Q1 2020 Earnings Call

Good morning, and welcome to the West Corporation first quarter 2020, <unk> earnings Conference call, all participants will be in listen only mode.

Yes, Justin please ignore conference specialist bypassing the Starkey followed by zero.

Today's presentation, there will be an opportunity question.

Ask a question you May press Star then one on your Touchtone phone to withdraw your question. Please press Star then to.

Please note this events is being recorded.

I would now like to turn the conference over to Kristine Kubacki, Vice President of Investor Lily.

Go ahead.

Thank you good morning, everyone and welcome to watch text first quarter 2020 earnings call with US today, our president and CEO I feel Santana CFO patent Oregon.

Senior VP of finance John bachelor's.

Today's slide presentation, along with our earnings release and financial disclosures were posted on our website earlier today and can be accessed on the Investor Relations tab on Wildcat Corp. Dot com.

Some statements were making our forward looking and based on all the best view of the world at our business today.

More detailed risks uncertainties and assumptions relating to our forward looking statements. Please see the disclosures in our earnings release and presentation.

We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliations tables carefully as you consider these metrics.

Before we begin I'd like to extend wishes of health and safety to everyone on the line as we continue all to manage through this could cope with 19 pandemic.

Now I will turn the call a bunch of all feel.

Thanks, Christine and good morning, everyone. We appreciate you joining us today, we had a solid first quarter. There was only possible due to the perseverance. So barring employees working in conjunction with customers suppliers on T. stakeholders. These are unprecedented times that helped for starts all just blackstone adapt.

Yes for data I want to sincerely kind of color Wap got team members in our tax rates any dispute supporting our customers as well while all of those working remotely for all dropped out they're going to go live or in the face of incredible change nickel get banking crisis, you reiterated appreciation for the world part team.

Numbers do everyday supporting essential rail services that are critical to overcome this crisis.

Their work around the World has allowed our sites to remain largely operational although we had some facilities down in places, including China, India in Europe.

As a company operating the mid August pandemic, there's some key to sexual priorities I'd like to highlight to you.

Please turn to is like me.

First we are committed to protecting their health and safety of our workforce and work taking significant albert's across our plants insights.

In many cases, where it going above and beyond that she can choose recommendations or any local government requirements. These actions include daily temperature checks at many of our facilities limiting plant for active see by relocating schedules removing non critical step from the fact before.

Restricting access to work your I guess, you haven't house, social distancing deep waning and increased disinfection Albert among daughter activities.

Second we're focused on maintaining our operational capabilities roughly eight weeks ago, we assembled a coke viewed response team comprised dog global business and functional leaders. They meet daily to assess ambrish sponsored extra nor do they already challenges that out and the implemented.

Contingency plans across our operations and supply chain.

<unk> South government mandates as well as any impacts to our business in real time.

Let's take decisive action to be sure Wap that it gets proactively position to manage through today's extraordinary challenges.

Yes, I shared earlier, we have an incredible responsibility to help keep people and product movie during this crisis.

During the quarter, we began to feel increasing in back of the coffee at 19 disruption across our supply chain as well as our operations and our customers operations.

Stepping Danny.

80% of our 160, plus global manufacturing sites have largely remains operational.

Does that experienced disruption were primarily due to the customer shutdowns supply chain disruptions or government mandated locked out.

This includes countries like China, which had several sites you back then in February but they were all Bakken operations by me in March.

We had operations in countries like France, Italy, and Spain, which were required to quote for several weeks in the first and second quarters and here, mostly all back up in running now.

And it also included countries like India.

However in those regions that were on walk down all Wap that service locations Fuchs service technicians and warehouses remained in operations to support Transportation's essentially infrastructure as required by the governments.

In the United States rail in passenger transportation has been squarely recognize that's critical to essential operations at such all of our major manufacturing sites Amsurg as soon as imports locations across Pennsylvania in Texas and most water locations have remained open.

Yeah and operational through out the pandemic.

Darren we are focused on cash and preserving the balance sheet.

Working to reduce capex by more than 40% versus our prior guidance of $200 million.

In addition, we're weekly lighting working capital for the volume environment.

Targeting improved cash flow conversion.

Overall, our financial position continues to be strong at the end of the first quarter liquidity was about $1.2 billion. In we recently took additional measures to partner enhanced liquidity by adding a new one drawn 600 million dollar credit facility after Dan.

Quarter.

Fourth points prior to the on shots of epidemic, we were laser focused on reducing costs and delivering on our synergy targets are ahead of schedule.

For example seems to a year ago during a period of topline revenue growth.

The company reduced headcount, including contingent workers by more than 1500 people and had begun to consolidate operations, reducing our footprint by 6% and removing over a million square feet across our operations were on plan to reduce our operational footprint by a nod or.

9% in 2020.

We also have captured significant sourcing savings from the merger we discontinued salvo shared services contracts with GE. Yeah. We've continued to drive lean across our operations to enable more cost effective and efficient throughput.

We saw the results of those actions realized in the first quarter.

And while we anticipate a change in the volume assumptions offered near term synergies, we have a pipeline of actions and we remain committed to deliver our synergy targets for the year.

Today, given the rapidly evolving situation and uncertainty regarding the duration and severity of the Cobiz crisis, we have withdrawn our previously issued annual guidance.

We will continue to take the necessary measures took control while we can to protect the long term viability of the company continues doing baskin acute technologies and capabilities and deliver shareholder value for the long term.

And you're saying that focus along with the strength up this franchise and our experienced Spanish team in our first quarter resolved.

As noted on slide four in the midst of a challenging market data included operational and supply chain disruptions in China, India in Europe.

We delivered a solid operational quarter.

Sales were 1.9 billion with an adjusted EBIT margin.

18.7% driven by strong execution against cost and synergy goals.

Do you feel good 97 cents adjusted earnings per share.

Got it and then to the team's execution in the midst all the challenging market.

Included in our results, we estimate over five cents of earnings per share loss due to the impacts of could be at 19, primarily in China and Europe during the quarter.

Gosh use for operations was $82 million. However, this was in line with seasonality and the one time outflows due to previously announced restructuring litigation and transactional charges.

Our multiyear backlog of about 22 billing continues to provide visibility across both freight and transit.

Yes, we continue to help support our customers. During these times, we are adjusting timing and specifications on some deliveries as needed and remain confident in our backlog.

Looking at cross our freight and transit segments, we saw several dynamic market conditions throughout the quarter, many of which we relate it to the Colgate 19 crisis.

In the freight sector, North American carload volumes were down about 5% in the first quarter and intermodal was down over 8%.

This was largely driven by weak global macro conditions.

Carload volumes, how far bigger deteriorated in the second quarter as the crisis has accelerated its impact on the global economy and supply chains, Yes, we'll have a near term impact on demand for services and components, which will improve out straight recovers.

At this point it is very difficult to predict where carloads will settle pretty year, given Dod direct dependency on restarting the economy.

In terms of the North American railcar adult all builders in North America has taken steps to small production lines in 2020.

The industry forecast now indicate that railcars built for the year will be less than 30000 cost.

That's your where some of these conditions were president greenco needs and the collapse of the global oil Mike yet, but we had already been taking actions to adjust capacity as outlined in our Investor Conference in early March.

But even more proactive.

We are taking additional actions to align all of our operations for the newly out because we face.

Reflecting on the quarter, despite a challenging global freight segment dynamics there were some bright spots.

Our digital electronic sales were up double digits versus the prior year.

This gives us harder cost us that the business can grow in average than the overall freight segment.

Our modernization deliveries show good momentum, which were up on a pro forma basis versus last year, along with Saudi International locomotive deliveries, which helped offset North America locomotive and freight car built declines as expected.

Transitioning to the transit satcher, the complete 19 crises in global shelter in place orders have had a direct impact on passenger transportation and near term service levels in Submarkets.

Yes disruption to services and Dane thoughts on our customers operations will have a corresponding near term impact on our OE and aftermarket sales.

However, as I shared earlier most of our transit manufacturing facilities remain operational.

Overall, we believe the long term market drivers remain strong, including the need for sustainable TRASM solutions and projected at all in both ridership and order position.

Got outs fire restrictions jeez, we will see infrastructure spend also week over.

I'd also add that we delivered strong margin improvements across the transient segment in the first quarter.

While sales were down 7% adjusted income from operations was up 14% due to improved mix and early I guess, a vaccines to drive margin rate improvement.

Finally, as noted earlier across both the freight and transit factors, we have strong multiyear backlog.

Helps provide stability and visibility to evolving environment demand.

With that I'll turn things over to basket provide more color on the first quarter.

Thanks, Raphael turning to slide five you can see that we had good operating quarter, despite an increasingly challenging environment.

Sales for the first quarter were 1.9 billion, which reflects a 21% increase versus the prior year.

Increased year over year sales were mainly due to the merger of GE transportation, along with higher digital electronics and services sales offset somewhat by decreased revenues and freight equipment components and transit as well as a negative impact due to foreign exchange.

For the quarter operating income was 217 million and adjusted operating income was 303 million up 30% year over year.

Mainly driven by higher freight sales and good performance in digital electronics.

The realization of synergies as well as a better mix of sales and better operational performance and transit.

Although there are limitations on visibility into the full effect of the pandemic. We estimated the cobot 19 impact on our customers suppliers and operations during the quarter negatively impacted our operating income by approximately 15 million or five cents and earnings per share.

Yeah.

For the quarter adjusted operating income excluding pre tax expenses of 86 million of which 69 million was four noncash amortization and 17 million of transaction restructuring costs.

Do you see appendix de up our press release for the reconciliation of these details.

Now looking at some of the detailed line items SGN, a was 243 million, including 16 million of the restructuring and transaction expenses I just discussed.

Engineering expenses increased to 49 million due mainly to the addition of GE transportation.

And amortization expenses were 69 million, but remember starting this year, we're excluding amortization expense, which is all non cash from our adjusted operating income.

For 2020, we still expect noncash amortization expense to be about 280 million.

Other expense was 15 million versus 8 million of expense a year ago.

The variance year over year was due to severe fluctuations in the FX rates late in the quarter, most notably from the Mexican peso in the Brazilian Riyadh.

Income tax expense was 38 million adjusted income tax expense was 63 million for an adjusted effective tax rate of about 25%.

We expect the tax rate for the full year to still be about 26%.

In the first quarter, we had GAAP earnings per diluted share of 58 cents, an adjusted earnings per diluted share of 97 cents.

The details that bridge GAAP earnings per share to adjusted earnings per share of 97 cents.

Can be found in attached to our press release.

As of March 31st our multiyear backlog was roughly 22 billion.

And our rolling 12 month backlog, which is a subset of the multiyear backlog was 5.6 billion.

Our backlog continues to provide visibility across both freight and transit.

Now, let's take a look at the segment results on slide six.

Across the freight segment sales increased to 1.3 billion into first quarter.

This increase was due to the GE transportation merger, which added 506 million.

Organic sales decreased 108 million, primarily due to lower sales of freight car components.

Due to the decrease in car builds.

Along with lower sales and freight equipment due to the timing of deliveries.

Segment operating income was 162 million.

And adjusted operating income was 241 million for an adjusted margin of 18.5%.

I'd like to know did the margin in the prior year quarter benefited from the timing of deliveries after the close of the G T merger.

Finally in freight segment backlog was $18 billion.

Across a transit segment sales decreased to 629 million driven by disruptions stemming from the Tobin 19 virus.

Organic sales declined 34 million versus the prior year.

But were also impacted by Fs, which reduced sales by an additional 18 million.

Segment operating income was 69 million for an operating margin of 10.9%.

The adjusted operating margin for the segment was 11.9% an improvement of 220 basis points year over year.

This improvement in is evidence of some early success in the plans and actions the transit team outlined at our Investor Day in March.

Now, let's turn to the balance sheet and cash flow on slide seven.

We entered the year with a very different expectation the world has ultimately transpired and one of the pandemic presents uncertainty at many challenges when tech is essential to a recovery and we're confident that are solid financial position and ability to generate strong cash flow will enable us to emerge stronger from.

Cash flow perspective, the quarter played out about as expected.

Our cash flow from operations was a negative 80 to 1 million in the quarter, we at about $80 million, a onetime impact due to prior year restructuring litigation and transaction charges.

Which we had identified in our last earnings call.

Our leverage at the end of the first quarter was about 2.6 times flat with year end.

Our total liquidity at the end of the first quarter was 1.2 billion down from about 1.6 billion at the end of the fourth quarter.

It's 1.2 billion does not reflect the new 600 million 364 day credit facility that we entered into as part of our liquidity planning subsequent to the quarter end.

Which further strengthened our liquidity position.

We have also stress test our balance sheet under a variety of scenarios and expect to remain in compliance with all of our covenants.

In terms of the working capital items like typically review they are the following as of March 31st.

See bubbles were 1.2 billion and inventories were 1.8 billion.

Payables were 1.1 billion all roughly consistent with the ended the fourth quarter.

Our unbilled receivables with 523 million, which were more than offset by customer deposits of 603 million.

Now turning to slide eight I'll describe some of the actions, we're taking to further strengthen our financial position.

First we are lowering our costs across the business. We are swiftly aligning our operating costs when volume realities, while remaining focused on achieving our synergy targets.

We are taking further actions to lower our fixed costs by driving down best DNA.

Eliminating discretionary spending suspending merit increases.

Implementing a hiring freeze since January one along with other actions.

Considering our cost structure and about 85% of our cost of sales are variable and within SGN, a about 15% of our costs are variable or semi variable in the short term.

We expect the incremental cost actions, we're taking to drive down as DNA.

[noise] second.

We are aggressively managing cash and looking to further strengthen our balance sheet. We expect improved cash flow conversion as we reduce our working capital levels in line with the volume environment.

We're also reprioritizing some of our 2020 spend two essential in critical items, we've evaluated expenditures that can be paused or canceled and we're targeting to reduce capex by more than 40% versus our prior guidance of $200 million capital spend.

In terms of capital allocation or approach remains consistent with what we've said at our Investor day, and we will continue to smartly invest in our people and the business.

We certainly recognize the current uncertainties of the macro environment, but believe our framework allows us to be flexible and make discretionary adjustments as necessary.

We like many companies are focused on our business and balance sheet, we're targeting to reduce the debt levels and to increase liquidity.

We did recently announced our dividend payable on May 22nd.

So the short term, we paused our share repurchase program.

Keep in mind, we have no major debt maturities due until mid June of 2021.

And remain confident in our ability to access the markets given our financial profile.

We are already taking steps to identify solutions to retire or refinance debt well ahead of maturities.

Including the opportunities from government stimulus programs and other long term forms of issuances.

With that let's move to slide nine and I will turn the call back over to Raphael.

Thanks Fat so as you heard throughout today's call the company performed well and delivered a solid first quarter, despite a weakening environments.

As we go forwards we remain committed to executing on our strategic plan as communicated during our Investor day, and we will continue to carefully assess the markets in which we operate.

This includes reducing costs.

Aggressively managing cash and enhancing our liquidity position, while focusing on what we can't control.

We'll also leaning into the strong long term fundamentals of this company.

This concludes our 22 billion dollar multiyear backlog recurring service revenues broad aftermarket reach significant installed base technical capabilities expansive international footprint in a proven leadership team with deep industry domain.

In addition, we will continue to invest in technologies and capabilities data will would bass, our competitive advantage and drive the long term good all.

These are done tangible differentiators that will help us successfully manage today's market headwinds over the long term and that will help us emerge at an even stronger and more resilient company.

Before I turn the call over questions I want to personally thank each and every member of the Wap that game for all of that they're going every day I hear stories about people jumping to action to ensure we keep our customers operations moving and critical medical supplies flowing.

So the hardest he's communities.

But I also hear stories of team members going above and beyond to make a difference in our communities.

Like our technology team, who are using additive technology to produce thousands of pay shields for healthcare workers and first responders.

Or our teams in Tennessee and in the UK well quickly provided radiators for generators at the University of Southern California Hospital, and East Slamdance XL exhibition centre, which bulk delivered emergency medical care during the up and down there.

These moments and so many more like down our the stories that fill me in RPM with pride and use our distorting stuck demonstrate how we will emerge from this crisis, even stronger with that I'll churn to call back over to Christine.

Thank you Rocky al.

We'll now move onto question, but before we do out of consideration for others on the call I would ask that you limit yourself to one question and one follow up question do you have additional question. Please rejoin the queue.

Operator, we're now ready for our first question.

Well now begin the question and answer stuff that I asked the question. Please press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up the handset before passing the keys to withdraw your question. Please press Star then too.

Our first question comes from Allison Poliniak with Wells Fargo.

Hi, guys good morning.

Okay.

Yeah, you talked about your European and Asian sites, you know from a lot Tech perspective coming back online, but could you maybe talk about how the recovery is playing out in those regions on the demand side, you know I suspect, there's a little bit of a lag there.

Sure I pick up couple of comments there are a alisha number one I think it's up today of our 162 manufacturing sites. We only have two that are still a closed and they've got I'm going to call specific class to be a opened within the next Monday. So I think that's encouraging to see from that perspective.

Oh for Chanana sites resume I think we're dealing with a lot of government.

A restriction still show drops to be observed and we're staying very much aligned with our customers to understand how does drop patient recovery will take place and I. Thank god geared to talk to most of our customers do would describe to us.

Volumes really bottoming between Wanna called the month of April and May and starting to really see a recovery through the end of the second quarter, It and Oh through the second half of the year. So I think that's probably the best description on Bob how are saying recovery are ahead of us, but we do expect a significant gotten.

The second quarter based on Oh, the bottoming of top line.

I didn't understand and then that 15 million profit impact to the quarter I'm from the closures is there anyway to help us understand what percent winter freight versus transit there.

Hey, Alex and I would say that the majority of it was in the transit area or the impact was was really kind of disruption to our operations and the ability to maybe complete and ship and recognize revenue on orders or.

Both from a supply chain or inflow of components, but as well our own operations and having to people there and get things completed and and things out the door. So so the majority of that was in Europe and Asia.

Great. Thanks, so much I'll pass it along.

If you.

Our next question comes from Justin long with Stephens.

Thanks, and good morning.

Justin.

Good morning, maybe that start with the balance sheet. At you mentioned you stress tested the balance sheet and expect to stay in compliance with your covenants, but is there any color you can provide.

EBITDA downside scenarios at your modeling as you think through that and if possible maybe talk about the range of free cash flow outcomes and 2020 as you think about the different scenarios that you're assessing.

Yeah, Justin you know thanks for the question, it's it's a.

Little bit of guidance and kind of wrapped in there, but what weve well. We've done is just as a reminder, our covenant ratios are about.

For the this quarter in the next at a three and a half times in the then it reduces to three in a quarter.

Total debt to two or even today on a kind of a bank basis for calculating that a those covenants.

We've done a variety of scenarios we've looked at.

Percentage drops of.

You know kind of like Oh, most likely.

Deeper case, we looked at changes within within quarters, where one quarter is more drastically affected than others and for the and Weve as we've come out of those those views.

You know our covenants, we are staying within those we feel like our cash conversion is.

Are aligned with what we gave in terms of guidance in the Investor day, 90% cash conversion that that will most likely improved because of a working capital management and so all those things have really giving us the the opportunity to it to see strong and we're confident in our strong cash performance.

And in meeting our covenants.

Okay. That's helpful. And then secondly, just because things are changing so rapidly here I was wondering if you could provide any update on the quarter to date trends you're seeing in the business just maybe from.

Revenue perspective, and also you know I think everybody looking back to the last recession as a proxy obviously the business has changed a lot with with acquisition is there way to think back and I guess look at a pro forma business and what the aftermarket business did in the last spring.

And on an organic basis, if we think about kind of a downside scenario for the aftermarket.

So let me maybe start sheer number one I think just with regards to cash flow conversion was shown opportunity here to increase that conversion from all the 90% above data we've got an indoor investor relations. So just keep that in mind. The second piece here, yes. So that's you're looking for the first quarter I think as you think about.

After markets and I'll break it down here on the freight side. It grew 8% or I guess performance. So I think we've seen at least a couple of bright spots in the business and the server sense is certainly one of them digital electronics is not one I think we've talked quite a bit before about.

The fact that we've got I internationally fleets are growing I think we see a especially across customers. Your Sean there being lapsing package, especially your more dependent on agriculture or specific single commodities versus dependent swaddle called global trade or a general cargo intermodal. So I think that's.

I think differently across different the geography, so we serve and of course, there's different end markets true that context, I think we see mining potentially less impacted and the overall freight.

Markets. So we remain cost actually in terms of the long term view up for some of these segments. We do again Onyx dotcom really based on Oh discussions were down with our customers to see bottoming of volume between here and lots of April and May timeframe with part recovering start.

Moving on to happening. The later part of this quarter and through the second.

Half of the year.

Pat.

Yeah, I would just a it's it's a difficult comparison to prior previous crisis I mean, not everything is the same this is.

This is not <unk>. This is unlike anything that any of us have ever seen in our in our lifetime I just I just keep coming back to.

The you know the strength of our aftermarket service business, which.

You know will be will be disrupted as repeal talked about but but is obviously critical to any kind of recovery and and a and part of the Oh. The essential business is that still operate and in some cases operate with some strength. So we oh we.

We feel good about the.

The the business the core business the base business and the cash flow that will generate blasting got out there. Justin is just start we're confident about our backlog, we're staying very close with customers and through that process of course other machine thoughts in terms of shipments based on some of the impact we've had and our customers.

Our second quarter, but Oh I got the backlog gives us a a strong cost us about long term views.

On the phone number for the business.

Thanks, Pat on the quarter to date.

Part of that question is there anything you can say are on how the business has trended from a revenue perspective or just looking at aftermarket.

Yeah. It's you know it's a little.

A little preliminary to be talking about our.

About the quarter and you know what what how we performed in April.

I understand the a desire to get a little bit of direction, there, but it's a it's it it's a bit earlier I can say that what we've been doing is focusing on there could you know some Cape you guys are looking at you know again, our confidence in our backlog and how that's evolving.

Looking at kind of cash cash performance on a daily weekly basis.

So far we feel that that performance kind of supports all the.

The comments about our or confidence and strengthen the overall view backlog and cash cash flow.

Okay Fair enough I appreciate the time.

Thank you.

Oh luck question comes from Chris Wetherbee with Citi.

Hey, Thanks, Good morning, guys right.

Maybe just drilling down a little bit on the cash flow in working capital. It sounds like there are some.

Efforts as they're bigger goes onto to me the improved who working capitals for dynamics can you talk a little bit about sort of the first quarter and sort of dynamics within working capital and then how that may sort of improved as you move forward through through the rest 2020.

Yes, so we we talked about the impact of those onetime items that really did it impact or first quarter, we had about $80 million, where the cash outflow, which are you know are working capital items protect cash outflow related to prior year reserves and accruals that were paid in the first.

Quarter, a they were restructuring transaction related they were litigation related and so that 80 million did impact Q1.

You look at the rest of kind of the.

Working capital performance in Q1, you do have a seasonality there. We have these these outflows that happened in Q1 specific to some comp and benefit type things and incentive related to reserves and.

And and then you also have.

A very good performance in Q4 that that probably impacted our Q1, a little bit which will see throughout the year is that our working capital.

Where we anticipate kind of the normal performance, where you made becomes a source of cash throughout the rest of the year.

And then you layer into it the impact of a have a business that.

We've talked about the disruption that's occurring related to the virus and in our operations in revenue and then you would you would anticipate that a working capital would become a bit of a have a source of cash over the over the course of the rest of the year. So we feel like that working capital performance and for the remaining.

In quarters will will help us drive our cash conversion up for the for the remainder of the year.

Okay. Okay. That's helpful. I appreciate that color and then just maybe thinking bigger picture about the transit outlook and maybe how we can think about.

Sort of.

Government budgets.

I'm, just sort of potential longer term changes post cobot 19 or are there any sort of beginnings of thoughts around how this business might look in sort of the shape or trajectory of this business might look in sort of the three to five year. When do I know it's early on in this process and we're still sort of learning about it but you're kind of curious maybe you're up failure thoughts around.

How this business might evolve over time, if it will be sort of impacted.

I think.

What I'd say the short term I mean, certainly ridership has been impacted but as we look at a really the restarting of economies man and if you look catch some of this transit systems implementation of what I'll call safe distancing, it's going to demand more trains more investment. So we're certainly looked out.

So I think a positive for Oh for the transit segment. So I think we continue to see a demand there and certainly part of also commitment of contributes to a I'd think moving thanks.

In about away, so I think well, we're bullish there and I'll just pick the opportunity to also mention as we think about some of the dynamics on the freight side I think we also see I think potentially some opportunity is playing out of Dallas, which would include elements of Oh, I think some of our end markets really value a lot more reliability.

In terms of their supply chains, and there could be an element, especially for north American terms of near shoring or onshore and some of the supply chain. So those are probably I think a couple of things that we could see out of doubts that would certainly a drive up volumes and trends up or for the end markets we serve.

Got it great. Thanks, very much the time I appreciate it.

Our next question comes from Mop, L. Cox with Colleen.

Good morning. Thank you so a lot of the North American Frank Railroad Zone talked about I think they still want to do locomotive Modernizations. Some may actually use a downtime to do more but they're also like everybody else cutting capital expenses a Sunday.

It shows up.

You know, where we stand now Rochdale.

How does that impact the outlook for Modernizations. This year are we looking out fewer modernizations or in line or off.

I think at this point, we see all countries commitment so to the modernization programs is a big part of how you drive efficiency and productivity Oh I into the customers operations and Oh, probably out to that some of the elements of our digital electronics business.

Well, so we're seeing a a commitment there and I think there's continued opportunity you have to play that also internationally and I think we're currently discussing a few opportunities to drive a upgrades internationally as well and continued to grow from a the opportunity to highlight it.

End of last year.

But it's too soon to say, whether the modernization revenue would be.

All right Directionally, how it would look relative to your expectations few months ago.

I'd say I mean, where we're cost that's about the backlog and I'll say, which we've walked into this year with bomb doubt baghwati fundamentally secured it was the same with regards to a new locomotives, which was expected to be though I do want to remind you that for the first quarter and we had.

I mentioned out before we expect at both new locomotives shipments in modernizations to be lower send Lseven Branco judge, but tech we remain confident.

About a dynamics of the amount for mods.

In the business.

Got it.

One more question. If you can just talk broadly about the impact of lower oil prices on the on the different part of your business.

Okay. So think about lower oil prices I think a forest saw the freight market goes through its really call for about 7% of what are up on North America Railroad such passport, that's probably where we see most of that in fact, I'd say last in a third of about 7% is really tight.

To a any variation of water call in Oh price of oil per se. So its last about dots and I think the one area to watch out to some of energy markets that we serve with our products and that's a an area that will contribute to a watch I think.

Yes, yes, we really fall with customer sheer on or how they are seeing volume I had them and we're very much committed to make sure. We're taking the necessary cost actions to adjust a different parts of the business to Ah faced this new realities.

Great. Thanks very much.

Thanks.

Our next question comes from Gary revoked with Goldman Sachs.

Yes, hi, good morning, everyone I'm glad you're you're all doing well.

Okay.

What I'm wondering if you could talk about the opportunities to accelerate the cost reduction targets as a result at the weaker demand environment anything that you could do could come out you know step ahead on the strategic front out of this lower volume environment and if you could talk about your expectations for.

Synergy savings cadence over the course of this year, given the evolving playbook that'd be helpful.

Let me start I'll, maybe pass it onto a Pat I think I, probably start with just a SGN A's down for the first quarter about 70 basis points hopefully you've seen that a lot of these actions were taken in the back of a year. So if you're looking at 19 were actually growing volume above 5% and we took more than 5%.

Headcount down during that time. So we are committed to take the necessary actions are challenging cost actions, but necessary to the environment, we have and we're going to continue to do that without the announcements in terms of a reduction since some of our key sites and tell will continue to move.

And outdoor action earlier on we talked about capex and wearing implementing more than 40% reduction I want to balanced out for the falling problem and I think a lot of that Capex reduction was tied to a a project that we have volume associated with it so.

So were you referring more pulse Pony somebody says we gained got visibility I had I think Oh I do want to again emphasize our commitment to R&D and continuing to invest on some key programs that will be differentiators for us as we highlighted in the investor.

Conference, We had I think daughter elements, it's been really consolidating footprint last year, we did about 6% to foot plants.

A consolidation and that was about a million square feet, we're going to be executing on our 9%. So that's also going to be an element of how we continue to drive costs down and we're a if I think about the synergies per se, we're absolutely committed to the $150 million of finish for the year.

Here, we don't Rick recognized there could be an element of impacts associated with volume up much a again I think we're continuing to take a foreigner actions to make sure that we oh deliver on that job maybe thoughts yeah. I would just Edward we were trying to be very disciplined about what we measure as synergies.

Versus just a adjusting the business for for the volume realities.

It's a weird we're doing both at the same time and and so if you took it back to your kind of original question is are there anything we can do strategically to accelerate we had already accelerated the synergy plan that we would hit our run rate a little bit earlier, we're going to continue to.

To execute on all of those are.

All of those are expectations, all those plans and and ER and they they can't they can and will be looked at as or may be done little bit earlier based on on volume, but nothing that we want to really highlight at this point in terms of given a number or a or anything.

Land specific all I can tell you is that we're working on everything we can to make sure to ensure that we we and we expect to get those synergies, but to do more in terms of additional cost because of the the change in the the the environment expect goes to use every lever in the business and we'll continue to evaluate goes.

And make sure that we exercise those as we we look into a new reality is that.

Okay I appreciate the color and then in terms of services and electronic specifically, how discretionary or aspects of those product lines.

This type of environment, where volumes are down 20% for your customers.

I'm sure. There also targeting Opex reduction does as well can you just talked about how critical the services are do you expect to continue to outperform in your services versus freight volumes just high level comments, there would be would be great.

Okay, well first of all there's certainly an element of impacted IRS customer shop bark locomote, especially in North America in the light of volume a bottoming I think.

We said before I think Oh, we have a younger fleet. So we felt like what is a more productive done or our competitors locomotive. So I think were better position in terms of being able to navigate through this downturn and so I think a lot of solutions that we haven't traditional electronics.

Even though.

To your point some of that could be discretionary spending I think a lot of dose play strong in terms of allowing customers to get a really lower.

The cost lowering expenses and ultimately getting the benefit with relatively short term and.

So we continue to expect shrank ondo saw product lines.

Yeah, I, just I'm going to just reemphasize, what what would wrap ill. Just said is that the service side of our business helps our customers drive efficiencies and reduce our operating expense. It's really at the present some of the premise of a PSR, but and I know you would think that that would that would continue as we go through the rest of Europe.

I appreciate the discussion thank you.

Thanks.

Our next question comes from Scott Group with Wolfe Research.

Hey, Thanks morning, guys Cisco warning can you help us think about the with transit ridership down at least so much in the near term.

Is that having more of an impact on Oh, we are aftermarket how do we think about margin mix within within transit right now and I know there was a comment in the in the release about committed to segment margin improvement. It does that apply to to both of the segments. This year.

Okay. So I'm, maybe start shot because you're thinking about transit shut man I think we're seeing Diane customers continues to be committed to all called the projects per se.

There could be an element of I'll call impacts of a waterfall services for the short term just based on well ridership being down I think again, I would probably going to see and now as we talked to customers I think there's an expectation that the bottom up that has really happened between here.

Amounts of April and May and I think ridership is expected to be a.

Ramping back up or as we go into the later part of the quarter and into the second half of the year. So I think that's one one elements.

I think a lot of the dynamics, what you saw in the quarter per se I think that referred to the or five cents a without the impact on EIP, Yes, I think a lot about came really associated with our inability to shift due to shut downs and those were either through our on flat, especially in a I'll probably mention here.

And yeah, and parts of Europe, and well of course, we have customers impacted through that as well. So in some cases, the inability of a customer shot receiving some of the ship bench, but again I think we're oh, we have a up a solid long term view here for the business and where Ah.

About a strong fundamentals that.

Yeah, I think I think kind of getting to your question about where what do we think about the impact of transit ridership being down I think you know kind of near term, you're seeing a little bit of a mix of.

Have a fewer trains running a but maybe some some pent up demand for some maintenance and services and and safety stock. So I mean, some of that is definitely occurring I think the kind of more longer term impact to the you know of of a quarter or more of a.

The lower ridership will.

As a is to be seen and and you know in part of the reason why we talk about our topline guidance. We we have is we still have to see how this this this this unfolds, but you know long term are the the areas that we operating in are heavily dependent and continue we'll continue to rely on the on.

Transit.

And you know and in one in some way it may become.

Opportunistic as.

Everybody kind of figures out what would transit looks like in the future.

No I think 20 reflect on the margin improvements I think we're continuing to see a quality all the ordering take a margin saw continued to improve their arsenal do orders are coming on and daughter piece is we're saying all operational improvement in the business that's fixed improvement on time delivery.

Reduction on cost of policy of course dish comments, our pre covidien gum and will be a south saying, how ah prevent will be impacting some of that we're we're committed to the margin improvement on a trend segment.

Okay and then.

I want to sort of see if maybe we can get a little bit more color I understand you won't give us April revenue and that's fine but no.

We're lapping Gee, we don't really have any CPI is to track there is not great sort of conflict.

Directional Lee is there any sort of color on sort of how to think about revenue right now down mid single down high single double digit stronger, but like any sort of directional color just because its.

With with you guys, it's particularly tough right now relative to some of the other.

Companies, Yeah, I you know I appreciate the question Scott I don't I don't you know with with kind of pulling the guidance I think for the year I think it's its a little bit difficult to put anything out there.

April for US is still is still being kind of accumulated and looked at.

We are we feel good about as we're measuring where our Cape or backlog is our cash for performances that we feel like it's it's it's well within some of scenarios that we have that outlined but not no nothing that we really want to talk about tech publicly right now in terms of guidance.

Okay, perhaps in the queue, maybe an update on April would be helpful. Okay. Thank you guys very much appreciate the time.

Yes.

Our next question comes from Mary Barra <unk> with Jefferies.

Good morning, sorry.

Mentioned mining being less impacted in the overall freight market could you talk a lot you softening industrial business in a quarter and how you're thinking about demand there for the rest of the here.

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I think what are we think about and talks I think certainly the energy markets as the one that we're oh, probably more concerned about and in fact, there as we surface amount customer Shaw on that regard, we're working very closely with far mining customers and staying very close to what camacho here I think a weaker.

Great to see opportunities for a of the services of adapt business in I think I wish Shane certainly lots of any impact there.

I I anything else you would out here fat.

No I mean, I think that some of the.

The industrial markets are really tied to oil and gas or our heat exchange business and some of our turbocharger business.

We've seen some of the decline in the quarter.

We imagined that that decline will will be sustained a little bit with the price oil.

Thanks, That's helpful. And then you talked about continued strength on the freight services side I was just wondering if you're seeing any of the rails perform or and how services given the lower volumes.

Could you repeat thought again please.

You talked about continued strengthen the freight services side. So I was just wondering in your conversations if you if you've seen any of the rails perform more in house servicing.

I'd say no we haven't seen any significant change to that and I think in fact, Oh, we have some opportunities here to help oh the railroads.

Potentially driving.

Efficiency.

Through that process. So you think about a modest in some of the elements of Oh. Thanks, God, we do on the services aside it out so I think that's Oh continued opportunity for us we don't see that as as an add back to our revenues right now.

Hi, thanks to the color.

Our next question comes from Cardinal walk a volatile with Morgan Stanley.

Hi, Thanks to the question Guy is can you just comment I'm, a little bit on the shutdown in India, obviously, they make up a large portion of the backlog on the freight side and I'm a little quick delivery side. HM can you just comment on your ability to kind of catch up by the end up.

This year or whether we should be thinking about some of those expected shipments getting their deliveries getting pushed out into a into 2021.

So I'd say, a our sites resumed operations today in India, except for want of down which I think we have a clear line of sight to starting back up a Wi Fi and not less than a week.

And I think we got to be watching really closely here, but right now think seems to be it really moving into right direction and Oh, we would have the ability to catch up or.

For the year and even as we look at it a guy in the quarter. There has been I think appetite for some opportunity to Oh, partially recover some of the volume loss there in terms of Oh my shipments.

Does that answer your question.

Yes. That's helpful. And then also you know you commented on kind of quantifying the corporate related.

Ah track on the quarter, it's been about five cents or EUR 15 million can you just comment what exactly you're including into that how you would break that down between freight and transit.

Yeah.

We we didn't view it as.

When we were talking about this this is this is not something we added back we just highlighted at four.

Just for you know exactly this question I mean, the mostly its its revenue.

Impact to.

Our operations in India, the ability to get.

Some of our logo build a finalized but I also point out we have a pretty sizable transit business in India. It was also impacted and again. It was just the just the timing of inch of shipments and production and shipments yeah in the quarter at the end of the quarter the or the right.

Most of the the impact is is is a it's a European operations, where shutdowns or partial shutdowns occurred and a and again, maybe there's something things weren't shift in revenue recognized or or in our inputs components from suppliers didn't arrive in time, and we weren't able to add to complete the project. So.

All those things kind of added up into the $15 million, where the EBIT impact we did not have a lot of.

We certainly had some but you know nothing worth highlighting of like a cleanup costs or any any kind of things like that.

We clearly we're taking the appropriate steps to protect our employees to.

To make sure that or any kind of cleaning or you know the or any kind of disruption that way.

Viewed but the but the five cents or we're talking about here are really revenue disruptions.

Okay, and then just one more clarification on the 9% footprint consolidation with that incremental to your previous plans or was that kind of what's expected to achieve the synergy targets you guys propel us Shah with fan or how we would have achieved synergy targets for the air show.

So a totally tied to the $150 million that so we're committed to deliver India yeah.

Okay, great. Thank you that.

Thank you.

Our next question will come from Ken Hoexter with Bank of America Merrill Lynch.

Hey, good morning, Rafael interesting on the the confidence in the in the backlog maybe you could just talk a little bit about this year.

I just want to see have you had customers come in and have discussions about shifting maybe you could talk to us and give us some president and prior downturns how.

How does that committed spending Ben and is the is that tied to production schedules in terms of the backlog. It can they shift delivery times and push that out to understand how the timeframe works on that backlog as well. Thanks.

Okay.

I think it bring a great point I mean this is not the first downturn, we're going through we will operate worked very closely with customer here and we're confident about that $22 billion backlog at this point where of course working with customers as a copy it has impacted operations. So there could be a shift in terms of when Ah.

Some of this project are shipped but overall confidence.

We are delivering on that backlog.

Yeah, just can you expand a little bit on that topic I have customers come and asked for further delays.

It is just one understand the commitment on that.

I'll pick up the backlog garage largely again I think we're executing through that backlog damn. It took away are really associated with some of the dynamics were saying the quarter, where it fits due to our a I'll call on a inability to oh catch up on some of the elements of this delivery.

Just based on the shutdowns, we've been subject to or customer's ability to oh should be receiving or actually coating out through that so I think.

Again back to my or regional common job to comp definitely backlog is there and will always be working with thought customers proactively on that regard.

But but no comment directly on if customers that have come in and asked for delays or what the negotiations like all of that I didn't get just trying to understand how that so can I mean I.

I think I think some of that we're constantly in conversation with all our backlog and our customers about the timing of deliveries and and and so it does have it does have an impact when when we kind of look at the current year.

Right now.

We have a lot of confidence in these in these.

In the.

The current scheduling in terms of manufacturing and and delivering.

But it will you do have a this kinda constant demand on us and our customers to kind of work on when and how we're going to deliver the the the backlog. So it's a it's it's not kind of.

Simple just saying we'll have they have they all have a sudden just showed up and and ask the question. This is this is how how all everything.

Unfolds every year.

Okay and then just on the second part of that was that isn't tied to your production schedules do they can they shift the delivery times is that part of the backlog discussions you huh.

[laughter] tourism that stairs or element of I'll call a long term orders God, we're certainly executing through there could be light delays there I think the area, where you could see some a variation is really tied to more transactional volume associated with potentially fleets that are being parked and ER maintenance to some extent.

It is going to be the for just the fact, you're not utilizing weapon.

And most of that in fact, it's certainly going to be felt here I think and a second quarter based on my earlier comments of a bottoming of volume between the month of April and May timeframe, and or did you expect out to.

Resume as we go towards the end of this quarter in the second half the year.

Great and then my follow up.

You bet on coordinators question before about the 9% footprint consolidation, maybe just expand on that a bit are you doing any structural changes you know now that you look at you know post merger and given the downturn in demand do you see like yourself accelerating some of these structural changes or are you, saying with 150 you're sticking.

The target, maybe you've accelerated that plan within that targets, but there are no new moves that you're putting within that to you know that are clear now that you've got downturn. It can make bigger changes. So certainly I think volume reductions allow us to potentially lucatz I'll call accelerating some of these elements and I think when I go back to our comments of.

Staying committed to deliver on the 150.

Million dollars of synergies for the year.

There's certainly an element of that and despite of any I think a volume reductions were seeing there on the synergy, especially if you think from a sourcing pushback of a there could be up I'll call an impact there I think we've got areas of opportunity this year to continually to take action on.

Hi, Thanks, if I guess.

Our next question comes from coal with <unk> capital.

Oh, Yeah. All question, if I look at the the GE business that you purchase.

Can you talk about the seasonality of that and <unk>.

It looks like the first quarter from the pro Formas you gave last year.

So that it's typically very seasonally weak in the first quarter and I'm just wondering what is it about that business. It makes it so seasonal.

Jeff I think I think the the seasonal aspect to this business and and then I feel may add onto this is that is the service side I think our customers.

Have a you know kind of overweight.

In the local areas the service business into the third quarter and not so much in the first and in the fourth and so that's that's that's the real seasonal element about it but when you kind of look at it over a multiyear period you do have the impact of projects.

And that which is though we and is driven by customer and a man's and expectations are on fleet or their own fleet strategies for new equipment, and then international projects to so so that can kind of create some lumpiness quarter to quarter in terms of revenue recognition, but the truth seasonal part which is the service in North America.

And international locomotives tends to be very heavily weighted in the Q3 and not so much in Q1.

But am I thinking about it correctly that the GE business. The first quarter is more seasonally weaker.

And then the legacy web type business.

I think your to look historically I think there could be elements of like a weakness in the first quarter, but back to Pat's comment is really more tied to a time of projects than anything else and as I look into specifically this quarter. We did have both elements of not just of ownership bent on new locomotives, but we also expect.

Good I lower shipments on the modernization side and those were even freak of that so oh.

Largely again, a project driven and I and I would add I would add and one other element and I don't know, how how many periods or what periods, you're comparing but there is if you go outside of the numbers that we've provided you have different revenue recognition standards and that would would maybe exaggerate some of the seasonality, but but I think that its.

It's fair to say that Q1 is.

Seasonally is lower on the service side Q3 is a little bit higher wavetek any of the hand, which is doing freight car service and maintenance or maybe a little bit different but now it's a much smaller percentage of the total the total business where that seasonality would be more more Q1 in less than.

In Q3, so a lot of things that kind of add and subtract from a from the for the topline seasonality.

Oh, Okay. Thank you.

Thanks, Thank you.

This concludes my question and answer session I would like to turn the call back over to Kristine Kubacki for any closing closing remark.

Thank you Jaime and thank you everyone for participation today have everybody spaced out safe and healthy I'll leave it for it does make it easier goodbye.

The conference has now concluded. Thank you for I tell me they pay them postpone you know mileposts along.