Q4 2020 Westinghouse Air Brake Technologies Corp Earnings Call

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Good morning, everyone and welcome to the <unk> fourth quarter 2020 year year end results conference call.

All participants will be in a listen only mode.

The assistance, placing all of the conference specialist by pressing the Starkey followed by zero.

After todays presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded.

At this time I'd like to turn the conference call over to Kristine Kubacki, Vice President of Investor Relations Ma'am. Please go ahead.

Thank you operator, good morning, everyone and welcome to the web Teck's fourth quarter and full year of 2020 earnings call.

Joining me this morning are president and CEO, Rafael Santana, CFO, Pat Dugan, and senior VP of Finance John <unk>.

During our call today, we will be discussing earnings release that we issued earlier this morning.

Our slides from today news release and financial disclosures were posted on our website earlier today and can be accessed on the Investor Relations tab on Web Tech Corp Dotcom.

Please note that some of the statements we're making today are forward looking and based on our best view of the world and our business today for more detailed risks.

Certainties and assumptions relating to our forward looking statements. Please see those disclosures in our earnings release presentation and SEC filings.

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

And now I will turn the call over to Raphael.

Thanks, Christine and good morning, everyone and thanks for joining today's call before we dive into the presentation I'd like to begin by thanking our global team for their resilience and strong performance in 2020.

The year challenged by the pandemic they work tirelessly day in and day out to protect the charter and to keep our operations delivering for our customers day remained disciplined on cost management.

Executing in the face of many challenges and helped to strengthen our financial position and ultimately delivered the results for our shareholders.

I am proud of our team and the performance we've delivered as you can see on slide three.

Total sales for the year were $7 6 billion.

This was driven largely by international freight market services and are recovering in transit, but offset by global disruption due to the pandemic.

Adjusted operating margin was 15, 1% driven by cost actions and execution on our synergies.

In 2020, we exceeded expectations by delivering a 200 basis point margin improvement in transit, where our team continues to drive improved project execution productivity and cost actions.

Cash conversion was strong with cash flow from operations of $784 million, which included roughly $220 million in one time impacts related to transaction restructuring and litigation expenses.

Cash generation was driven in part by good working capital management.

This allowed us to deliver on our financial priorities of investing in the business paying down more than $300 million DAP.

Which includes the tax obligation to general electric and returning roughly $300 million of capital to shareholders.

Total multiyear backlog.

The silver $21 billion and up sequentially over the prior quarter, providing us better visibility into 2021 and beyond.

We ended the year with adjusted EPS of $3 79, our teams continue to take action to manage what's in our control protect the long term growth of the company and improve competitiveness, while delivering shareholder value.

In terms of synergies we've delivered over $150 million net synergies during 2020, and we're on track to deliver the full run rate of $250 million of synergies in 2021.

To achieve these goals we are taking further actions on structural costs in.

In 2020, we reduced head count by 12%.

We drove a 10% reduction across all of our operational footprint.

And we have started lean reset across the company to remove waste maximize competitiveness across our product lines and advance our culture of continuous improvement.

Since the GE transportation merger total.

Total rooftops have been reduced by more than 30% and total head count by 16%.

And to date, we have the exited more than 90% of the Gs shared services are ahead of schedule.

Throughout the year, we also never lost sight of investing in growth.

We extended our leadership position in autonomous operations, helping more than 70 customers successfully meet the deadline for positive train control.

We also closed a strategic digital order for trip Optimizer zero two zero.

This is an advanced technology that allows the customer to start of trained from zero miles per hour and stop the train automatically using various controls that are integrated with positive train control.

In 2020, we also further strengthen our role as leaders and Decarbonising Global rail transportation by developing new technologies that reduce emissions and drive fuel efficiency.

With built shipped and tested the worlds first savvy Hall battery electric locomotive.

We're proud to share just locomotives currently in revenue operating service with BNS, South in California, and it will be a game changer and Decarbonising rail.

In 2020, we extended battery technology to passengers as well by closing of significant deal with New York City Transit to drive down the overall carbon footprint.

We have also reduced the weighted lifecycle cost and braking distance of of transit train with solutions like Metroplex.

For which we secured a key order in Singapore.

And finally, we are improving air quality and site transit cars with the launch of <unk> future and advanced the air filtration system.

And as we highlighted last quarter, our order pipeline could choose to strengthen and we started to see the pipeline convert in the fourth quarter.

Book to Bill at the end of the quarter was <unk> 99 versus <unk>, 89% of the third quarter and we will continue to have positive momentum throughout 2021.

Global freight volumes and equipment utilization have sequentially improved since the trough in the second quarter and we are continuing to see uneven yes continued sequential recovery.

This aligns with what you've heard from our customers as well.

In the fourth quarter of 2020, we secured a strategic international locomotive order and throughout the year built on our strong install base closing several long term service agreements.

We have also expanded our global technology footprint in key regions like the Americas, Russia Gis in India.

Demand for reliability and productivity will only accelerate as we continue to differentiate <unk> in the market.

Quarter to day, we closed the significant multi year order for Modernizations and long term service agreements and we're well positioned for modest growth overhauls and parts demand, especially as railroads recover.

Based on these factors and orders what Texas in a strong position to drive profitable growth and continue to perform for our shareholders for our customers and for our employees in the short and long term.

With that I'll turn the call over the past, who will review of the quarter segment performance and our overall financial position debt.

Thanks, Raphael and good morning, everyone, our execution through a very challenging year demonstrated our ability to move quickly to reduce costs generate strong cash flow strengthen our financial position allocate capital and position <unk> for long term profitable growth.

Now turning to slide for I'll review, the fourth quarter in more detail.

Sales continued to recover sequentially in both freight and transit up 9% from the third quarter.

Sales for the fourth quarter were $2 billion, which reflects of 15% decrease versus the prior year driven mainly from the disruption across our freight and transit segments caused by the pandemic.

For the quarter operating income was $161 million and adjusted operating income was $283 million, which was down 22% year over year.

Adjusted operating income excluded pretax expenses of $122 million of.

Of which 71 million was for noncash amortization and $51 million of costs related to one time.

Synergy related expenses, along with restructuring due to 'twenty and 'twenty, one locomotive volumes and restructuring in our U K operations.

Adjusted operating margin was lower than the fourth quarter last year, mainly driven by under absorption costs at our manufacturing facilities stemming from roughly 40% fewer locomotive deliveries.

As well as sales mix impacted from lower parts.

And higher level of transit sales.

During the fourth quarter, we took additional and aggressive operational and structural cost actions that will continue to drive margin improvement sequentially through 2021.

Now looking forward, we expect the seasonal first quarter with some volume impacts as you have heard our customers describe.

That said for the full year, we expect sequential improvement to result in a higher adjusted operating margin and profitable growth across both our freight and transit segments.

At December 31, our multiyear backlog was $21 6 billion up about $200 million quarter over quarter of.

Our rolling 12 month backlog, which is the subset of the multiyear backlog was $5 5 billion and continues to provide good visibility into the year.

Looking at some of the detailed line items for the fourth quarter adjust.

Adjusted SG&A expense declined 22% year over year to $205 million.

This was the result of Swift cost actions during the downturn and excludes 30 million of restructuring and transaction expenses.

SG&A expense benefited from head count reductions and the realization of synergies.

Engineering expenses decrease from last year. This was largely due to lower volume outlook as well as some changes in project timing.

Amortization expenses were $71 million for.

For 2021, we expect non cash amortization expense to be about $280 million.

And depreciation expense of about $180 million.

Our adjusted effective tax rate for the quarter was 22, 6%.

We expect the full year 2021 effective tax rate of about 26%.

In the fourth quarter GAAP earnings per diluted share were <unk> 46, and adjusted earnings per diluted share were 98.

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

Across the freight segment total sales decreased 20% from last year to $1 3 billion.

But we're up 8% sequentially from the third quarter as freight end markets continued to recover globally.

In terms of product lines equipment sales were up sequentially from the third quarter.

But down 32% year over year, mainly due to timing of locomotive deliveries.

Which we have discussed can often vary quarter to quarter.

In line with improving free traffic our services sales improved 7% sequentially, but were down slightly versus the same period last year.

This was largely driven by lower parts sales due to continued high locomotive parking's as well as the timing of overhauls.

We expect our services sales to continue to improve with the gradual recovery in freight volumes.

On parking of locomotives and higher demand for mobs.

Digital electronics sales were down 22% year over year.

As orders shifted to the right in North America due to Covid disruption.

Yet we closed the fourth quarter with strong order momentum and continue to see significant pipeline of opportunities in our digital electronics product line as customers focus on safety and improved productivity.

Component sales were down 22% year over year. This is compared to a 58% lower railcar build year over year.

Demonstrating the diversification within our components business.

Since the third quarter, we have seen signs of improvement in demand for aftermarket components as more railcars to come out of storage.

Great segment, adjusted operating income was $218 million for an adjusted margin of 16, 3%.

The benefit of synergies and cost actions were offset by sales mix and services and digital electronics as well as under absorption of costs.

As always we will continue to execute on our synergy plans and further improve costs as part of our lean efforts.

Finally the.

Segment backlog was $17 9 billion up slightly from the prior quarter.

Turning to slide six across our transit segment sales decreased 2% year over year to $684 million drip.

Driven largely by disruptions stemming from COVID-19.

OE sales were up 2% year over year, demonstrating continued investments in green infrastructure.

Aftermarket sales were down 6% from last year.

However, we remain positive on the aftermarket and expect sales to continue to improve as transit ridership and services increased globally.

Adjusted segment operating income was $77 million, which was up 40% year over year for an adjusted operating margin of 11, 3%.

Across the segment, we continued to drive down cost improved project execution and risk management as noted by our strong operating performance.

We are pleased with the momentum underway and we will continue to execute on more actions to drive increased profitability for the segment.

Finally transit segment backlog was $3 7 billion, which was up about 5% versus last quarter.

Now, let's turn to our financial position on slide seven.

Despite a year of significant challenges, we generated $784 million of operating cash flow demonstrating the resiliency of our business.

Cash flow was driven by conversion of net income and good working capital management, including improved inventory levels and higher customer deposits.

Of note, we had about $220 million of one time impacts on cash flow during the year, mainly due to prior restructuring transaction and litigation charges.

The restructuring costs in 2021 will result in further structural cost reductions, but we expect the overall level of onetime impacts to be less in 2021.

For the full year total capex was $136 million.

In 2021, we expect capex to be about $180 million for about 2% of expected sales.

Overall, our strong cash generation allowed us to execute on our strategic plans and capital allocation priorities.

Throughout the year, we continued to strengthen our financial position and reduced debt by about another $190 million, bringing our total debt down by $723 million since the merger with GE transportation.

During the fourth quarter. We also made our first payment to GE of $115 million per our tax matters agreement.

Our adjusted net leverage ratio at the end of the fourth quarter was two seven times and our liquidity is that of robust one 9 billion.

Over the course of the year, we returned $300 million in capital to shareholders through dividends and share buyback and as we announced this morning, Our board approved the renewal on our share buyback authorization for up to $500 million.

As you can see in these results our balance sheet remains strong and we are confident we can continue to drive solid cash flow generation.

Giving us the liquidity and flexibility to allocate capital to grow shareholder value.

With that I will turn the call back over to Raphael.

Thanks, Pat turning to slide eight let's look at some of the segment dynamics heading to 2021.

Starting with freight by product line North America freight has mostly gone through a reset our services business has recovered.

And we're working through the trough in our OE business.

Due to the locomotive deliveries are expected in North America in 2021.

Total of locomotive deliveries will be down roughly 35% year over year, driven mainly by North American locomotive deliveries down by more than 100 units versus 2020.

The volume headwinds will create margin pressure due to under absorption of dollar of manufacturing facilities.

Our international pipeline remains strong and order momentum continues to build.

In mining we are optimistic as conditions are continuing to improve.

When it comes to the North America railcar built railcars for a coming back into use roughly.

Roughly 24% of the North American railcar fleet still remains in storage, which is similar to a pre COVID-19 level.

Builders are taking continued staffs was low down production and forecast estimates the railcar builds for this year to be around 25000 cars.

The freight services, we are seeing year over a year of pressure on parks due to higher levels of Park Kings.

Demand for reliability and productivity will improve as railroads continue to recover which as I shared earlier, but I was in a position of strength for modernizations overhaul and parts demand.

In digital electronics, we're focused on growing PTC internationally.

In 2021, we have contracts to install over 3000 horsepower per ton upgrades to our trip optimizer systems, a new record.

While we anticipate north American the Capex budgets to remain constrained the long term outlook is strong.

Now transitioning to transit, we expect growth on both OE and aftermarket as ridership recovers from the historic lows in for.

For structure spending will continue in line with green initiatives as governments continue to churn to rail as the cleanest safest and the most efficient means of transport and I'll expand on that in just a minute.

For 2021, we expect revenues in the range of seven six to $7 9 billion.

Adjusted EPS is expected to be in the range of $3 90 to 430 and the cash conversion is expected to be greater than 90% for the full year.

Across our segments recovery is underway and will continue as customers experienced volume growth and reinvest in their operations.

We're seeing it already in some areas and we expect sequential improvements in both the aftermarket services and international locomotives.

In 2021, we expect orders to exceed anticipated sales, putting <unk> in an even stronger position to drive profitable growth.

With that let's turn to slide nine to discussing foreign so of sustainability and the strategic direction, we're driving as a company.

At <unk>, we are determined to have a lasting impact on our industry and the world.

Last year, we launched the company's first sustainability report and provided a detailed look at how we are building a more sustainable future.

By strengthening our corporate governance framework, which guides, how we operate how we innovate and how we drive growth.

We also laid out our strategy on how we are taking on some of the world's toughest challenges, including climate change in automation by creating cleaner more fuel fell shouldn't solutions like of Flex drive locomotive.

As noted earlier this is the world's first battery electric locomotive and it's currently being tested in revenue service by BNS out in California.

So far we're seeing opportunity to reduce fuel consumption by 10% to 30% with significant interest from customers in North America and internationally.

We're also reducing our own carbon footprint driving down energy intensity and greenhouse gas emissions across our facilities.

And of when it comes to our employees. We are building a company culture grounded in meritocracy and integrity, one that embraces diversity in all forms and invest in its people and communities.

To deliver on distribution, we outlined specific targets for how we plan to drive measurable impact.

Our 30 by 30 strategy sets the find matrix to reduce greenhouse gas emissions and more.

By at least 30% by 2030, making our commitment clear the bulk of our customers and our shareholders.

We are making good advancement on these efforts as you can see here and throughout our report.

As we continue to build an even stronger Wap deck, we will be driving for us in transitioning the industry to a more sustainable future.

And with that let's turn to slide 10.

As you've heard this morning, our strategic plan has empowered us to innovate and has given us the clear framework to execute on our commitments to generate strong cash flow and to drive continued shareholder value.

And it will can choose the guide us as we expand our international installed base as we accelerate growth in digital electronics and services, while the farmer transforming our transit business.

We are two years into our integration.

We have delivered on our synergies we have delivered an increased shareholder value and we've positioned <unk> and our customers for competitive advantage.

Heading into 2021, we will drive margin expansion through the prioritized cost actions.

And continue to invest in growth, creating new technologies that strengthen our leadership position on the carbonization and automation with the same determination and focus that has brought us here today.

Before I turn the call over to questions.

I want to once again personally. Thank every member of the <unk> team for what they have delivered in 2020 and the work they will continue to deliver in 2021.

Thank you and with that Christine.

Thank you Raphael, we will now move on to questions.

Where we do out of consideration for others on the call I ask that you limit yourself to one question and one follow up question. If you have additional questions. Please rejoin the queue with that.

Operator, we are now ready to take our first question.

And ladies and gentlemen, our first question comes from Allison <unk>.

<unk> from Wells Fargo. Please go ahead with your question.

Hi, good morning.

I just wanted to go back to the comments around the new I guess than your locomotive the electric locomotive, obviously I understand even North America market is pretty challenged right now could you maybe walk us through the process from pilot I know you said Theres interest. This is something that will be revenue generating in 'twenty. Two just trying to think of how that progression with the work.

Okay.

And fuel is one of the biggest cost for our customers say they are heavily focused on driving fuel efficiency across your operations.

Combined with the growing focus on ESG and the need for de Carbonization, I think positions of the flex drive as a unique product to really address the challenges we are.

We're actively working with customers in North America and internationally between sort of this technology in their operations for.

Poses are out, but we do not have sales of this product into 'twenty, one or 'twenty two at this point.

Got it and then just on transit.

There's a lot of obviously news around government fund in the U S and for a little less clear what's going on internationally any color that you can provide just sort of where we are in terms of that type of funding internationally for you guys.

Allison, we're seeing I would say continued commitments to transit overall in terms of transportation and.

We're saying called the continuation of projects, we have not seen cancellations at this point in fact, we have a lot of discussions regarding new projects with with our cash margins.

And I guess, it's just in line with that is it would you say theres some accelerated discussions based on potential government funding or municipal funding outside of the international market is kind of similar to what we're seeing here or is it a little different.

I think fantastic is growing in the light of.

The recovery in the monarch cash.

I think on the other side with CNR business to stay quite resilient through this time.

Thank you.

Yeah.

Okay.

Our next question comes from Justin Long from Stephens. Please go ahead with your question.

Thanks, and good morning, good morning, good morning.

Wanted to start with a question on the freight segment. So great margins declined sequentially in the fourth quarter. It looks like this was mainly a function of of mix, but I was wondering if you could provide any color on anything else that drove that sequential weakness and then looking ahead.

The 2021, I think Pat you said margins for both segments should improve but I was wondering if you could provide any more color about the magnitude of improvement by segment, that's baked into the guidance. Thanks.

Let me start just and I'll pass it onto a path here, but in the fourth quarter.

The one we had a very significant drop in locomotive production as we go into 'twenty. One we have about a 35% reduction of locomotive volumes, which means no deliveries for North America and that's the first time it happens in decades.

So we went through a significant restructuring in a couple of facilities in the U S debt drove under absorption inefficiencies in the quarter with a lower margin rate.

We have taken the necessary cost actions in the fourth quarter with significant head count reductions and we will continue to drive profitable growth for US. We go into 'twenty. One mix was also of headwinds and that was a function just of some of the elements. If you look at byproduct line you would think about transit.

Aftermarket was actually declined versus a year ago with all of <unk> growing and you have some moderate dynamics with the.

The equipment coming down we put significant step down in all of locomotive shipments.

In the quarter and you also had a significant drop in the digital electronics revenues.

Okay.

Yes, just adjusted just let me add on to that I mean the.

The impact in the fourth quarter is really.

The result of those those are low low.

Of the motive deliveries and the and we see that continuing into next year the.

When you look at the full year for next year, you were asking about kind of the guidance or view into the segment margins. We typically havent given a lot of information about the segment margins in the guidance, but but I think if you look at.

The full year the.

The full web Tech view.

We expect to be in that.

With the guidance to be in the above 15% kind of range.

Which is.

Flattish and improving into two from.

From 'twenty into 'twenty one.

We're committed to the more margin improvement.

On the transit side like we've talked about in the strategic goals, we put out there.

<unk>.

And we see the the.

The freight margins to improve as we continue to get our synergies that we've talked about.

As we benefit from the cost actions, we've taken both in the full year and in the fourth quarter on the on the freight businesses and seeing the.

The mix of business really.

Heading in our favor.

Okay, Great. That's helpful and for my second question I was wondering what youre assuming for rail volumes in 2021, and if you anticipate your aftermarket business to kind of trend in line with whatever you are modeling in and then on buybacks also.

Curious, if thats something thats getting factored into this outlook.

Let me start with the last parts and buybacks are not included in.

<unk>, we're providing at this point adjusted.

Even though it is an element of capital allocation as we look forward the <unk>.

Second piece.

In terms of just the dynamics I think we are continuing to see sequential improvement in the fourth quarter. We saw book to bill of that increased the <unk> 99.

<unk>.

That's an improvement versus the average for the year, which was around nine one.

As we had said I think our pipeline of deals continues to strengthen we're off to a strong start for the year and as we're looking to of the elements of what's taking place I think there could be some tailwind.

Tailwind so associated with the.

The dynamics, we are currently seeing and our debt.

Debt to some of the elements of water and services deterioration.

Okay I'll leave it at that I appreciate the time.

Hello, Ladies and gentlemen, our next question comes from Jerry Revich from Goldman Sachs. Please go ahead with your question.

Yes, hi, good morning, everyone. Good morning, good morning.

I'm wondering if you could.

Talk about Raphael.

Huge on alternative.

Locomotives longer term, how attractive do you expect hydrogen powered battery fuel sort of locomotives to be for the industry and can you talk about your investments in that area versus battery electric.

And any other areas that you folks are spending R&D dollars on.

So we're stepping up our investments in that area, we call. It the de carbonization product portfolio and in our minds. It starts with really the ability to improve fuel efficiency for customer on existing platforms. So dollars are upgrades. There is the second element of ties it off with the adoptions of more of <unk>.

<unk> and renewable fuels, so that builds on the stairway I think there is.

Im not of element here, which is tied to just continue to modernize the fleets and you've got a still of lot of opportunities to replace three units with Q.

For the element here of the battery technologies, which.

Will the and can be a game changer and you need that in order to actually drive for the next level, which is.

The use of fuel sales so thats, how we see the stairway I think we're well position to lead in all the elements of that stairway. That's been the continued work from us.

Youll see us continue to step up investment on that area.

Okay. Thank you and then on the.

The integration.

The the $250 million number for.

The 'twenty 'twenty one.

The tough circumstances can you just talk about are there any cost to achieve.

Numbers that are running through the P&L and your adjusted earnings number of things like.

Double counting essentially for the support costs between.

The shared services for GE, and you folks or anything that's happening like that in 'twenty, one that we should be thinking about.

<unk>.

Think about the margin structure in 'twenty two.

Yes, Jerry so the.

And 'twenty there was obviously cost to separate.

And we capture those and our restructuring.

The restructuring and transaction costs. When we report our numbers. We had there were expenditures in order to to stand up our own systems and achieve synergies related to the separation from GE get out from the the tech transfer transition service agreements.

We had.

Some of those costs come through in the fourth quarter two air.

But we expect this and we expect to see some of those going into 'twenty, one but to start to really slow down and get the full benefit.

We're also.

And we haven't included that in our guidance, we will treat them. The same as we have in 2020.

And then when you look into.

2021.

Those efforts are really starting.

Starting to be behind Us, we're starting to get the full of the full benefit we have additional synergy projects that will get us to that $250 million run rate by the end of the year.

And.

But the cost to achieve those synergies were really slow.

Sorry.

Just to make sure I'm on the same page with you in the cost to achieve you're treating as nonrecurring items anyway. So.

There is no impact on adjusted.

What kind of even perfect.

The same manner that we have been treating them since the since the combination in 2019.

Okay. Thanks sure.

Our next question comes from Rob Wertheimer from Melius Research. Please go ahead with your question.

Thank you good morning, everybody good morning.

Just a little bit of a question on the.

International demand I Wonder if you could characterize if that's you know a little bit broad based or just the customer too and then within that you touched on mining I don't know where mining.

<unk> stands now and whether that's on the come.

Active dialogue or further thank you.

Well as we had mentioned before I think.

Recovery of special on the equipment side.

Clearly taking place of first internationally.

We have gotten the significant order.

As a result of that in the fourth quarter were continuing discussions.

We're seeing some bright spots there whether you think about you just mentioned mining what if you think about agriculture exports, we certainly see that in both South America, we see that and Australia, but the overall southeast Asia, we're quite active day, our Russia CIS region and will continue to expand on delivering our fleet.

In India as well.

But just on mining and more specifically, it's certainly I think the bright spot for us as we look into the air.

Okay. Thank you.

Our next question comes from Scott Group from Wolfe Research. Please go ahead with your question.

Yeah.

Hum.

So Paul it's Scott.

You made a profit of the first quarters.

Yes.

Color there.

Could you just talk about the whole lot.

No.

Can you kind of bridging from <unk>.

Sure Bob.

The problem.

One of the key things.

For sure.

Thank you.

Hi, Rob.

One of them.

Let me start to the last part of your <unk>.

Question I think.

We are a unique inflection point here to help shape, what I'll call the clean energy economy focused around rail.

You know rail is the most sustainable way of moving both freight and land and large amount of people. So I think policies that incentivize movement by rail will be both good for the economy. Good for the environment, but kind of stimulate job creation of North America, we actively working with.

Do you sort of administration in that regard and with regards to <unk>.

Just how we see things progressing throughout the year I think similar to what you've heard from customers I think youll see a sequential improvement we do have elements of seasonality here into the first quarter certainly water has impacted our operations in the port work and that's something that we're at.

<unk> working very close with our teams there to assess that impact.

Yeah, and I would just add Scott.

We do have some seasonality of that comes from our aftermarket business and in our mining business, just the timing of of how orders and projects.

Get landed in the <unk> and the kind of the the operating rhythm of our customers related to aftermarket and parts sales so first quarter tends to be.

Impacted the.

A lot by all of these kind of <unk>.

Elements that along with the things that Raphael just talked about.

Just going back to the infrastructure side.

Can you maybe just talk maybe more specifically the now.

Okay.

Okay.

The content of infrastructure.

The end markets.

Okay.

Scott can you repeat that it's very difficult to hear you.

Hello.

I guess I'm trying to understand on the infrastructure side.

We have specific.

Good day.

We participated in the.

One of our board.

Where would you be able to comment.

Structure.

Scott, we're working I think some of the initiatives go right aligned with the opportunity to improve efficiency for our customers on the fuel side opportunities to look at potentially accelerating some of the introductions of new technologies that help the bulk.

On driving fuel.

Fuel efficiency, driving more automation and ultimately reducing carbon emissions. So.

Thats.

That's the best way to frame it.

So loss associated with the high speed rail per se.

Okay. Thank you guys.

Yes. Thank you.

Our next question comes from Chris Wetherbee from Citigroup. Please go ahead with your question.

Hey, guys James on for Chris. Good morning, just wanted to touch on digital you mentioned the the orders are sort of gotten pushed out to the right of the growth outlook just frankly at.

All of that strong. So just wondering if there's any sort of product lifecycle issues. There that are creating a headwind and there is more underlying growth just kind of wanted to understand sort of the puts and takes to the growth within that line in 2021 and sort of how to think about it moving forward.

Scott.

Revenues for the business came down about 2%.

'twenty versus the year before I'd say customers continue to be very committed Chris on.

Investing in productivity and we have a record number of installs and new products as we highlighted so the fundamentals are good there and customers continue to be really committed to drive productivity and investing on that.

What we saw also was a good book to Bill in the fourth quarter I think we're continuing to see that as we're moving through the first quarter, but a key challenge for our team is to drive what I'll call convertible at the end of year. So think about getting the orders that churn of two sales within.

'twenty one but.

Back again, the fundamentals are of the business are strong.

Got it so it's more of along the lines of essentially of pipeline issues that sort of the right way to think about it as essentially there wasn't as much of the sales activity in 'twenty is sort of bleeding into the realized revenue in 'twenty. One is that sort of the dynamic there and then that it was a quick way to also eliminate costs within the air pushing some of those decisions.

For the right.

Got it alright, and then just on the freight revenues outlook broadly just wanted to it seems like the guidance of at least includes of the possibility of freight revenues being down.

I wanted to understand the at.

North American carloads of turn positive for how to think about freight revenue for.

For the earn that segment's revenue inflicting sustainably positive across the year is that like the second half thing or should we think about that being something like more than 2022.

Yes.

I'll just start with we're seeing sequential improvement right.

Dod has churned of book to Bill two I'll call a significant improvement in the fourth quarter I think we're continuing to see that improvement.

Especially quarter to date, so I think we've had a strong start for the year with.

In order for both the mods and in order for service agreements, which it's a real positive.

So at this point.

Think we will see sequential improvement on volume as a result of continued on parking of locomotives and freight cars.

I think it's important to mention here I think we as we look at the quarter to date the backlog coverage for the year is better than we had a year ago, but we're still sitting on one of our significant higher number of locomotive spark versus pre COVID-19 level.

I think the Ontario auto elements out off for you. There is the <unk> debt, we signed the past couple of years impacting demand I think they're largely reflect into the network.

I would not be surprised to see potential incremental.

Ill call volume created by the combination of <unk>.

This winter Wouter deterioration of the fast service levels and this should be really the first year that we see traffic growth after some time.

Okay got it actually in the real quick one can you just comment on.

The mod year over year in the fourth quarter and sort of of what Youre thinking about debt in 2021.

In 2021, and that's it for me significant order.

To date <unk>.

We expect double digit growth for the months number for the year.

Yeah.

Okay.

Our next question comes from Ken <unk> from Bank of America. Please go ahead with your question.

Hey, Rafael Pat Christine Thank you and good morning.

Just maybe can you talk of Pat can you talk a bit about the outlook what are the highs and lows in terms of the parts of the outlook can you maybe provide any specifics I know you said youre not giving details on freight or more transit specifically, but maybe just talk about the highs and lows on the other.

So the range what would what would how would we get to the high end of the the range of the impact of the low end, it's really going to be driven by the the.

The areas, we see the see positivity, which services, it's the it's mods it's.

Part sales.

My driver for that is really the.

The.

The the rail.

Williams.

When I look at the transit the same thing as the.

The regions and the economies are.

Reopened in passenger ridership starts to continue to trend positively we will see those those part sales we have good visibility into our OE side on transit in our OE side on the on freight but.

Where the where the reaching the high end of the range, it's going to be driven by those those items. It's it's freight volumes car loadings and in ridership.

I'll just.

Choose to see strong international opportunities the pipeline continues to strengthen the.

This is certainly a trough year for us when you think about the equipment business.

We are building from there and I can't remember a year of where we had zero of deliveries on locomotives. So.

Moving to the right direction.

That's helpful. And then it seems like international is really a big part of this is there a baseline kind of pad.

The.

On the the local builds or.

Or I guess carload growth that you've said is kind of the midpoint that we should look as a starting point just to help us.

For the year I mean, we've got the backlog inhouse for what I'll call New locomotives. So this is really about building forward into 'twenty.

<unk> 22, and that's where the dynamics are positive you've talked about the freight cars kind of all back to the parking levels, we had pre COVID-19.

We will shortly of significant drop last year with the 58% drop in the freight car belt, we expect.

Debt to be more on the 25000 for the year. So.

Where we have started the year with a positive.

Beat up the dish point.

Okay, and then I guess for my follow up.

Yes that was great detail on the on the electric locomotive test in California.

Rafael can you take the step further the integration of our positive train control your ability to go fully autonomous one of the next steps for the rails given the the trucks for obviously, making strides on and pushing autonomy. What what is left from your your thoughts on the development side for the rails to go fully autonomous.

We took a key staff with the order of zero to zero, which is really the ability to start at zero and stop the train at zero. So you talk about moving it and the integration with BTC.

Got really sets the tone of how you can be a lot more autonomous through that process.

Some of the steps might vary a little bit on the various.

Class once but we have the suite of products in order to support that so you have tied that off with a lot of the elements that I described in terms of our portfolio for de Carbonization, we have a real strong portfolio too.

Drive golf.

In this business for the long term and despite of I'll call variation here on the carloads.

But I guess is there anything technological that you still think is needed or is it just is.

As the technology, there and it's just developing I don't think the technology into the bottleneck.

So we've got the elements of technologies to drive to that.

Thanks for the dose which at the time.

Our next question comes from Brittany Jakob <unk> from Morgan Stanley. Please go ahead with your question.

Hi, guys.

Just wanted to dig a little bit more into the comments of margin improvement.

In transit as well as free for next year obviously.

You've laid out the synergies and the pricing in the backlog of in transit, but can you just talk about any headwinds that you're incorporating into your guidance at this clean up of some material cost or supply chain headwinds.

Debt Youre accounting for it.

Well, let me start I think as far as the transit business I think we had good progress in the business the.

The focus continues to be on execution, improving the quality of the order intake, but also improving I'd say the metrics to our customers'.

Margins have improved about 200 basis points and the team has a good plan to move up and out of 100 basis points. This year.

I think the some of the dynamics on the business might vary depending on well locked down sort of restrictions that have had a significant impact on ridership, but what has not changed for us as.

We continue to see a very resilient services business. If you think about ridership down 30, 50, 80% levels as we saw last year, we had of business that the aftermarket came down by single digits in 2020.

On the OE side do we have not seen as I sat project constellation. So long term fundamentals are strong there.

We certainly are looking to some of the headwinds you described inflation being one of them. We've got our team are really actively working with suppliers to make sure that we are well prepared for any of these elements what anticipate for you. We also have a.

Agreement that provides a waterfall of escalation in the case of faced with that but.

A good amount of work being done by our teams as we speak around that.

Okay. So would you quantify anything that gets baked into the guidance at this point or.

I would say to while we have visibility to I think.

We feel confident about the framework with provided for you.

Okay, Great and then just on the transit recovery again, I know you've talked about the improving ridership.

Any comment on what Youre seeing in Europe versus U S.

Versus Asia in terms of how you expect to see that business recover next year.

I think Asia, certainly the ridership this and the higher levels right. There's of course, some specifics in terms of some of the lockdown. Some some governments have the act on it I think Europe's.

Come next.

As we saw some of these.

The new Lockdown measures you saw what used to be of ridership on the 80, plus pushout level go down to more of like <unk> and <unk>, but we expect those to resume back up North America has certainly been on the low end of that spectrum of recovery, but us.

<unk> nation takes place we will see those improve across the board.

Thanks.

Our next question comes from stream for.

<unk> from Jefferies. Please go ahead with your question.

Hi, Thanks for fitting me in so historically web tech as being more maintenance demand related to breakdown from severe winter weather I know you talked about of we can start to the year, but is this something that could provide upside the guidance.

We're certainly watching that very closely.

We do think debt.

Well the combination of severe winter weather conditions.

The higher volumes. The fact that of you have a deterioration of service levels.

And back to the fact that the 'twenty one should be the first year that we see traffic growth, yes that could provide job.

<unk>.

Okay, and then you talked of of international opportunities in PTC would that largely be in Brazil, or South America can you talk about what other regions would be an opportunity for that.

I'll tell you we just got our first international order and it was not in South America, but.

We do have opportunities to continue to expand out of and that's one of the areas of focus of our games.

Great. Thanks for taking my questions.

And our next question comes from Steve Barger from.

Bank capital markets. Please go ahead with your question.

Thanks, Good morning.

I just wanted to clarify on the freight revenue question, you talked about headwinds from seasonality and equipment activity levels in the first half and then on the positive side, you've talked about mods orders and backlog coverage. So if I net that out is it reasonable to think we see positive year over year growth in the second half or is it too early to tell for the freight segment.

We expect to drive what I'll call profitable growth for overall walked Atkins is true.

You'd see those dynamics into the <unk>.

Profitable growth in the back half for free.

Yeah again, we we said specifically sequential growth so.

Looking at the quarters I mean.

That would sort of imply that the second half is going to be stronger to the answer your question specifically yeah.

And the additional to the seasonality you see in the first quarter was certainly watching for well data router impact study of had on our operation.

In Fort worth.

Yeah, I mean, just given the seasonality that you're talking about it sounds like you're expecting bigger year over year declines in the in the.

In the first half than you see year over year growth in the second half is that right.

Yes, that's right that's what we're looking at.

Alright, and you said the impact from onetime costs on the operating cash flow will be lower in 'twenty one than it was last year could you put a number on that relative to the $2 20, the that hit last year.

For the $2 20, as the cash flow impact right and you have I would say roughly half of it is of.

The cash flow impact is from cost that had been.

Recorded in the 19 paid in 'twenty.

The other half for kind of where costs an impact within the within the year and then and then going forward.

We were still working through those.

Cost to achieve synergies and restructuring.

We haven't given any specific guidance on those items because of the sensitivity to our operations.

We expect those to come down.

So well the the 110 from 19 paid in 'twenty rolls off of course, so the the other 110, you would expect of stepped down from that.

That's exactly right.

Okay. So I'll just squeeze one quick one and so with conditions just sequentially improving balance sheet is in good shape cash cost of restructuring coming down reasonable to think youll make significant inroads on the buyback.

This year.

So number one I think we continue to see opportunities to return value to shareholders through share buyback and that's why our board has renewed the authorization of 500 million of buybacks.

Our focus starts with driving organic growth.

I mentioned the portfolio of solutions, we have around the carbonization in automation. They do provide a significant growth opportunity for our business and it's very much aligned to both.

<unk> 50, and carbon reduction for our costs from our so we're committed to continuing to lead there and we have increased the spat into 'twenty, one and on the inorganic will continue to explore bolt on acquisitions, we will be opportunistic here this will be.

But really highly strategic with strong returns that drive higher.

ROIC and faster are profitable, but all of the increase in shareholder value. So that's fundamentally how we think about capital allocation here going into 'twenty one.

Thanks very much.

Okay. Thanks.

Yeah.

Okay.

And ladies and gentlemen, with that we'll end today's question and answer session I would like to turn the floor back over to management for any closing remarks.

Thank you operator, and thank you everyone for participating today, we look for Etsy speaking with you throughout the quarter of a good day. Thank you.

And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.