Q2 2020 Westinghouse Air Brake Technologies Corp Earnings Call
[music].
Good morning, and welcome to the web checks second quarter 2020 earnings Conference call.
All participants will be they listen only mode should you need assistance. Please cyclical specialists that puts into starkey all across Europe.
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I would now like to turn the conference over to Kristine Kubacki, Vice President of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to watch <unk> second quarter 2020 earnings call with US today, our president and CEO Raphael Santana CFO caught dougan president of freight services Pascal Schweitzer senior VP of finance, John Mac alert today's slide presentation.
Along with our earnings release and financial disclosure disclosures were posted on our website earlier today and can be accessed on our investor relations tab on Wabtec Corp. dotcom.
Some statements were making our forward looking and basis based on our best view of the world and our business today for more detailed risks uncertainties assumptions relating to our forward looking statements, we see the disclosures in our earnings release and presentations.
We will also discuss non-GAAP financial metric and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics and now I will turn over the call to Raphael.
Thanks, Christine and good morning, everyone. We appreciate you joining us today and I hope you on your family's remain healthy unsafe.
Before we get started up like Scott once again, thank our employees all into feud north factories, and those working from remote locations for continuing to keep our facilities safe and operational to this been dynamic.
I'm very proud of how our teams has responded to the challenging environment delivered for our customers. That's supported one and water during a time when healthcare economic and social tensions run high and you see that reflected in our second quarter results in long term focus.
Turning to slide three we had a strong execution in the second quarter, despite a difficult environment.
Total sales for the quarter were $1.7 billion, driven largely by the international freight market and services, but offset by disruptions due to go good in both the freight and transit end markets.
Adjusted operating income was $262 million, resulting in an adjusted margin of 15.1%, which was impacted by the drop in sales across freight and transit, but somewhat offset by synergies.
Cash flow from operations of 311 million was driven by strong cash conversion and good working capital performance.
This allowed us to further strengthen our financial position.
Hey down down during the quarter by 300 million and increase our liquidity position by $700 million.
Total multiyear backlog was over $21 billion, providing us continued visibility across freight and transit despite market conditions.
And finally, we ended the quarter for just a deep gas of 87 cents demonstrating that we're taking the steps necessary to control what we can.
Dr Long term viability of the company and deliver shareholder value.
With that let's dive into some actions underway.
As you know we remain committed to our synergy targets and we're accelerating our efforts here.
We have $150 million of not sooner just plan for 2020.
Year to date, we are on plan with over $70 million in that synergies realized.
And we remain confident that we will deliver on the full run rate of $250 million in synergies ahead of schedule.
Of particular note we continue the aggressive action on structural costs and lower das DNA expense by 26% year over year.
During second quarter, we reduced headcount by 5% and were down more than 10% year over year.
We have also reduced our operational footprint year over year, and we're actively driving cost reductions through lean initiatives.
Today, we have exited more than 60% of the shared service agreements from GE transportation merger ahead of schedule.
Looking at had the rail transportation market and impacts from depend NAMIC remain challenge and fluid.
While we anticipate market conditions to remain somewhat mixed that's all share with you in a moment.
We believe volumes largely bottom in the second quarter, and we'll we'll see a gradual recovery.
With this in mind and based on our first half results as well as based on the backlog coverage for the rest of the year, we already issuing a new outlook for 2020 year.
Banding no fodder lockdowns due to cold you had 19 pandemic or resulting negative impacts on our business. We expect revenues in a range of 7.3 billion.
To $7.6 billion for the year.
We will continue to adjust our variable and fixed costs to align with volume realities, and we are committed to improving segment margins.
We anticipate adjusted EPS to be in the range of 350 to 380 and cash conversions to be greater than 90% for the full year.
This includes roughly $130 million from prior restructuring and transactions cash outflows.
Cash conversion within the company score business is expected to be over 100%.
Turning to slide four.
I'd like to discuss the market conditions and drivers we are seeing across the sector.
Lets call Schweitzer President of freight services will also hit on some of this in a few minutes.
In both freight and transit we are experiencing mixed conditions as economic recovery begins and commuter travel resumes.
And we're carefully monitoring the ongoing impact of the virus in some regions.
In North America rail volumes had a record decline down roughly 20% year over year in the second quarter. However, we have seen rail volume improved since bottoming in the second quarter.
Likewise locomotive park Inc.'s after peaking to a record high in the second quarter have also shown gradual improvements and we remain positive on the aftermarket sector.
In terms of the North American railcar built.
Our record one third of the North America Rail car fleet is in storage and builders are taking continued steps to slow down production lines in 2020.
The industry forecast currently indicate that the railcar built for the year will be less than 30000 cars.
Reflecting on the quarter I want to share a couple of highlights.
Internationally rail volumes were more resilience driven largely by agriculture and mining Tailwinds.
International locomotive shipments were up versus last year, and helped to offset North America locomotive and freight car build declines as expected.
We continue to see demand for new locomotives in Russia, I asked Brazil, and Australia. Some tenders have pushed to the right to code. We had 19, but do we expect us to resolve as economies of stabilize.
New growth opportunities for next Gen sustainable solutions also remains strong.
Especially for hybrids in fuel saving technology.
We are doing some really innovative work in reducing fuel consumptions by 5% through our engine overhaul process.
Hi, Scott will share more on does in a moment.
We're also currently field testing are flat strive locomotive the first 100% heavy haul battery powered locomotive into world operating in a hybrid consist.
So far we are seeing an opportunity to reduce fuel consumption for our customers by 10% to 30%.
We are extending battery technology to passenger transit as well and just closed a significant deal with New York City transit to drive down their overall carbon footprint.
Finally, we continue to see our digital electronics product line provide significant productivity and improved safety for our customers.
Sales for the quarter were up 4% versus the prior year.
Transitioning to the transit soccer the co viewed 19 crisis has had a significant impact on ridership and service levels in early second quarter.
Since down, particularly in Europe, and Asia ridership trends are showing a slow recovery as economies reopened.
This has resulted in some positive activity internationally with new break new doors and HVAC contracts in regions, like Australia, Canada, India and the UK.
Overall, we believe the long term market drivers for passenger transport remaining time specially as governments look to rail as the cleanest safest and the most efficient mode to address the world's public transportation challenges.
Across the segment, we also continued to drive costs down.
We continue to improve project execution and profitability.
No in and the team are on track to expand margins overtime, while delivering over 100 basis points of improvement meant in 2020.
With that.
Lets flip to slide five and I'll turn things over to Scott.
Thanks Roughead.
Good morning, everyone is good to be we will review today.
I am afraid there and they MZ group president of what pick trade. So if you.
This is a roughly 2.2 billion that our business weve operations in their own 40 countries and approximately $12 billion in vector.
Roughly 80% of our revenues are generated crumitie a contract.
Pruning long term service agreement box contract as well as multi m. with amortization agreement.
So in short we are we have our customer for the long core helping them proliferate in some of the most important logistics corredores around the world.
As I've shared before we are executing on focused strategy.
Create value per customer.
This included ensuring that our freaky that plumbing weather and running hard.
But we are capturing the aftermarket we've a superior product and delivering outcome for our customers proof technology upgrades and new tours.
All the way it constantly improving our food for thought it might take a good.
Today as railroads continue to hunt for productivity and efficiency gain.
Through initiatives like cohesion Kindred railroading for instance.
And in the challenge is brought on by the pandemic these strategies more relevant than ever.
The second quarter as rough had explained that we saw significant disruption in many of the regions, where we operate.
Government shutdowns had an impact on our customer operations and freight volumes globally.
As a result at a record number of locomotives will pop in North America.
However, despite heavy.
Continue to have a leading an increasing share of the total active fleet.
And our customers continue to increasingly prioritize with respect to overcome with you.
Due in large part to the performance and reliability of the fleet.
I would also like to point out that and subsequent quarter.
We didn't hit to record performance for our on time delivery.
And the despite regional disruptions and trend down from Covina.
Each of our more than 100 service locations remained open and fully operational.
The huge testament to the team in the field and received a strong illustration, which we do so much more than set it up.
To see if it's reflected in the resiliency of our second quarter topline.
So while himself from queue relate to the Crazy has led some railroads to delays of an investment decision.
You have our portfolio remain.
We have worked with our customers to align scheduled maintenance planned to the new must get created to you.
And as a result, we have leverage of full power of uptick to increase the scope of our work and to unlock new growth.
Now looking ahead as railroads and telling to recovery and the growing level uprates relying on more long term goal for commodity.
We expect to demand for reliability to be even greater.
This will translate into more comprehensive work scopes into more comprehensive fleet strategy into materialization of opportunity.
Currently we have more than a thousand with anite locomotives operation delivering improved reliability at the fuel efficiency and will grow economic performance for our customer.
As our customers strategically consider their investment plan over the long term.
The value of Modernizations remain very compelling.
The second quarter mode deliveries showed good momentum.
And we continue to a visibility via our mid tier backdrop.
Now on a broader international escape where economies affected to reopen we're also seeing encouraging improvement in banking and operational feedback from.
Good to give you a few examples.
Trulia rate activity has shown good momentum throughout the quarter, China resumed business following the koby look now.
Thanks, Don you have to date count volumes are compared with 29 King.
Brazil, we see a strong demand we've created dependency on agriculture products following a recall how it.
Media World event, where a significant number of locomotive Buck to due to the endemic.
He had little impact to our business as we shifted focus to maintenance.
And as of July all of these locomotives are back in operation.
Finally in North America as discussed we do expect carload volumes to continue to gradually improve and backing to progressively recover.
In terms of commercial activity for the quarter. The team closed some significant long term service agreements Weve class ones in North America as well as in Brazil.
And one a kielder for our LTL advantaged product.
Going into this product a little bit more specifically as rough L. described.
We have at around 10000 that locomotives running globally menu of his locomotives are approaching the effect on that failed engine of growth.
So we this next Gen solutions, we are able to reduce the fuel consumptions by up to fight the absent.
That means for a single locomotive building around 200000 gallons of fuel a year.
At around $25000 in savings per year.
He is an exciting 15, but is opening up a multimillion dollar pipeline of opportunity for what uptick fully in line with our strategy of technology differentiation for the installed base.
Finally, I share a few foods and cost management.
Two left here, we have reduced our headcount by roughly 10% ahead of our synergy commitment and in line with market realities.
We have undertaken lean initiatives to drive cost out of the business, while still being able to deliver for our customers and scalar as markets recover.
So to conclude while the markets remain prudent carload volumes and packing drew significant headwinds.
The freight services team and a strong operational costs, though.
Giving us confidence that our broad international portfolio, our $12 billion multi on backlog and our strong aftermarket treats will position with us well into the future.
Looking for a while you will see some fluctuations quarter to quarter due to the seasonality of maintenance activity due to our engine overall profile than most delivery schedules. However, the fundamentals of your business and its ability to recover both covia remains strong.
I will now turn things over to Pat to provide more color on the company's over second quarter performance.
Uh huh.
Thanks Pascal.
Turning to slide six sales for the second quarter were 1.7 billion, which reflects a 22% decrease versus the prior year.
The decline in year over year sales was mainly due to production across our freight and transit segments caused by the Kobin 19 pandemic.
Quarter operating income was 159 million and adjusted operating income was 262 million.
Thats down 32% year over year.
Mainly driven by the lower sales in the disruption in our operations as a result of the pandemic offset somewhat by variable cost actions and the realization of our synergies.
For the quarter adjusted operating income excluded pre tax expense.
103 million.
Of which 72 million was for non cash amortization.
31 million of restructuring and transaction costs.
Take a look at the appendix D to our press release for the reconciliation of these days.
Looking at some of the detailed line items SGN, a decline of 26% year over year to 217 million.
Loading 13 million other restructuring and transaction expenses.
SGN a expense benefited from structural cost actions across the business as well as the realization of synergies.
Engineering expense decreased to 38 million or down 33% from last year.
Hearing expense move down with the lower volume outlook as well as some changes in project timing.
In the amortization expenses were 72 million.
2020, we expect non cash amortization expense to be about 290 million.
Preciation expense of about 180 million.
Second quarter, we had GAAP earnings per diluted share of 46 cents and adjusted earnings per diluted.
Seven cents.
Details that bridge the gap earnings per share to adjusted earnings per share of 87 cents can found attached to our press release.
As of June Thirtyth are multiyear backlog was 21.4 billion.
Leading the impact of FX backlog is flat quarter over quarter, a rolling 12 month backlog, which is a subset of the multiyear backlog.
5.3 billion.
Our backlog continues to give us and provide good visibility across both the freight and transit segments.
Now, let's take a look at those segments results on slide seven.
Ross the freight segment total sales decreased 21% to 1.2 billion in the second quarter FX negatively impacted sales by about 26 million during the quarter.
In terms of product lines equipment sales were down 37% year over year.
Sort of lower North America locomotive deliveries.
Which as we have discussed often can vary quarter to quarter due to timing.
Matt and that was offset somewhat in the second quarter by higher year over year International locomotive deliveries and increased mining sales.
In the second half of the year, we expect locomotive deliveries to be slightly higher when compared to the first half of this year.
And as you heard Pascal discuss our services portfolio continues to show will resiliency despite the headwinds.
Right and nearly 18% drop in North America freight volumes for the quarter services revenues were down 8% year over year.
Result of lower part sales due to record locomotive parking, but that was offset by double digit growth in March deliveries.
We expect our card sales to improve with the gradual recovery in freight volumes.
He some timing of maintenance and overhaul work edging into the fourth quarter.
Digital electronic sales were up 4% year over year on higher sales of distributed power products and signaling projects.
Well its sales were down 30% year over year on lower year over year railcar build.
Mines in key industrial end markets, such as oil and gas and power generation.
Quite the topline headwinds evidence of our synergies.
Coming through as segment adjusted operating income was 229 million for an adjusted margin of 19 per se.
Finally, the freight segment backlog was 18 billion about flat with the prior quarter.
Of note again that FX negatively impacted that backlog by about $58 million.
Turning to slide eight.
Across our transit segment sales decreased to 25% year over year to 533 million.
Driven largely by disruption stemming from the cobot 19 virus.
But were also impacted by FX, which reduced sales by an additional 18 million.
Well, we sales were down 32% year over year on disruptions caused by the pandemic.
During the quarter our operations in our customers operations, which are primarily in Europe, and Asia were negatively impacted by government shutdowns.
Aftermarket sales, which were down 18% from last year were impacted by reduced capacity at many transit systems around the globe.
However, as economies have opened up we've seen a resumption service increased equipment deployed.
Gradual recovery and ridership in most markets.
Our adjusted segment operating income was 51 million for an adjusted operating margin of 9.6%.
Margin performance was impacted by the lower absorption of fixed costs in the first half of the quarter. However, we are continuing to drive improvements in the transit business expect transit margins to increase 100 basis points for the year.
Finally, the segment backlog was 3.4 billion also about flat with last quarter.
FX negatively impacted the backlog by 79 million versus the end of the first quarter.
Now, let's turn to the balance sheet and the cash flow on slide nine.
Cash flow generation during the quarter was strong at 311 million.
I would note that we had about 40 million of one time impacts due to prior year restructuring transaction charges.
We had identified on our last earnings call.
Our leverage ratio at the end of the second quarter was 2.7 times about flat with the last quarter.
But our total liquidity at the end of the second quarter was 1.9 billion up solidly from the 1.2 billion at the end of the first quarter and total net debt is down about 282 men.
Also in July we took proactive steps to restore a more balanced maturity profile of our debt with the successful five year 500 million bond offering that retired 500 million in floating rate notes due in September of 2021.
Summary, our balance sheet is strong we are confident in our ability to generate cash flow.
Giving us the liquidity and flexibility to execute our strategic.
With that let's move to slide 10, and I'll turn the call back over to Rapidio.
Hey, Thanks, Pat So as you heard throughout the morning, and you see on this page Wabtec had a solid performance in the second quarter, despite a weak and fluid environment. Our reminder, that in difficult times strong companies must learn how to adapt find about away and lead through change.
We could not have imagined a greater stress test for our company and Hollywood performing a difficult environment then to one we're seeing it today over the last 17 months. We have successfully managed a massive merger doubled the size of this company with based into the global Ben.
Dynamic in an industrial recession, and one of the most difficult business cycle has ever seen.
Yes, despite all the odds we are performing strong and we have delivered a true testament to the team and their commitment to position this company as a stronger and more resilient Ptwop dock.
Adding to the second half of the year, we fully expect to see continued headwinds, especially given the uncertainties of co Vietnam gain.
Our leadership team remain confident and committed to manage cost and to drive profitable growth that will help us navigate these challenges.
I want to personally thank each and every member of the Wabtec team again for all of that they are doing in the face of change. Your efforts are reflected in the results we share today with that I'll turn to call back to pristine to begin the Q on a portion of the discussion.
Thank you wrap yeah, we will now move onto question.
Before we do out of consideration for others on the call I actually that you limit yourself to one question and one follow up question. If you have additional questions. Just please rejoin the queue.
With that operator, I think we're ready to take our first question.
Thank you.
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And our first question will come from Justin along with Stephens. Please go ahead.
Thanks, Good morning, and congrats on the quarter.
Good morning, Justin.
So maybe to start with that 2020 guidance. So if I look at the revenue guidance. It implies that sequentially in the second half of the year revenue should get better relative to the second quarter.
As we think about just the mix implications can you give us some color on how much of that sequential improvement in revenue you anticipate to come from freight Mercers Transit and then anything just on a quarterly Baden basis that you can provide to help us think about the cadence and.
Revenue or earnings in the back half.
Sure.
So let me start first with a well.
As we look at the backlog coverage for the ranges. We provided we feel strongly about doubts I think we're also fueled strong about distracting the execution.
Got so I'll say, a strong momentum in terms of both synergies and cost actions Delaware taking.
Thank you in the second quarter, we certainly saw a volumes bottoming for our customers. We think there was also when we think from operational disruptions I think we also to some extent have seen the worse I don't think we're through that so I think we have seen improvement and the trends towards.
The end of the quarter appointed to Dodd with on par kings of locomotives ridership well levels and the transit side have improved the bets, but I think about our news there you've got a large number of trains still operating so I think we're continuing to see those trends.
The dairies so of course, some volatility as we see and as we look into the recovery, but we're seeing trends up starting at the end of the second quarter and we're continuing to see that.
Through this month of July as well.
Got it unless you want to out any more specifics into it no I think I think the one thing I would point out is that.
When the M.
So.
When you kind of look at our information as it comes available the the mix of of aftermarket versus though we.
The decline is much more significant in the in the OE side kind of quarter over quarter and year over year. You you, where you see that is really being impacted by the by the disruption in the industry in the market and and so I think to get your question, where and how is recoveries I think the recoveries going to be in both said.
Since I think you're going to see see it coming back to more typical mix of businesses as year goes along I think one of things we'll be watching for is really a any push outs on decisions with regard to new projects and I think that's something for us to puts you into monetary here as a we've entered into a built backlog.
Okay, Great and then maybe Pat on that cadence part of that question for third and fourth quarter.
Do you feel like third quarter, it's maybe a little bit worsened and we kind of build off of that entity ended the year any color on that front.
Yeah, you know just want to be careful about guidance to quarters and everything but I think you see sort of I'm kind of a steady sequential improvement as we go through the rest of the year.
Okay helpful and as my second question I wanted to ask about free cash flow I know you made a comment about that and the cash conversion percentage this year, but any more specific thoughts around free cash flow and 2020, and how that cash can be allocate.
In between.
Yes pay down and maybe potentially even buybacks I don't know if that's something you're you're considering at this point.
Well, a couple points tetco with given clear guidance to cash conversion being above 90%.
We remain committed to that and I think we have the areas of opportunities here to act. If you look into areas like inventory for instance, so Oh, we'll continue to have a strong girl rigor.
Around that since Oh, we would feel strong about to delivering above 90% cash conversion here.
Yeah, and you know as for the allocation I think.
It's it's obviously a one of the most challenging times and and and we want to make sure that we focus on the on debt repayment and then a and then get into.
Other uses of capital I don't think or.
I think it's too early to really be be talking about a you know anything.
You know aggressive war, we want to but we want to make remain opportunistic and that's that's that's the way. We've we've approached this word we're generating cash for meaning our goals and then we're using it to add to it to get our debt in the right right kind of ratio ranges, we've always talked about.
And be opportunistic for all the other things we can do we remain committed to the framework where presented during the Investor day.
And there is a commitments to continue to pay down, but we're going to be looking odds opportunity this year, and especially we can see bolt on acquisitions being I'll call more available than the where maybe six months ago and so we'll make sure to evaluate died against a a different options. So we're committed to.
That framework, we presented back at Investor Day.
Okay, Great I really appreciate the time.
Thanks.
Your next question comes from Chris Wetherbee with Citi. Please go ahead.
Hey, Thanks, and good morning.
Maybe if you could that I was curious if you could provide a little bit more sort of color on the outlook for the second half on on freight segment. So looking through sort of equipment in components in coming in in the sense of how we should be thinking about that revenue rebound relative to what we see in the freight market services and digital obviously held up fairly well, but.
When you think about those two pieces those kind of move linearly with recovery in volume or how are you guys expect you got to play out the second half.
I think job.
I'll, probably 0.0 to three tanks to be a really watching of course think back for both customers and operation was very significant in the second quarter as we're going to the second half I think the a first really watching closely on the freight side down parking of locomotives. What if it was a north America, where international mean, we have.
I've seen the impacts in the second quarter and as those on parking of course I think.
We have seen that trends, it's not linear, but I think theres some broader spots done, but one places versus orders.
Especially internationally I'd say, we see some of those brighter spots, we see them across a cross some geographies and driven by well either agriculture specific mining there's still some markets were heavily underpenetrated. So I think all we see a a good dynamics coming from those firms.
Some of these markets and its reflected also in the pipeline of water call opportunities for equipment deals.
So ratified talk about agriculture in Brazil or mining in Australia, a we're also continuing to deliver on our contract in India, you pick up a country like cows extends volumes carloads are actually up year over year, a year today and that's also I think a signal.
Ken or opportunity for us.
Okay. Okay. That's very helpful. I appreciate that color and then.
Just a detailed question about the 12 month backlog I just want to make sure I understand sort of what the progression has been over the last couple of quarters. So that's come down a bit no FX, there's probably some of it I'm just kind of curious have we seen any of this sort of 12 month outlook get pushed out into the right. I think there was some comments about that maybe on their prepared remarks, just want to make sure I'm under.
Standing sort of what the 12 month use because obviously the long term is very stable just want to make sure. How we're seeing that kind of play out over the course of the sort of more immediate term.
I'd say certainly when I look at second quarter, even first quarter I mean, I can't say those were a necessarily a great in terms of all favoring a dynamic of ordering tech I think when you compare first quarter of yes second quarter and if you have to exclude FX you will see a backlog remained flattish.
Quarter over quarter, I think as we look at it had some in where we're really in the business are looking for business. We're chasing every piece of opportunity that we can go after our strategy here is to grow the business profitably and I'd say, we're continuing to watts or to have a more competitive cost.
From a than ever before I think yes, we are seeing some of decisions moving to the rights and.
Thank.
Especially if you think about some of the dynamics in the transit sides.
With really despite of the fact that ridership is low I think we're seeing a number of a train so in operation. So operators are really reevaluating.
Some of these but ER, we think the long term fundamentals ratified woollcott transit or freight remain strong and so we are seeing your commitment to actually are being vesting and does modes and despite of the solution.
As we look at the world to add in terms, while driving a more efficient or more productive or less emissions and I think a way with sits up we sit in a good place in terms of the long term.
Fundamentals so for the business.
Okay. Okay. That's helpful. I appreciate the color thanks very much.
Our next question comes from Allison Poliniak with Wells Fargo. Please go ahead.
Hi, guys good morning.
Hi, I just wanted to delve into Chris his question, a little bit more on the freight aftermarket Pete, particularly as it relates to North America.
I guess just given the focus on the browsing in terms of increasing the release universe is bringing equipment back I would've thought your freight aftermarket I think you said it wouldn't recover one to one but I wouldn't think of it actually recover a little faster and resolve that any thoughts there I am I thinking about that wrong.
Well couple of comments there are number one I mean, we felt the impact in the second quarter in North America and that's a.
Brutal right I mean, as you look into the numbers you've heard from.
From the class once a man, we've seen volume reduction or pretty close to those.
Numbers that you have hurts I've seen Cubs transactional parts and I think some of the class ones alluded to like 20% down Yeah. I mean, we did filled out directly I think what we've also seen yes.
From the bottoming of volume, which are fundamentally out in the first two months of the quarter, we've seen that improvement come through that's also being true not just for North America. We've also seen that into international markets. Yes, do we do expect recovery to happened there faster, especially as fleets are on.
Parts, it's all dependent on the pace in which those fleets gets on part I think we're seeing a faster rate of recovery on international markets. I think I've mentioned here earlier some of the dynamics on Agri business mining across some of the geography. So that we serve and was certainly saying Oh, let's say.
Much faster recovery in fact, a some customers actually up year over year.
In terms of carloads in some of these geographies.
Got it data and then just sort of turn to transact in terms of the recovery entered the U.S. versus global I know global at a much bigger impact. The your lunch brand. That's you know any difference isn't that you're seeing in those markets in terms of how the recovering or.
Interest investing in infrastructure going forward.
I think the recovery in terms of number one ridership, it's been a little bit better in Europe future compared against the U.S., but reality is it remains well below what I'll call that precludes you had a level. So I think the about our side of it is we've seen.
I think a number of train service in operations.
Our very significant despite of the ridership being down so I think we can also be looking at service.
Despite of maybe a lower decline going into a faster recovery and I think daughter element is I think as far as project schedules, we haven't seen any again.
Cancellations rainy thing with regards to impact to the share there could be an element of I think splashing to the right in terms of just project delays on when customers might want a equipment I think thats. So one of the on it so we're going to keep monitoring.
Great. Thanks, so much I'll pass it along.
Our next question comes from Courtney Jaekel bonus with Morgan Stanley. Please go ahead.
Hi, Great things kind of question guys, you talk a little bit about you know hand, the bottoming in volumes in writers have been transit I appreciate kind of lot of questions on kept the aftermarket, but could you kind of clarify.
What the exit rate trends that you're seeing kind of that improvement off of you know the down 18% in transit aftermarket you know and then similarly in in the freight services side kind of how how you've seen that recovery progress so far as you've gone through the quarter any I picked trends.
But in terms of the Axa trends and then again, we saw its going back up some of the demand in both terms of orders, but in terms of sales.
Versus the first two months of the quarter I think a in specific are saying transit.
I think beyond that I think we've taken significant actions in the business of low end. The team is really committed to continue stake.
Then a shared cost actions and ER I look at a year to date, we were 110 basis points margin improvement versus the first half of last year I think we've talked to you about being at least 100 basis points improvement year over year sell despite of what I'll call, Oh really unprecedented quarter in many ways.
Oh, we're very much on track to deliver on that promise. So I still lot of work to do.
It's still a subject to a lot of disruptions but.
We feel like the team is adding the right direction here.
Okay, and then just on the synergy target. Obviously, you know makes me feel confident they had over 150 million that by the end of this year I think you've talked about some of those synergies being volume related to maybe can you just comment on your confidence about because yeah.
We're seeing that volume improved or are you seeing no you know maybe faster footprint reduction and then you were anticipating and then if you can talk at all about maybe the upside to that 250 million you know since you've mentioned that you achieved that earlier than you previously anticipated.
Yeah, We're certainly I'd say number one reason for that yes, we do have a pipeline of synergies us greater than the one that we've provided to us. So we're continuing to work on daus and they are critical in order to offset any all call a downside. So we could experience along the way so.
Oh, we're not giving necessarily any considerations on volume growth at this point as being able to accelerate dot, but up I think we've got good momentum. There I think we continue to have an opportunity here to provide a call batter and you'll see in terms of accelerating synergy says.
As we progress so this year and need to next year.
Okay. Thank you.
Your next question is from Ken Hoexter with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning, Pat maybe just a continue on the margin commentary that you are what are your thoughts on on freight margins now that you've fully integrated with GE and lapping a year over year.
You are in the upper teens, but maybe just help us think about what happens as an asset sales come come back online.
Should we see a mix change do you expect that to move back into the 20 should it stay at this level, maybe just year your general thoughts as the mix shifts.
The business mix.
Sure I mean, when you when you kind of look at the the impacts you have a freight car builds that are really at a at a very historically low levels. You have a you know North America logos and a in the impact of that markets on our business you know as those volumes come back on.
We have we obviously get a really good margins on the you know any when the freight car build and and and we get good margins in the local my own builds on OEE and the in the absorption that comes along with that so I think that.
You could see or the business and the margins for that freight segment improved with a with the with the with the higher volume made it certainly makes sense. The other aspect to this will be a digital electronics and and you know the investment that our customers will make in the growth in that a that revenue area will a wall.
So provide really good margins for the segment.
So it's not like digital has higher margins because of less asset intensity. So therefore, its its peak is now and with more assets. It. It would be pressured you see as has been the physical assets come back and improving in that margin just as you get more fixed costs coverage just yet.
I think the fixed charge coverage is big part of it but I think it's you know it's also it's it does or does a good product lines for us and and and Ah and they they deliver a lot of value for for our customers and and I think that as the overall volumes recover and we get a.
The industry improve I think at the you'll see the and the margins get back to more store and typical levels.
Great and then for my follow up Pascal.
Obviously freight did well in the in holding up in the backlog can you talk about the mix of of contract services versus equipment in the backlog itself in terms of what was added and maybe your thoughts on domestic versus international as well.
Luke.
You into things about I is always want to be a little careful you know I don't think we've we've kind of broken out like each of the the component of the product line revenue into its backlog and everything.
You know obviously, we talk in general about a the revenue mix in component and a services.
As as you know about half of it comes in or the MSC agreements, which is an element of both the kind of labor service and parts and and and other other activity you have a mods in there and you have and you have part sales in there. So those are.
Those are basically the the rule of thumb that we've been talking about in terms of how to look at that that product line revenue I think the orders that we have come in kind of hold with that would that mix, it's not it's not.
Absolute every quarter, but when you look over a longer period, a year or more year, you're going to you're going to see are you order intake be.
Pretty consistent with that mix of revenue.
Yes, Thank you maybe maybe.
To your question Dynamo no.
Perhaps not to finish on your question about North America fishing, Donna <unk> I mean, what we see that North America. We've seen these big impact from from backing now if you look at the active fleet today, what that locomotives really represent the majority of the fleet, but he's running two days will be season, the fact that he's mitigating the so.
Hi, Bucking number and then looking with you that are running are running really home. So income of May go with how well milestone locomotive, we've really seen as Truman Cree is oh, we have always implementation of profusion scheduled railroading Soviet you've received one thing with you've accelerates unscheduled maintenance, but he's putting more and more focused on reliability and good folks on me.
International referred to discuss keep I mean, it was truly a strong Brazil is thrown Kazakhstan Jeep and.
Many of probably begin commissioning markets have remained strong and in terms of a in terms of modes leaves a great working with our supply chain team has been doing to keep our factories open we've been able to seek tool delivery schedule and two of its trunk club still as well to be though really the three building blocks that have it can explain these performance I would say.
I think if you look at the last two years with a continued to see an increase in terms of the percent of our fleets.
Running when compare to our competitor sweater, if I look at its North America or global markets I think that's an ongoing trend.
Thanks appreciate the time does.
Yes.
Your next question comes from Matt Elkott with Cowen. Please go ahead.
Good morning. Thank you so back at the Analyst Day, you guys provided a chart showing the.
Installed base distribution for locomotives.
And.
Based on the age profile of the T for locomotives.
It would appear that some of them may be rolling off warranty in the next couple of years.
First of all is that it does that make sense and if so.
Would that be a.
Positive for aftermarket revenue on those locomotives.
Yes, yes, that's true now keep in mind I mean, we see that big cities right. We are talking about 23000 assets as we even as we as we presented I think we have a favorable age distributions easy average age or VCTS only 15, yes, we see that pretty young fleet, but he's going to keep running for a number of yes, you have some of your Duffy that.
Running less you have some of fleets I thought coming off that's coming off a warranty officially especially internationally and so you have a number of off affect becoming a coming to prevail, but true we have from locomotive coming up warranty and he's looking with you start generating service revenue.
And then service revenue in bed, but that doesn't make it into the backlog number does it. The good you publish the 12 billion not necessarily depends on the contractual coverage that we have hobbies Union. Yeah. I mean, you. You you you can you have a and assays that are out there depending on the.
When the customer and the fleet and their their own decision there might be a contract agreement that's that's in place.
But you could also have customers be doing some of the maintenance on their own with just our parts or some somewhere in the middle It's really it's not it's not a.
Somebody gets you can kind of paint broadbrush or where everybody. It can be a little bit different night, and that's why I always go back to that kind of the mix or have a of the service revenue for the for the product line. So theres about what 600 million, which is more transactional waitress orders you get on the Gulf. So you might not be seeing dollars. So on the backlog to your point out of the toll.
Total 2.2 billing that make up to <unk>.
Got it makes sense and speaking of a question that may be.
In a gray area and and somewhat hard to answer.
I was just wondering.
If we can gauge what percentage of your international backlog.
May be for customers that are but you know crane government backed.
Entities.
Federal government back into these versus.
State level versus private companies.
No that you probably don't have that specific breakout, but any color would be helpful.
Exactly we don't really how that breaks down like Cuba strides, but American certainly bookings without and try to get back to you if a at least some color around it.
Yeah, I would just add I mean, just is that you know is like a rule of thumb or something that you just to consider I mean, a lot of are a lot of art, especially in afraid side, our contracts or are backed with bank guarantees and Ah and.
And other.
Financing that's in place.
When you get on the transit side, especially on the OE and the OE markets, where you have the back big backlog those are those are.
Typically.
Supported with government funding.
And often that funding has been in place for years and because the because the contract was awarded years ago. So that's just it just to kind of thing to consider so thats one side on the equipments and maybe on the service side. There will very often be sold if a services contract on the top of that because they want to make sure all.
From a day maintains a look what is running and there's an element of continued training to the operators and what we often see as.
Our fleets running, especially those remote locations.
As we support the customer throughout the life of the locomotives.
Absolutely I mean internationally internationally, we can we can pretty often we vote. The profile of issue both end up with a weve a brand new fleet of looking with you at teams have trended up till a few you have only we really try to you know to stay close we have a custom over the entire life of the look of the MTR life of the looking with EUV, we have more than 160 Lucas.
Let me location or their own the willing to adding look I'd prisons, and being able to bring engineerings, who booked with a physical youre weve remote diagnostic sees having keeping pop locally is really a is really important for us in commission. So we're very interconnected with our customers to the points out in a lot of places we managed to invent.
Sorry associated with parts coming in and ultimately, making sure we guarantee the availability and reliability of those assets. So oh, we we feel very much upfront or any of those changes.
Great very helpful. Thank you very much.
Our next question comes from Jerry Revich with Goldman Sachs. Please go ahead.
[laughter], Chris how are you had good morning, everyone.
Okay I'm wondering I'm wondering if you talk about how you're out and I'd say is performed in in the quarter. Obviously really strong services result sounds like mobs help but can you talk about the.
I must say performance in particular and I believe you get.
Higher revenue opportunities post.
Sorry.
The option and I'm wondering are you starting to see that hitting the sweet spot. If you will can you can you just expand around those points GAAP. So I'll just start with the second quarter I mean of course, the trends were not great. There and then we saw a decline.
And some of these items and I think I mention about parts. I mean, we also saw pressure on M.S. I am in units not just not running as much as they work, but once again I think as you start seeing the on parking take place I think we're saying those.
Trends as early as of June and continuing to July to move into right direction and Dicom. We're seeing a good pattern from just a point of view, but I think the one thing that want to highlight to you here is a we're working with customers to make sure that Theyve got ultimately I think the most efficient.
The most reliable locomotives out there and views presents to us opportunities to overhaul to modernize into ultimately also equip them. So they can long run a lot of the things you heard from the class watch how do I run longer trains, how they get to a more fuel efficiency for those locomotives and.
We got to make sure that were competitive as we do that but things like distributed power with low control, Alex say trip optimizer does or some of this acknowledges that.
We will enable that and.
These are in fact proven technologies that are aligned very well with PSR in all deficiency railroads want to drive down I think again very much connected with a lot of the store do you hear from up a scale on the services side and the one area, though we continue to see opportunity or to grow.
Our installed base and to help customers with a great paybacks.
Okay and then.
Follow up on Mods, you know Pat and I think you mentioned your prepared remarks, you had double digit growth to hit.
The type of outperformance that you had in services versus pretty boring quarter, you would see.
Shipments would have to be up 30% to 40%.
Year over year.
To drive the level of outperformance that we saw for you folks in the quarter and I'm wondering if you can comment on what's the inquiry level like we're adding model to backlog.
Are you able to essentially maintain the mods backlog as yet we hopefully see improving their freight conditions generally 21.
Yes. So some of them odds are you know there in the backlog a year over year essentially we we we continue to execute on orders received in you know it would've been a in 2019 and a in according to the schedule that are that are that our customers and have worked with us on on establishing.
So there's a there's a there's just there's a certain amount of about quarter to quarter variability it'll come with with his those mods orders or as we execute.
It's it's sometimes its.
You know to to look at it and say that's going to be linear or whatever or have a trend. There. If you really have to look at a bigger picture a bigger a number of quarters or a year to date kind of kind of number. So it just so happens it in the second quarter.
With that backlog is more staggered in compared to last year.
When you talk about order intake from odds going forward I mean, it's.
I think that there's a lot of interest in our customers to continue to to use. This this small I'd approach to leverage and especially in their PSR strategy and and their fleet a in their fleet strategy escalators.
No I mean shipment number one knifings. The if you look at them at the Soviet number falls across time, it was not unwritten upfront than most story right as we explained we it.
A difficulty attrition enough memory can do to packing. However on a big portion of our fleet kept a kept running internationally Oh, we saw some another strong performance and then we had a stronger mcauliffe, though in terms of in term of deliveries now looking full on four months I mean, we believe it or do you see the big opportunity you called <unk>.
For the railroads, which is 49, we there are we there are a strategy as rough has said or on a longer trains more reliable trains a bit of economic developments, we have and I used the fleet.
You know look of in their local for details and we have your but can you keep who didn't even bigger outcome and 12 cut them out. So we have talking about 50%, increasing haulage ability reliability improvement by more than 50. So.
Then duffen fuel efficiency improvement the additional follow suite of did you thought it solutions trip optimizing local Detroit and you see an order. These you know when you when you combine it together, we believe it'd be he's turning into a very attractive investment proposition for falls the railroad now for them in the end it's a quick.
No for of capital allocation and and they decide I mean, we will conduct to to fill them to value. If I will a fellow product and we believe that there is a big opportunity to create value for Oh.
The railroads and for what that kids. The same thing you can and you will see big swings between mods and sell a lot I'll call new locomotive ER volume so quarter over quarter, just keep in mind to the same facility as theyre doing them odds are doing yes, new units and of course, we tend to profile dose to make sure I mean would.
Driving good productivity out our plants. So there could be some significant changes on quarter over quarter numbers I seem to seasonality is a seasonality effect is in bulk 10th annual mugs you have a sell reach a scheduled you have in due to maintenance with your overall profile Verizon.
At seasonality impact and a and and then you will see some ups and downs yeah.
Okay.
Reshaping discussion and congratulations on another strong quarter. Thanks, everyone. Thank you.
Our next question will be from Steve Barger with Keybanc capital markets. Please go ahead.
Hey, Thanks, good morning.
Just a couple of quick ones.
For the did nothing it's a 4%.
Recurring revenue from existing customers or do you have been able to convert new customers looking for efficiency and into Q.
Can you repeat gotten it yet you broke up a little bit Steve can you say it again, yeah, sorry, the digital business increased 4% more recurring customers or were you converting new customers.
I think.
Weve a lot of its associated with fall call existing customers, we have the opportunity here to grow our installed base on some products start until it's still Underpenetrated I think I mention here, Alex say as a product that I mean, we still have a an installed base that's relatively a small when I look at that but.
Actual at this product and it's a key products, especially as a railroads look at making longer trains I think there's some elements year of auto products like smart HBT that will also enable customers to get significant fuel savings as they rondo sell longer trains so.
More with existing products and existing customers I think what are the big opportunities. We have is to expand that share golf and Oh really into the international markets. I think we've got some earlier adopter shop in places like.
Brazil, a in places like as extent, but we can still be doing a lot into some moderate geographies.
So that was my next question the digital business is much more North America and less penetrated in international.
Exactly.
And just last one one quick clarification slide eight says you expect to drive margin improvement in transit through the rest of the year does that mean sequential improvement by quarter or is that relative to what you put up last year.
Thank you again, well set last year was a we're going to drive at least 100 basis points margin improvement year over year and are we certainly have actions that support more than dots and biotech. My commentary earlier was you look at the first half of the year, we're very much on track to do so.
And actions will continue its less about the event I'll call the improvement year over year, but making sure that we've continued to drive momentum or two well get far entitlements. So oh.
When its she continued momentum there.
Understood. Thank you.
Your next question will come from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks for the time guys.
A couple quick ones for you first Pat so.
Typically third quarter, just normal seasonality is lower than third then second quarter does that sort of normal seasonality apply this year and then maybe just bigger picture when I look at the guidance I'm sort of a faster or improvement in revenue growth off. The bottom. Then then earnings growth maybe just some thoughts there.
On sort of the mix or or or margins as as revenue starts recovering. Thank you, yes. So.
The the seasonality.
You know, we kind of find out to be a little bit challenging and a little bit a you know not typical year to year. When you would consider all the we've gone through you know the the easy wanted to point to is or the timing of some of our freight services business, we would see a a lot of strength of that in the in the third quarter.
In the there my earlier remarks prepared remarks, we suite, we I kind of mentioned that we see some of it aging out into the fourth quarter and I think that that's a you know from what we can tell with our customers. We think that that's going to have an impact I think you are you also look at Oh, Yeah that was always a you know kind of a positive seasonality in Q3.
We also had some negative impact of shutdowns and plan to slowdowns when the a in the summer months in Q3, where where we're seeing that being a little bit moderated. So I think that that's that's the expectation for us in Q3.
With Oh, you know getting back to normal and next year.
You know and an eight year your point about about kind of revenue growth outpacing your earnings growth I I think that that's a little bit related to a the sales mix.
Ah timing.
Would you know, we certainly we'll see some or some kind of return to normal and some of our engineering costs and.
And and as she in a being you know more consistent with the higher revenues and I think that'll have an impact on our margins a little bit in second half the year.
Okay. Thank you and just just last one the if I go back to the beginning of the year you that you were talking about 900 million a cash from ops.
It looks like the net income guidance is down around 200 million from from January So should we assume a similar sort of 200 million decline in cash flow from operations or is there are reasons why it can be better than that.
Well I think you got to you got to obviously consider the impact of net income in the lower volumes on the cash flow, but you know the at the the areas of of of confidence in cash flow and opportunities to do better.
No really starts with the ability to to work with our working capital to reduce our working capital with a lower volumes turn out in a source of cash.
Obviously, the cash or the cost savings initiatives that we put in place.
And and a you know we're looking we continue to execute on on some of the tools the balance sheet tools in the and the supply chain tools that we replaced a from a exiting the GE or a transaction. So all those things I think lead to a lot of confidence our cash flow generation for the rest of the year.
Okay, great. Thank you guys appreciate the time.
Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Kristine Kubacki for any closing remarks.
Thank you everyone for your participation and I will turn it off the call over to Rafi out for a quick you comment Hey, just star one of the most disruptive quarter Shaw for us alber with really an impact for both customers in operations.
Walked back employees have you an absolutely amazing and their response and I just want to thank them for the hard work and dedication to keep serving our customers in running our company well Ah. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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