freight cars.

To about 40,000 cars versus in the fifties for the previous year. So at this point where

Very much constant on being able to drive margins up about a hundred basis points despite of those headwinds.

Okay, great. I'll leave it at that. Thanks for the time. Thank you.

Our next question is from Allison from Wells Fargo. Go ahead. Good morning Raphael. The services wage component of rate here. Could you help us better understand? It seems like it's holding up better sickly cyclic quality wise, you know, I think you touched on some seasonality issues with it, you know any color there that you can help me with that that particular component of rate.

Allison a couple of things so I'll start internationally. I mean in our install base continues to grow we have a number of locomotives. Well either entering into service for getting out of the warranty. We can change to see robust, uh a growth there. I think are mods business we can choose to see opportunities to grow that business into the sheer. We talked practically about an international order we got and I think that also provides us similar Dynamics and not forget about our opportunity to ultimately help customers on driving more information. See we have a number of solutions that can help them in that regard as they look at ways of improving their operating ratio. So we remain confident so we work with our system is very closely on fleet strategies are making sure that ultimately our fleets are the ones delivering a most value out there.

Great, and then on the digital side, I think you touched on.

Order that you got there you any specific product area that's driving some of that growth. Is it broad-based? You know, how are you viewing that particular piece of the business and in light of PSR on what's going on? There. There's a couple um areas there that I'd highlight to you. Number one as railroads look into increasing efficiency. I think we have a number of solutions there that allow them to be managed through a larger trains, but also there's an element of fuel savings and I think we're well-positioned on that regard. So that's one of the specific sub product Lines within doubt Fitness. The other one is on really managing the overall operation. So we talked about Network optimization and some of these are longer-term orders, but it certainly reflects off the confidence in the business and ultimately the opportunities we have to help customers improve their efficiency in their businesses.

Great and then just left it might be too early for this but any thoughts and they also Lombardi.

A announcement in terms of any impact potential to that too early days still. I mean, we're still really going through the details. We have good strong relationships with both customers. And so we see an opportunity here to grow our business cell with them. Great. Thank you.

Thanks.

Next question is from Matt from Cohen. Go ahead.

Good morning. Thank you. Can you guys give some more specificity on the double-digit decline in locomotive deliveries in 2020?

Good morning, Matt first. I mean this is fundamentally driven by North America and it's just a reflection of really carloads being down by 84% last year and especially in the fourth quarter by more than 7% We continue to see I mean some of those challenging Dynamic the first half of this year and we do explain that as per our customers up for some improvement as you go into the second half of the year, but it's it's a North America trip in a faith.

Okay.

That's helpful. But you know double-digit I guess is is a big range. Are we talking closer to like, you know teens double digits?

We're going to stay away from specific. I'm going to call counts on the locomotives but down double-digits. Okay, and I'm staying on locomotive deliveries and and maybe you know, operational metrics disclosures. Are there going to be changes to the way you guys report any of your segment metrics or operate operating statistics, you know associated with the investor day in March or any any color of what we should expect at the investor. They you know, long-term growth plan anything like that would be helpful. Well, we I think that is his Pad. I think the first thing we've done is we've kind of recast our Revenue so, you know can a little more visibility on the revenue a line with you know, our equipment business which includes Locos wage.

the

The freight car component business which also includes a little bit of an industrial and and services and and all of those things are are are kind of available but historically and and then you know in restated the, you know going forward into next year in the guidance at the investor day. I think we've been pretty consistent on Thursday and disclosures of like local deliveries and and and work we're going to stay away from that. But but I but I do think we've taken some pretty good steps to talk to provide provide some transparency on the top line. And and where where it's where it's coming from. Okay, that's helpful pet. Now on the you talked a bit about the capital deployment priorities, I think historically before the transaction you guys did, you know three to four tuck-in Acquisitions per year birth?

Should we expect you guys to ease back into that too?

At some point in the in the future or or do you not think of it that way?

Well, we've certainly I think 19 was very important in terms of making sure that we strengthened the balance sheet. We certainly feel confident about having the optionality to still do age bolt-on Acquisitions and it's certainly something um, we will consider as part of the capital allocation a process along the lines with returning value to shareholders money, but also looking at Organic Crop internally.

And Rafael, is there a like a priority area when you're looking at bolt-on Acquisitions is it you know digital Acquisitions that relate to real life automation. Is it uh, you know to support your service after market locomotive business. Is there an area of focus that you prefer to do Acquisitions and and the longer term, I think you touched the to one of them being the digital electronics area with certainly see an opportunity there. It's an area that grows faster than the overall trade market. The other one is just an element of recurring Services making sure that we're utilizing a lot of the infrastructure. We've got around customers and I'll continue to grow that business faster than the segment gross.

Okay, and just one final question any impact from the coronavirus specifically as it relates to your your Transit business and you know, as you as you think of wages or ship, you know going forward if this grown-up virus thing does not subside soon. Is that risk to your aftermarket Transit business potentially a couple of comments their fax number one, very important to us is really the safety of our employees and I think in China, we've got close to 1500 employees. None of them with krack virus at this point. So we it's it's critical parts for us. We can show you to monitor our supply chains and have taken a number of actions in order to make sure we ultimately off on alternative Source. Yes, we do about 3% of our business in China at this point. I mean, we're continuing to monitor the situation and confuse take a bath

Can you rather than facts we'll we'll make sure it's closed down.

Great. Thank you very much.

Thank you. Next question is from Chris weather be from City. Go ahead.

Ice cream sounds good. Chris. Wanted to touch on synergies in the 150 million dollar number you gave it. How much is that is blow through 2019. And how much is new to 2020 also kind of wanted to get a sense where you thought you'd be exiting twenty-twenty terms of right right percent increase

So the 150 is is incremental. It's it's it's an improvement you have you have an element of it is say about sixty million is coming from you know, the what the 30 was a net number, you know, we we do have about sixty worth of expand that was applied against that that 30,000 you have a additional spend though in this year. So I don't want anybody to you know, don't think we still have some costs in order to achieve some of these synergies but the hundred fifty net wage is the incremental over the 2019 results, you know, it's it's coming from the same areas. It's it's the full benefit of the rooftop to Rooftop consolidations the sourcing the supply chain improvements and the restructuring efforts that we went through in in 2019. We haven't Quantified with the Run rate is dead.

the end of the year, but but we

Still think that it it it puts us on a really good path. When you look at it to achieve the the twenty two hundred fifty million dollars worth of a run-rate synergies and off for the original guidance when we closed the transaction. The one thing I would add is consistent with what you saw last year expect us to continue to look for ways to accelerate the palm trees and that's very much aligned with making sure that we ultimately adjust the business to the reality as we face.

Got it. Then also kind of wanted to get a sense of what your outlook for next 20 20 great is you're calling at some headwinds to just kind of understand what you thought after market next would be in to get an idea of like how much of that do you think is sustainable from sort of getting better penetration on some of the aftermarket products you've been talking about.

Well, we continue to see strong opportunity to grow our services business. I think states are some of the offerings which are of course a little bit different when I compared to last year, but that size off to modernization that ties up to some of the elements of really some fleets that are entering operations a global. There are some of the head winds are presented in our freight components business with Freight cars down on the forties. There's also a number of markets. I charged a sense to that business segment. They're also down including all your guests the transit business we continue to see opportunities out there some significant orders in the underground UK North America as well and Angel continues to be a bright spot where we're very well positioned. So mixed overall condition wage.

We're guiding to eight point seven billion dollars of orders, which when you look at a 12-month basis, it seems basically flattish.

Okay. Got it. Just one quick follow-up. What what level growth in your mod. This is are you expecting in 2020 and then all depends on how long did you say your question again, please how much growth are you expecting in my deliveries in twenty-twenty and then I'll just send it off. Okay, and we should have the opportunity to have still slightly, uh-uh grow the business and we're continuing to invest on ultimately. I'll call driving more value for our customers bills will includes enhancements to fuel as you look at overhauling or modernizing the engines and so this modernization. Thank you for choosing to be a good love story for us as we look into ways of driving partner value for our customers.

our next question is from Jerry revich from

Goldman Sachs, go ahead. Yes. Hi. Good morning. Everyone morning. I'm wondering if you could talk about your order out look for for the Freight business owner. I know it can be lumpy in terms of timing of major contract Awards. Can you just flush out for us and how your prospect looks both on the service side as well as on the locomotive side Thursday. We kick off 20 20 here. I think internationally we continue to have a bright spot and I think I mentioned Asia we're seeing demons in putting in an order for demand for new locomotives. We're also seeing aspect of Fleet renewal that continues to take place in places like Australia for instance run agency. I ask which used to be a bright spot for us and growing as a Luke I as I look across west coast of Africa, we have the opportunity of follow-up off.

of existing projects that the next phase of them Latin America was

You'll confuse to be a market where we're well-positioned. And as you look out concessions being renewed that's also an area of opportunity for us transaction. The Dynamics are positive in ridership out there. It's it's a business. We look at the area. We work in the promotion at least three to five percent growth for us. It's more about being selective in terms of the order intake we have had wins in North America a lot of really cheesy by the Freight Market and Dynamics. I mentioned with regards to new locomotives and Freight cars and and all that. Do you think you could backlog in 2020 based on the prospect list that you that you have in front of you today focused on doing that? I think we have a good pipeline of opportunities that we're working on dead.

But we're certainly dealing with alcohol challenging Dynamics in the North America.

Markets, it's good to see the fourth quarter on where we've landed with backlog growing about a 2.3% and we certainly got our teams out there working very easy to make sure that we we we grow the business over time and lastly, you know on the margin Bridge 20 vs 19. So the hundred basis points are a hundred million dollar wage even growth. I appreciate that. It's early in the year, but it taking some of the discrete items. It looks like you you have the pieces to get you above the hundred million dollar increase. We spoke about a hundred fifty million dollars of synergies the Improvement in transit margins as prior projects for Olaf that should be, you know, fifty to a hundred million dollars hundred million dollars from pro forma GE Transportation Edition based on the February nineteen presentation. And obviously we have the policy harmonization headwind, and I know it's early in the year, but yep.

And if you could just talk about if there any other pieces that we should be thinking about that might be headwinds or is it a function of look it's early in the year and the environment is choppy. So, you know, we need to give them room to execute.

I think I think you've kind of outlined all the all the aspects, you know, the synergies are obviously a positive contributing to the to the margin growth, but we definitely have you know, head wage Market you're seeing some shift and mix of sales year-over-year where you have your your replacing sales, you know, like our freight component area wage which tends to be a strong profitable business with with other business that doesn't have the same kind of margin profile. So when you can look at those things and off the net basis that that's what gives us the the confidence in the in the hundred basis points overall Improvement in margin for the for the year.

Thank you. Thank you.

Our next question is from Scott group from Wolf research. Go ahead.

Hey Scott, are you there?

Yeah, when we go when we go to the next question, maybe we'll maybe we'll add Scott back later. Okay. The next question is from Courtney from Morgan Stanley Cup.

Hi, good morning guys, just on the services part of free. I really appreciate the disclosure that you guys gave us. But can you help us? Just think about how that business is growing on a pro-forma basis year-over-year 2019 and any you know thoughts and whether that's kind of the right run-rate to think about that business in 2020 giving guidance for real car and and Loco deliveries.

So a couple of points because she needs to see the opportunity to grow that business. I think there's a number of Dynamics there. I think are mods program continues to be an area of opportunity of I can't emphasize enough internationally what some of those opportunities are the other element for us. It's the fleet that it's expanding Global. We we have ground the number of water call installed diesel engines out there and that provides that business and opportunity to sign on what long-term agreements to support those fleets out there. So that's what she needs to be an opportunity for us. I did mention that we're continuing to invest on enhancing the value. Customers can get from modernizing existing a fleet that includes fuel Solutions, and we're going to be coming up with alcohol incremental opportunities there, so we're certainly yep.

You need to look at service.

Cuz as an area of opportunity and has even in North America as you look it's a very significant number of locomotives Parts. The motors are Iranian. They're running back order and so will continue to support customers in terms of well making sure they're getting the right reliability and availability of these Suites.

Okay. Got you any just on on 2019 any insight into you know what that growth rate was on an organic basis, you know, just since it's a little confusing with the the not in the 2018 numbers. Yeah, it it's it's kind of hard because two two aspects you've got different bases the Gap and follow these and so it's it's a bit confusing. I would just say overall the 419 the service Revenue because of the impact of the opportunities created by itself under PSR and the additional mods that the that the revenues for for services were up in nineteen. And then when you look into twenty-twenty, which I think was kind of your first question all the things wrong, I'll just talked about but you you have a little bit of a headwind from parking's offset by our continued to focus on new products and and opportunities under PS are dead.

to this is

Our customers so that's a long-term growth rates would you know, we'll talk, you know, we we really wouldn't talk about that on this call, but it's dead say, you know really for us an area of growth. Okay. Got you and then just switch it on to the transit side of the business and you did some money and now it looks like on the on the core business as it's restated margins were down, you know for the past two quarters and then down pretty significantly this quarter long. Can you talk just a little bit about what was driving those those margin declines this quarter and then, you know kind of what gives you and when when we think about the hundreds of Iraq and you know next year how should we think about the pace of that and kind of the continuation of of the UK projects flowing in?

Okay, let me start here. Well, I think a couple things to celebrate here number one the corlee.

Performance was certainly impacted by well the lower margin of the refurbishment projects in the UK. I think we've reached some really critical milestones in this project off the quarter and now we believe to have a really strong cost visibility as we've delivered more than 75% of these projects up to this point. So I think that's one element of that. I think the other thing to keep in mind is we're very encouraged to see the steps taken by the transit team in terms of the performance and the overall business and we're starting to see that really showing up into someone or call underlying key metrics that includes Improvement on on Time delivery that includes Improvement on with really low cost associated with cost the quality. We continue to see accountability up across the business. There's a more robust beating process out there. Yep.

Margins on the order steak in over the last year are up versus the backlog. We've got cost and actions taken to drive margin improvements and we have really pushed off the supply chain about a cost locations. We do not take this results lightly a million between have really taken action including leadership changes at the project level. So we ultimately Drive the right discipline and accountability across the business. So I just want to just to help a little bit. You know, we took in in the quarter. We took the fourth quarter of nineteen. We took charges associated with you know, certain inefficiencies, especially in terms of higher labor costs. We did reach some some critical milestones in these projects and the quarter off and we think we have a a really good cost visibility and we have delivered more than 75% of these projects with most of them running off in 20 20 dead.

Our our estimation is over.

80% completed by the end of the year. So, you know, we feel we're coming to the end of of these projects with with a good view on on the on the profitability and we've and I would just add you know that this has been well received and and with hitting these Milestones, you know created cash opportunities that were realizing the fourth quarter.

Okay. Thank you.

Our next question is from Steve Barger from keybanc Capital markets. Go ahead. Good morning guys morning. Good morning off. So you're looking for around $700 in free cash flow, which I think is about 80% of midpoint. Net income plus or minus. Can you remind us how you're thinking longer-term for free cash flow conversion from net income and how long it'll take to get sick.

Yeah, you're saying you're going on for free cash flow. We've done cash conversion off of sort of just cash mobs which would be in excess of you know, our goal is to get over a hundred percent. And and I and I think that we have a little bit of impact from the restructuring items. I talked about in the working capital pressure in the year, but you know overall we think we may have a have a you know, cash. If you look at a cash from operations percentage that income that you would be, you know, an access to a hundred.

All right.

And just going back to an earlier question. You talked to the buckets of capital allocation, but no numbers. You got six hundred million in cash, you know, just to use that free cash flow number you'll have around seven hundred or nine hundred million in cash flow. Can you give us any dollar targets for debt reduction this year or can you frame up how you're thinking about debt reduction versus share buyback in terms of size and timing.

Think our debt reduction would be you know goes hand-in-hand with the with that leverage ratio. So I think in in you know put numbers to it. It's it's a similar performance to what we did in nineteen month, maybe a little bit less, but it it I really hadn't thought about it in terms of total dollars. I keep focusing on the on the on the leverage ratio and off and and and of course the capital allocation story is is one about having having the the cash available for funding or growth initiatives for for the opportunistic m&a in other areas that would allow us to to return cash to shareholders. It goes back to creating the optionality. We spoke and I think the announcement that we have with regard to the five hundred million dollar program that gives us also here in Opportunity when Shares are selling below the intrinsic value for us to act on Thursday.

I guess that's kind of the point I was making.

Is that you feel good enough about the balance sheet now to start executing against that buy back because it certainly seems from a liquidity standpoint. You're in you're in good shape.

We certainly feel we we have done. I'll call good progress through last year and we're out of state here that we should fully exercise optionality and that should include a shared by that. Perfect. One more just thinking about the seasonal pattern you talked about for 1 Q as I recall. The first quarter in nineteen was unusually strong do to locomotive mix so long just to clarify what you expect EPS will be down versus the dollar 6 and 2019.

On a you remember you're you're you're looking on an adjusted basis versus a different adjusted basis, but I think that a couple of things I want to point out. If you go to one q a year ago, you had a partial quarter and and it was an especially strong quarter month stub. That got included in the in the web Tech results look at it in total and for the freight segment. I think you're going to end up with a a result. It's it's kind of similar profile to what you see here in Q4. That's the season a reality to to to to 20 20 in the first first quarter, but as for like a specific EPS guide for the quarter of where we're going to you know, what we always did and we're going to we're not going to give any kind of quarterly guidance for the for the specific to the quarter, you know. All right. May I squeeze one more in for the full year. Do you expect negative organic grog?

In Freight offset by relco and anything else or or do you think that organic growth can be positive for free?

Well, when you look at what we got into I mean we certainly have pressures coming from the overall Freight business with Transit being up.

I mean Rocco in terms of size is is it a small tuck-in tuck-in acquisition its strategic it's good. It's obviously but on one of the bigger ones put the that's the truth. So I think I think to your you know to your question, you know, where overall or Revenue guidance on a pro-forma basis is relatively flat. I think it I think we set it off that you have a little bit of a mix of freight and and some of the stronger Freight businesses will be a little bit down offset by some of the growth in our Transit business.

Thanks. Yep.

Our next question is from Ken cook stir from Bank of America Merrill Lynch. Go ahead.

Hey, good morning, just to follow up on the prior questions on the transit margins, which you don't have a 10% Maybe just your thoughts on getting back to double-digits long-term. I know you talked a hundred thousand points near term and removing some charges. Is that a product shift or is it increasing competition pushing those margins down? Maybe just talk a little bit about that on your bigger picture.

I think let me let me start here. First of all, I think we have the opportunity to improve margins in our overall business. I think I've talked before about the quality of the order into age, which the team has taken some specific actions around that and we see improvements happening. I think we talked about the quality of execution and that's why I made some, earlier on some key improvements on some key metrics which include on-time delivery and really lower costs associated with the cost of quality the team continues along the lines of having a very robust bidding process. They've taken for the cost actions to drive margin improvements and they'll we're continuing to bash the supply chain to battle coughing occasions. You're going to hear from Lillian and the team a lot more details on that progress, you know, their committee even now ready this year to drive more than a hundred basis points off.

Improvement during

the investor day that

any know I I feel I feel I just reiterate the same thing at Raphael just said we feel we feel good about the the overall for you know, long-term ability to to drive margin expansion. It's it's it's Court both businesses as well as achieving of of having her over year leaned efforts other opportunities that month that we find to offset and and improve offset inflation and other costs and improve the overall margin but the synergies also contributes long-term to to us improve and and and while we we we also feel good about our 250 million dollars, we we we constantly are looking for opportunities above and beyond.

Great appreciate that and then just a follow-up on the you mentioned some passenger opportunities stepping up in the US. Maybe is that something you're looking to offset Freight? Is that strictly on the transit side or are you talking kind of locomotives? What do you you mentioned just in the in the prepared comments to step up and passenger opportunity in the US are just looking for some follow-up on that. Thank God. So yeah with specifically with regards to our Transit business. We continue to have opportunities in the US market again, we're being very selective on the opportunities. We gon not sure but it certainly also a bright spots in terms of both orders and brakes specific opportunities for the transit business.

Our next question is from Ivan from Wolf research. Go ahead.

Good morning, guys. This is Ivan on for Scott group. Thanks for the thanks for the time first. There's a pretty meaningful drop in the locomotive and Railcar deliveries in your guidance. Can you talk about the biggest offsets this year that keeps them all sales flat? And with that thanks for the new sales breakdown this year. That's very helpful. Maybe you can say how much of the equipment sales are in North America. And how much of the components is absolutely tied to the equipment Market.

Okay, so I think when you look at the Dynamics in the Freight business, you'll certainly see an element of freight cars and locomotives down. Our freight components business is also off well with pressure associated with some of the adjacent adjacent markets that we serve we can change the opportunity to grow our services business. I think I know if it's International Golf tied off with not just modernization opportunities, but also an element of fleets entering to service rep or digital electronics business. We talked about double-digits orders could off last year which provides I think a solid and strong backlog for us to be execution. And that's certainly an an area of opportunity for us here as we we we continue to progress forward. Well our overall Transit business will suck.

To be growing this year.

And the rails are working towards one man Cruise right now. What is the opportunity for web Tech and when do you expect to start seeing it? And also can you also talk directly about p t c and the direction of that business office this year up down flat? Thank you. I mean when you talk about rail automation overall, we've been working with our customers over the years and Thursday. We do have an element of adoption which might vary from customer to customer in terms of some of these tools but we really believe we have some of the critical elements to allow that we're down to invest on really the next generation of some of these products the ability to go from zero to zero on basically autopilot. And there's there's a number of alcohol specific products that could farter help our customers automating their operations. So it's really up to our customers and Thursday.

Working through its on how they would like to get.

We are we're really ultimately providing the tools and the optionality on how to do that on I think we're very much focused this year on both elements of making sure that we've got to interoperability working and then we continue to work with our customers or making sure that you have a system that's reliable and available to download as they go through a full implementation.

Great, and last one isn't the transit backlog down your of year. So, why does Transit grow in 2020? What's the offset? Thank you.

The transit is affected by FX and and the and some of the recast items. So it's it's a little it's it's it's a little bit complicated. But ultimately you have a a big bag full of of Transit backlog and then in terms of sales the the phasing the timing the delivery the project schedules that are are expected by the customer will will you know have been considered in a guidance and and we'll drive the top line. So backlog access is slightly up a quarter over quarter. I think there's of course an element here of what that just said. What if it's Susan ality of timing of orders. However, when we look at our backlog it remains off at Whitehall call historical high levels and down in terms of well the opportunities that we have had.

Our next question is from Terry from Jefferies. Go ahead an could you provide an update on what you saw in your life mining business in the quarter? And then how you're thinking about the 2020 Outlook? What do we think about mining? I think overall there's certainly a lot of pressure for overall mining as we talked to our customers. I think it's a little bit different and we feel better about in specific the truck size class that we serve but it's it's a market. We're really monitoring closely especially do with the situation in China, but at this point it's no specifics to be detailed say very much reflected within our Guidance the elements. I just described

Okay, and then it looks like sg&a guidance is embedding pick up as as a percentage of sales. Can you just talk us through if there's any headwinds in sg&a that we should think about in 2020?

No, I don't think so. I mean thinking about our sg&a, you know, we do, you know, we are combining the two companies and we offer got a 10-month GT versus 12 months and those that might be factoring and how you're looking at it but I think all in all we've sg&a is is there's there's no specific item in there. That's that's causing a problem and compare boating year-over-year.

Okay, and then just a final question just given the five hundred million and share repurchase authorization. I guess any color on the Cadence of how we think about twenty $20. And then with this all the upside to your current job guidance. It doesn't look like you're embedding any Buybacks in your Share account.

That's right. We have not considered any buyback in the in the share count for guidance purposes. So yeah, the authorization was really a way to make sure that ultimately it's chairs are selling below the intrinsic value that we have an opportunity here to act and that's that. That's basically how we're looking at it. I appreciate the color. Thank you so much. Thank you.

this

Includes the question and answer session. I would now like to turn the conference back to Christian for closing remarks, and thank you to everyone that your participation today, and we look forward to seeing you in March at our investor day or speaking to you again next quarter. Goodbye.

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