Q2 2019 Earnings Call
Good day and welcome to the web check in second quarter of 2009 to the earnings release Conference call.
All participants will be in listen only mode.
If you need assistance, please signal called the specialists, especially the stock you fell by zero.
I have to say its presentation, there will be an opportunity to ask questions to ask a question Press Star then one on the Touchtone phone to withdraw your question. Please press Star then too.
Please note this event is being recorded.
I like to turn the conference call over to Mr., Kristine Kubacki, Vice President of Investor Relations, Sir the floor is yours ma'am.
Thank you Mike Good morning, everyone and welcome to <unk> second quarter earnings call with US today are executive chairman on New paper, President and CEO Raphael Santana.
Yeah, So Pat do good at corporate controller, John that color.
Before we start I would like to remind you that our earnings release and financial disclosures were posted on our website earlier today and can be accessed on the Investor Relations tab on Lab Corp Dotcom.
Some statements we will be making today are forward looking and based on our best view of the world. Today, We will also disclose 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 house.
Thanks, Christine and good morning to everyone.
First I'd like to start by welcoming.
Moving to the team I've known Christine for quite some time and she's already had a.
Very positive impact at web Tech.
I'm confident she will do the same for you our investors going forward.
Today, we are looking forward to sharing with you the progress we're making across the portfolio as the new websites.
This is a strong company and its globally position with a significant backlog a diverse portfolio of businesses.
And then on match market because the fish.
It's a company with transformational technologies and solutions and established position in digital in electronics.
These are disruptive technologies that are important for the future of lab tech as well as the industry and will give us momentum as we help customers redefine how they run their assets and operations.
And finally, it's a company with a proven leadership team that has managed successfully through the cycle.
With the right Luverne and placed the deliver continuous lean improvements and drive improved productivity.
We are very pleased with the progress that we've made since the Wabtec and GE transportation merger.
We have made great strides in integrating our culture.
And integrating our organizational structure.
We have a strong leadership team in place with the alignment and we have validated our synergy run rate targets of 250 million by year four.
Before I turn it over to Raphael I also wanted to share some insights on him as a leader.
I've had the opportunity to work closely with them since we announced the deal some 14 months ago.
Well you know has a deep understanding of the portfolio and a unique perspective on the world given his global background.
He is a proven growth leader.
Strong operator, and has a deep appreciation for prudent capital allocation.
He is also a champion of lean enterprise and continuous improvement.
Entirely focused on delivering for both the short and long term.
These trades are right.
Foundational qualities to have as a CEO .
And I'm looking forward to all but he can deliver.
With that I'll hand, the call over to Rafael.
Thanks, Phil.
Excuse me back with all of you today on officially in the wrong as you. All know did want Texas' strong company with a 150 years of history, serving really as a leader in the transportation industry, we're driving productivity moving people and product around the globe, where paving the way for safety efficiency reliability and sustainability for our customers.
It's going to actually in my age I really wanted to share with you. Some initial thoughts on how we will continue to create shareholder value.
First and foremost and outside you had highlighted to you in our last call. We are focused on executing our plan and delivering on our financial commitments, we have slammed age outs for better position or your legacy businesses and we're laser focused on making sure that we execute on our financial commitments for the year.
Stronger cash generation will allow us to create foreigner shareholder value.
While prioritizing debt reduction and creating flexibility to fund organic growth acquisitions stock buyback and dividends.
Second.
We're really committed to continuous margin improvement, we're establishing the right structure to position the company for profitable growth through the cycles. This includes a more focused prioritization of resources and prudent capital allocation.
Our cost reductions and synergy initiatives stemming from the Wabtec and GE transportation merger, they have already begun to deliver benefits and we have the opportunity to foreigner accelerate synergies.
We're confident that our integration efforts will lead to a more competitive cost structure for our business and we will build upon the foundation to improve cash flows and margins.
Third.
We'll leverage our scale technology domain diverse business portfolio to drive profitable growth.
We will continue to invest on organic opportunities expanding our competitive advantage, while combining innovation and technology with process rigor and global reach to drive increased value for both our customers and shareholders.
Finally, we have an exceptional team committed to outperform.
GATR, we're building a culture focused on execution and accountability with a shared SASSA purpose to move tanks in about away.
And you're seeing that commitment in our second quarter results, even despite a challenging environment in North America that includes car loads down for the year, Yes, sorry implementation in one of the highest levels of parked locomotives in over a decade, we're focused on controlling what we can.
This means accelerating cost out and restructuring efforts for new business along with synergies.
At a high level, we had a good quarter with strong operating performance margin expansion solid cash flows from operations and based on our second two performance current backlog.
In our assessment of key markets, we're raising our cash flow guidance for the full year to approximately $900 million in our EPS guidance is now 40 down to 420.
I'll talk more about our market expectations for both freight and transit, but first that will provide you a deeper dive into the financials Pat.
Thank you Raphael.
As you can see from our press release this morning.
We are going to discuss both GAAP and adjusted numbers. So we encourage you to review the reconciliations we've provided.
We continued the momentum started in the first quarter and delivered solid operating performance in the second quarter.
Which was the first full quarter of results since completing the merger between asset and GE transportation.
Today, we updated our guidance for sales.
For adjusted income from operations for adjusted EBIT da.
For adjusted EPS, and cash flow from operations, which shows that our business performing up to expectations.
So looking at sales the sales for the second quarter were two.
2.24 billion adjusted sales were 2.25 billion.
Dollars, excluding the effects that adjustment is excluding the effects of accounting policy harmonization.
Our freight segment sales increased 262% to 1.5 billion that increases obviously due to the GTT merger, which contributed 1.1 billion.
Organic sales decreased 34 million, primarily due to lower.
Electronic sales.
The quarterly run rate for the rest of the year will fluctuate based on delivery schedules of projects on some seasonality.
And.
Among other factors.
The transit segment sales increased 6% to $742 million and that was driven by strong growth in OEM sales.
The increase.
The organic increase was about 81 million.
And acquisitions contributed $3 million, which was was offset by negative impact of foreign exchange of about $41 million.
This is the sixth quarter in a row, we've now seen organic sales growth, which shows that our our near record backlog has kicked in for transit.
Looking at consolidated operating income for the quarter. It was $201 million and adjusted operating income was $320 million or 14.2% of adjusted sales.
Adjusted operating income excluded pre tax expenses of 119 million related to the GE transportation merger.
And to break that out it consists of 89 million for onetime noncash purchase price accounting charges.
$31 million for transaction and other restructuring costs.
Again, a point and ask you to see our reconciliation table for these details.
In addition to these expenses.
The company also had pre tax expense of $56 million or about 22 cents earnings per share.
For noncash recurring purchase price accounting charges.
We have not added that back to our adjusted income from operations.
So looking at some of the detailed line items in our.
Income statement SGN aim was $291 million, including 40 million of the $119 million in expenses I just discussed.
We expect the adjusted number for SGN eight be about $250 million per quarter going forward.
Engineering expenses increased to $57 million.
Due mainly to the addition of the GE transportation business.
And our amortization expense was 66 million, including $56 million of additional recurring PA.
For the GE transportation merger going forward, we expect the amortization expense to be about $65 million.
For each quarter.
Looking at segment operating income.
For freight operating income was 152 million and adjusted operating income was $251 million for an adjusted margin of 16.6%.
Transit operating income was $71 million for an operating margin of 9.6%.
Higher due to operating leverage from higher sales.
For the full year of 2019, we expect our consolidated adjusted operating income to be about 14%.
And we expect adjusted operating segment margins to improve through the year.
These improvements will come through.
Our continued improvements in project performance.
A better mix of sales and the benefits of restructuring and cost reduction programs.
We have also included net synergy benefits of about $20 million in our adjusted guidance for the year.
I also want to emphasize that we expect to see the normal seasonality in our transit business in the third quarter.
Additionally, product mix can fluctuate quarter to quarter.
Project deliveries and other factors will impact our results, which is why we do not guide to segment sales and margins.
Interest expense.
Net interest expense was $59 million due to our higher debt balance related to the acquisition.
Adjusted net interest expense was $55 million going forward, we expect interest expense to be about $55 million per quarter.
Remember that we are focused and have as a priority generating cash to reduce our debt and therefore, our interest expense.
Income tax expense was 41 million, excluding the net tax benefit from transaction costs for the GE transportation merger adjusted income tax expense was $65 million for an adjusted effective tax rate of about 24.5%.
Second quarter EPS.
Had a GAAP EPS for earnings per diluted share of 54 cents and adjusted EPS of about a dollar sick.
To help you reconcile that second quarter EPS you can find.
The following detailed in our press release.
We start with GAAP EPS of 54, we add back one time noncash PVA of about 35 cents, we add back our transaction and restructuring costs, which is about 14 cents.
An add back tax expense for non deductible transaction cost of about three cents.
Resulting in an adjusted EPS.
Have a dollar six.
I'll just highlight again that in addition to these expenses above the company also had an after tax expense of 22 cents per diluted share for non cash recurring.
Purchase price accounting charges.
EBITDA, which we which website defines as income from operations plus depreciation amortization.
Was $308 million and adjusted EBITDA was $428 million.
Adjusted EBITDA excluded the pre tax expense of $119 million discussed earlier.
Shifting to our balance sheet into our cash flow.
We believe that our balance sheet.
Provides the financial capacity and flexibility to invest in our growth opportunities.
We have investment grade credit rating and our goal is to maintain it.
In Q2, we generated.
Cash from operations of about $413 million.
And thats due mainly to improved working capital.
And from.
Customer deposits received on certain contracts certain projects.
When you look at our working capital at June Thirtyth, our receivables were $1.7 billion.
Our inventories were $1.9 billion and payables were $1.2 billion.
With all showing improvement compared to the first quarter.
Our receivable balance included Unbilled receivables of about $460 million.
Which were more than offset by customer deposits customer deposits of 649 million.
Our cash and debt at June Thirtyth.
We had 461 million in cash mostly held outside the United States.
And our total debt was about $4.63 billion.
Resulting in a net debt.
To adjusted EBITDA of about three times compared to 3.4 times at the end of Q1.
By year end, we're targeting net debt to adjusted EBITDA to be about 2.5 times.
So a couple of miscellaneous items that we always review with you in these calls our depreciation for the for the quarter was 42 million.
Dollars versus the $16 million in the year ago quarter.
The increase is due to the merger with GE transportation and for the for the full year of 2019, we expect our depreciation to be about $155 million.
Amortization expense was $66 million compared to $10 million in last year's quarter.
The increase also due to the merger.
For the full year of 2019, we expect it to be about $225 million.
Our capex expenditures were $32 million in the quarter versus $22 million a year ago.
The increase again due to the merger and we expect to spend about $200 million in 2000 2019.
Our backlog at June Thirtyth, our multi year backlog was $22.6 billion in our in our Rolling 12 month backlog, which is a subset of that multi year backlog was 5.9 billion.
So let's talk about our updated guidance for 2019 for a minute.
Based on our second quarter performance.
Based on our current backlog.
And art and based on our assessment of conditions in our key markets. Our guidance is for sales to be about $8.3 billion.
Our adjusted EBITDA to be about $1.6 billion.
Our adjusted income from operations of about $1.2 billion.
And adjusted earnings per diluted share between 410 and 420.
And we have raised our GAAP cash from operation guidance to be about 900 million for the year.
Even in light of the aforementioned market challenges. We believe this guidance is achievable as we focus on controlling what we can which means.
Focusing and accelerating our cost actions and synergies into the year end.
The adjusted guidance excludes estimated expenses for the GE transportation merger for transaction and restructuring costs.
For the one time purchase price accounting charges and for noncash accounting policy harmonization.
Excluding these expenses, our adjusted operating margin target for the full year.
It's about 14% and our effective tax rate for the full year is expected to be about 24%.
I'd also like to point out that our adjusted guidance.
Includes after tax expense of about 80 cents per diluted share for that.
The noncash recurring purchase price accounting charges in other words, we are not adding that back to our adjusted EPS guidance right now.
So with that I'd like to turn it back over to Rafael.
Okay. Thanks Thats.
First let me talk to you about the overall freight market conditions.
Starting with North America freight rail traffic's down about 2% year to date, driven largely by inclement weather conditions. So a drop in intermodal traffic declines in critical commodities like coal and agriculture, our precision as casual railroading is certainly having some effect from the new local orders.
But it is offset by our modernization program and aftermarket services book, we continue to work closely with all class wants to understand their current fleet strategies and we remain confident that our business model as a technology leader and critical provider of services is much more aligned with what the railroads are trying to accomplish with CSR, namely improved efficiency and productivity across our international markets, we remain well positioned for growth and we're pursuing we have expansion opportunities across several critical growth markets. This includes southeast Asia includes Brazil.
Our troops in West Coast of Africa. Additionally, we continue to strengthen our industrial end markets, particularly in mining, we expect double digit growth for the total year.
So while we saw weaker north American market, our freight business performed as expected.
Looking at the rest of the year, we have adjusted dollars view on carload volume, which we now expect to be a lower versus a year ago. The freight car market has weakened so versus last quarter and is tracking known to deliveries in the low to mid 50. So for the year and these assumptions are included in our guidance for the year.
With that in mind, So let me move into transits.
The transit sector, we're seeing steady good off in ridership in the organization.
Aging fleets across Europe , and the us they need to be upgraded presenting really unique opportunities for growth. We see public operators are being flushed for increased productivity and the industry is demanding tactical a really advancements, including safety reliability and condition monitoring which are areas. We place a strong role and will continue to grow.
Across our segments portfolio, we have a firm multiyear backlog that will result in growth. We are continuing to make progress on our transit business Lillian ruined the transit team are driving a clear focus on frozen project selection that will need to increase profitability as well as long term aftermarkets.
Revenues.
At the same time, we are continuing to drive actions to improve execution on our existing projects with these efforts underway. We remain confident that our transit segment margins will improve over to companies of strategic planning period.
With that I hope you have a better SAS for what we're seeing across the company our strengths our challenges and our strategy for moving forward.
We reported good performance this quarter, we've raised our cash flow guidance for the full year for approximately $900 million, we if our adjusted EPS guidance down at 14% Fourtwenty.
Additionally, we're off to a strong start with the integration of lot that can GE transportation and remain on plan to deliver $250 million of operating synergies by the end of year four of the merger.
With a higher than expected run rate of growth synergies by the end of this year.
Our teams are focused on delivering for the year, while creating long term value for our customers and shareholders.
Now, we're happy to answer and your questions. So Mike. Please proceed.
Yes, Sir.
We will now begin the question answer session.
So you ask a question you May press Star then one on the Touchstone song in season. The Speakerphone. Please pick up perhaps before pressing the keys. So let me turn my question has been addressed and like to Brian's question. Please press Star then two again star one to ask a question.
At this time, we will just pause momentarily to assemble roster.
The first question, we have will come from Allison Poliniak of Wells Fargo. Please go ahead.
Hi, guys good morning.
Thanks, Good morning.
So Robbie I know, you're only of a quarter under your belt in terms of managing Rob.
Pat.
And then I guess.
As you look to add anything surprising or negative the one thing that caught my attention was in your opening remarks about trying to find a way to better position. The legacy products. So Bob had so any commentary that you have on that.
Also a couple of things. So I think there are number one we've started to work on to us a while back.
Got opportunity to start interacting with al and the team here going back 14 months ago switch, how the opportunity to really go through and map a lot of the opportunities.
I see outside Lucatz.
These opportunities and we continue to have.
Dr. This year to grow share in terms of the content of our Wap deprive dogs into the motors that we provide to the market out there I think there is some of the key markets.
Globally speaking, though we're well position, we can take advantage of longer term agreements and bring a lot of those products seem to be part of our services franchise.
So it's one area of opportunity here and would feel.
Strong about being able to drive share of wallet with our customers.
Great and then obviously transit margin showed nice improvement it seems like the OEM mix, but still there can you maybe sort of some of the laptops and she is now firmly behind and you're making some.
Move on the productivity efforts there maybe talk to that just given some of the OEM mix headwinds that seems light in the quarter.
Yes, so I think you're seeing some progress there.
Early days, what I'd say is sell million, though the rule and the teams are really committed to make sure that we have a strong rigor to the bidding process. So that speaks to the quality of the order intake make sure that we sign off for projects.
We clearly understand risks and that were able to deliver on it. So that's where it starts first our quality of the order intake are the team's been taking really a strong view on projects we are executing through.
Making sure. The accountability is there no we're taking cost out measures as a result of that sold through that process. We do expect and we're committed to drive improvements of margins overtime with regards to the UK projects.
Dose projects some of that is.
Of these projects actually extends into 2020 and 21.
I think some of these elements of delays is really associated with.
The receipt of cars to be repair and overhaul that they've got to be sent by the customer to us if you're going to see the majority of that being run by the end of this year.
So it's continued work early days some improvement in the quarter a lot of work ahead of us.
And you just mentioned you know early days I mean, there's nothing structurally wrong with the European business that you guys could not get back to for that low double digit mid teens margin is there.
We've been there in the past.
There's clearly opportunity is the question is.
How fast we get there so we're certainly committed to improving the margins.
Perfect. Thank you.
Next we have Justin long of Stephens.
Thanks, and congrats on the quarter.
I wanted to.
Start with the question on operating cash flow and in the guidance there so using the midpoint of the prior guidance. It looks like the expectation for 2019 went up by 350 million on a GAAP basis and it went up about 150 million on an adjusted basis.
Pat can you just help us understand what drove these increases in operating cash flow and the outlook.
Sure. So I think when you look at it you know and we talked about as a an awful lot in previous calls it said.
There was just some concern it today is close number at that in the first quarter we were.
Only five weeks into the combination and we definitely had some.
Some.
So what I keep referring to a supply chain tools that were provided by GE capital.
Analysts and helped the business manage.
They are working capitals factoring programs on receivables extended.
Supplier a program payments programs for.
On the payable side and and so the impact of those getting out of those tools.
Was it was a headwind something that we were concerned about and I think we kind of referred.
Given everybody references that that was about a $150 million worth of of.
Working capital concerns and frankly, the team has done an excellent job on mitigating that impact.
I'm working to to do it.
Good job in collecting receivables and working with our suppliers.
And then on top of that there's just been a an overall better performance in terms of.
And focus on working capital management, So all wavetek contributed to that.
Better receivables better better payable management, better a better inventory management and and then we also have talked about this in the script a little bit of the.
Impact of some of some some customer deposits that we received on discrete projects. So.
All in all its a it was a good working capital performance and mitigation of that headwind.
We ended up in a really good.
Cash performance in the <unk> in the second quarter on a go forward basis in terms of our guidance, we think that.
We are giving a.
A good view of of a typical cash conversion cycle.
We don't see.
Any kind of like a one time benefit in working capital rather a continuous improvement in working capital and really allows us to to to come.
Couple that with a good guidance number that's materially improved.
Okay, and just to clarify on that so previously you were assuming $150 million of a working capital headwind and it sounds like now you're assuming working capital as a neutral for 2019.
Yes, I think Thats right. We also had some some concerns through the the working capital you had you had restructuring and other costs and and so that was really kind of added up to our total impact of.
In.
Cash that was the 300.
Okay, Great and then for my second question Rafael I wanted to go back to something that you put in the release and said on in your prepared remarks, you talked about an acceleration in cost reduction and synergy initiatives, but can you help us size up the benefit from those actions and in terms of the timing of these actions is this more of a benefit to 2020, because I noticed the synergy guidance for this year didn't change.
So from a synergies perspective, yes, I think we've guided so forth not see hundreds of 20 million for this year.
Well, certainly tracking to north of that but.
The bulk of the synergies four to 250 million will have 20 and beyond.
I think we're.
Really making sure we continue to.
Evaluate and watch closely our end markets the various end markets that we serve.
John we've been ready to take actions.
As needed so as those markets fluctuate, we give a positive but we're not so positive on yields on that regard.
You are seeing the reflection of some of those actions already in our second quarter results.
And do you have any initial thoughts on the synergy benefit you could see next year.
No we're not at this point, providing what I will tell you is.
We have validated the 250.
Million dollar shelf targets to be achieved by the end of 2020, as you and I will certainly not being incremental opportunities.
Well, we could ask on us the environment demands.
Okay, Great I'll leave it at that thanks for the time.
Thank you.
Next we have Scott group.
Research.
Hey, Thanks morning, guys wanting more help wanted just wanted to follow up on some of the cash flow of things can you just quantify how big is that the customer deposits.
Benefit in that change in cash flow and then when we talk about we thought we were going to have 150 million headwind from.
Factoring in and now not it does that mean that we're doing factoring island. So this is an ongoing benefit or is this sort of when you can start some offsets for this year, but we still have that factoring headwind to think about in the future years and.
Can you just clarify.
Good sorry go ahead.
So just let me let me answer those two questions first okay in terms of factoring the factoring we have not placed the factory program.
We had to exit the GE GE factoring program. So in other words the.
Factoring provided a quicker turn on cash receipts on receivables.
We have been able to.
Yes, thats been paid off that there's there's no more factoring out there and we have not put in a new program in place for those receivables we have so that's behind us.
And.
If we were to actually find out and get into a factoring program that we thought was a good answer and attractive that wouldn't be a benefit going forward, but we have.
Nothing that we're working on right now our plans for that right now.
In terms of the customer deposits I think in total the the receipts of customer deposits that I was referring to or about $60 million.
And and one of those deposits occurred and a portion of those deposits Kurt and first quarters second.
In the second quarter, and you know, but of course, you're you're constantly kind of receiving and consuming.
The deposit so to speak in terms of project performance, but the but the gross number received was about 60.
Okay helpful and then.
Just as we think about the free cash flow here that the tax benefit that I guess gibbs share to GE or in the beginning.
Does that show up in the 900 million of cash from ops or is that in investing.
So I think you're going to get a benefit.
From the from the.
The cash share the tax sharing kind of arrangement, where we get the benefit in other words, we have less.
We have to pay to the.
The government so to speak in terms of taxes.
But then that shows up in the cash from operations, but the amount that we paid to GE as to their to their cat 470 million will come out in our cash from a.
Testing activities.
Cash used in investing activities. So I think as we took to quantify that for you because.
I think that would be a good piece of information is maybe the benefit in the second quarter.
It's about $20 million.
And I would expect a similar benefit in each of the future quarters.
And then you're saying that's the net benefit the 20 million. This quarter is that that's the benefit to cash from operations.
So that would be a good guy in the in the cash from operations in the second quarter and each of the third and fourth quarter and then you would have an outflow in the in investing activities that would be equal to a net.
Zero impact.
Okay makes sense and then just lastly.
You mentioned that the freight sales were down I think just a lower electronic sales I presume that's sort of the PTC stuff starting to roll off do you think are we seeing a full run rate of that reduce PTC spend or do you think we need to think about you know a potential another sort of step down in that into next year.
No I think I think a year ago.
The electronic sales and PTC sales were.
You know we're we're we're we're running it with the idea that that deadline in 18.
You know was was it had an impact and I think that when you look at the current quarter I think we're at the kind of the more typical run rate without the PTC deadline out there.
So.
You know the the decline any electronic sales you would definitely correlate to the to the change in PTC demand.
What what we.
We're focused on now is again the.
Development of the the next generation opportunities on maintenance contracts.
And and upgrade.
Ah, yes capabilities in PTC, and so we really see that as our as a growth opportunity, especially as we integrate it with our.
The digital business that came the GT.
Thanks, a lot guys appreciate it.
Thank you.
The next question will come from Jay Roberts of Goldman Sachs.
Hi, Good morning, everyone. This is Ben brewed on for Jerry.
Good morning.
Morning.
I would just can you help us think about organic growth.
In the quarter at the legacy Bob to create business as well as the acquired GE transportation business.
And can you also give us an idea how you're thinking about those.
Thanks organic growth trajectory going forward as well.
So maybe a good way to answer your questions just Chuck I'll walk through a little bit on some of the dynamics. We're seeing around the world are probably start with Asia, where traffic growth continues to be strong driving demand for well hold rolling stock in locomotive replacement. So while we've been working on a number of opportunities there.
You take the aspects of Australia, New Zealand style. We also see fleet renewal offer during two stand works are driving demand Gen. Here's a combination I am not just.
Locomotives freight cars and a lot of the.
Components that we sell.
This continues to be.
Pockets of opportunity in Africa of course, we recently completed contract for 233 locomotives, but.
We're expecting to grow in West Africa, and until shop, some of the opportunities. We worked here for the second quarter.
Russia and see I asked despite waterflood traffic being flattish, there's certainly opportunities for fleet renewal and we are really working strongly with Bofa Russia.
Ukraine as opportunities ahead.
Last one is fully Latin America, I'll say right now demand seems to be a moderate but we've found pockets of opportunities.
To grow our fleet that we're continuing to pursue that.
Understood and turning to freight.
The backlog some burn in the quarter can you can you comment on the Twoq you order activity for again, both the legacy Rob's like freight business and the acquired GE transportation business and then going forward. What are you seeing as the cadence for new locomotive opportunities.
How is the problem you step through it a little bit but can you elaborate on the prospect list and when can we expect a return the backlog growth and the freight segment.
Okay. So we've seen how the backlog with waterfall a slight decrease of about 600 million from on first quarter I see some of that is really associated with the lumpiness of some of your orders keep in mind. We've received a number of multiyear orders and the horse last couple of years and I think thats number one something too.
Keep in mind, the second piece to that is.
As you start looking to the elements of.
Our freight market into specific I think John .
Surely had when so when I think about.
I'll call, our OE business in specialty in the light of.
North America, I think it's important to keep in mind.
Some of the dynamics have been playing out for some time I mean, I've been having a number of locomotives. We're apart starting the first half.
The first part of the second half of last year and.
It has gone through the first half of this year right now we're sitting on one of the highest number drove look more to spark for fast in years and that has played out over the last 12 months.
When you think of the aspects of carloads being down Thats certainly be in a dynamic since the beginning of this year I think what we like our portfolio is when I think about the services portfolio a recurring revenues, we certainly have a more global installed base. There were certainly taking advantage off I think we have a portfolio that allows customers for the fleets that theyre maintaining running down we have the opportunities to provide enhancements to that fleet, you're seeing that coming through the modernization program, but you certainly see the fleets. There are remaining active there's more demand for parts. The Serbs SCADA being sounds supplied on those in order to improve mate.
Reliability and availability of those units. So when you blend that up I mean, we're looking at a services business that is growing.
For the year I think that sell one element to keep in mind.
When it comes down to well specifically you asked on new locomotives.
I think as we discussed strategies for far customers I think there has been a number of discussions where are the preference might have gone forward, some monetizations versus new locomotives and that's offsetting some of that pressure and.
We like the portfolio, we have in terms of the opportunities and.
There's a lot of pieces of the portfolio, which transits, we certainly have an opportunity here to continue to drive Gulf mining.
Now, we're having double digit growth for the year and good prospects here moving forward.
Got it and finally can you give us an update on the share picture and the locomotive business are you seeing any shift in competitive intensity or maybe do you intend anticipate any change you know down the road when we head to head up into a new upcycle.
So I think we are well positioned from a technology perspective to have a really one of the most competitive products out there as far as you look not just into North America that internationally. It's an element not just a new locomotives. It's also an element of the services portfolio, so keeping those fleets.
After today.
You Shouldnt productive so when I look at the share of the installed base I think we've been able to grow that share our installed base just based on having a more reliable and more.
Efficient fleets and we're certainly continuing to make investments to allow customers.
More opportunities to.
In vast I'm getting more value out of the existing fleet with I'll switch also drives value for us.
Great. Thank you very much.
Thank you.
The next question will come from Chris Wetherbee of Citi Group.
Hey, Thanks, good morning.
I wanted to stick on I guess on the free business for a moment and it sounds like you calibrated the outlook for the full year from a revenue perspective towards some of the deceleration that we've seen at least here in North America can you give us a sense of what you've seen sort of back half may look like or what.
And the guidance in terms of maybe returned to some degree of growth year over some stabilization certainly the current environment seems particularly soft so kind of you just want to get a sense of how the guidance just calibrate the current environment relative to a potential improvement as we move forward through the rest of the year.
Okay. When it comes to the rest of the year of course reassess your backlog in different projects, we're working on and.
Without shrunk to the point that we've.
Raise the guidance on cash flows to be.
Really move.
Our range from four down to 420, so I'll just start there.
With regards to being able to comment on 2020, it's kind of all too early.
We're certainly watching carefully all our various end markets and we're really ready to take the necessary cost actions to make sure that we offset any elements of our challenges on any markets that we ultimately serve.
I think one of the things start to keep in mind is.
What I just described for our services business, which I think it really has the opportunity.
To drive value of providing customers solutions for the existing fleet, so you're going to need to ultimately extract more value of those fleets they need to be running better conditions and.
I think we're seeing the opportunity to grow our services business as a result of that but we'll keep.
Really watching carefully as some of the same.
Data to us.
You look at it and.
We will continue to monitor our end markets.
Okay. That's helpful and I just want to come back to the working capital point for a moment make sure I understood. What you guys are describing here when you think about sort of working capital go forward for the mix of the business as it stands today should we assume that should be sort of more neutral or was that more of a 2018 I just want make sure I understand sort of what the outlook there.
So so I think what we're talking about in our guidance is that.
Our working capital at the end of the second quarter will will remain about the same levels as it is now we're not.
We're obviously, we're constantly looking to perform better to to do better with working capital.
Inventory turns receivable days outstanding but in terms of our guidance, where we're at we're feeling like a.
You know that's that's fairly neutral for through the rest of the year. The overhang that we keep talking about in the in the initial guidance that we gave earlier years just do is really.
It's we feel is behind us.
It.
The the the factoring we extended payment terms.
Programs. Those those are those have unwound themselves and and and of course.
Uh huh.
The restructuring.
Cash costs were also part of that that adjustment. So it's just.
We're looking at a kind of a neutral view on on working capital change for the rest of the year.
Okay. No. That's helpful. I could speak one last one here I know I know, it's early to talk about synergies beyond that the rest of 2019, but conceptually when you think about the opportunity set.
The general view that will be backend weighted what are the sort of factors that you guys are looking at that could potentially influence or impact the timing of being able to sort of leverage those synergies I don't know if global macro dynamics kind of how much that sort of plays into it or maybe that allows you to accelerate it sounds like there's an effort to accelerate cost take out and be more focused so just wanted to get a rough sense of.
Bigger picture when you think about the longer term integration of the business. How do you think about the potential for realizing the synergies.
Yeah, I think we're I think we're on track to achieve the synergies I I think what you're kind of driving at is you know what levers do we have in order to to pull those in or what kind of.
Kind of risks are there for them to be pushed off and and I definitely think that there's.
There's a lot of factors a lot of opportunity there.
We're going to.
When we talked about our synergies and the kind of the buckets of where these are these are being.
Achieve both near term and long term.
If it's definitely coming from from sourcing from buying as as a bigger organization leveraging each other supply chain.
Or the Oh, we are reducing the number of rooftops having consolidated.
Facilities and capacity.
And you can you can kind of look at those those those near term synergies that we've talked about.
As a there there could be impact is how fast we move based on our market conditions.
Our goal is to move as fast as possible to get these hit these opportunities.
Kind of.
Uh huh.
Benefiting the company in 19.
So that are up and running and ready for future periods.
Perfect. Thanks, very much for the color I appreciate it.
The next question, we have will come from Matt Alcott.
Cowen. Please go ahead.
They ask about the a freight backlog the 12 month portion of that backlog when.
Down slightly from March from I think 20.9% to 20.2% so it's not.
The flight a decline, but I was just wondering if it may be partly a function of customers wanting to push outs or deliveries or if there are any discussions of that sort going on.
So a couple of points I mean with regard to our backlog.
I think we were clear on the first quarter, our backlog for new locomotives was close to 2000.
Units and.
The modernizations.
There were close to 900 units.
I would say as at the end of the second quarter. Those numbers are about 1900 for new locomotives and about 804 months on that regard.
We have not had any project cancellations.
I mean of course as part of business, we might have discussions with customers in terms of.
Timing of.
Our deliveries and things like that but we don't disclose those and they are really.
On a case by case basis.
Got it that's helpful.
Roughly.
The initial guidance for locomotives on the deal was first announced a it was a double digit cagar growth through 2021, how much slower is that outlook now that rail traffic is down and MPS ours is widely implemented.
So a couple of points I think number one this is a cyclical markets, but overtime, we do expect that those numbers.
Can be I'll call more than two times higher versus the trough numbers than we had in 2020 18 with that in mind.
And there's certainly on in a variety of elements up playing out there some of that size you discuss fleet strategy with customers. We are seeing a stronger interest in some of the modernization programs and.
In terms of numbers those are more than offsetting I'll call. Some of the numbers on a walk on new locomotives, but over time I think a good way to think commodity us think about out as you look into the fleet stem we have out there they're running hard in some key markets you will see those locomotive seen average being replaced every 20 to 30 years. So as you think about that just from a I'll just be kind of you ask market perspective with.
Close to 15000 units you apply that logic I mean, you'll see we should expect.
Those numbers to be north of 500 locomotives in average per year and of course, you've got all the international markets, which will be very project based so we think it's consistent the timing on those will vary based on where we are in the cycle.
Okay and EMEA the modification of the Modernizations go into the aftermarket portion of the revenue right not the new build.
That's correct.
Okay, and I know that there are railroads that are contemplating whether they do in house modernizations or they let you guys do it can you maybe talk about that a bit and whether you guys are thinking of any incentives to increase the portion that you would do.
So we do both today and in some cases, we do the full.
I'll call modernization, our shops in some cases, we shipped a lot of the cannot see under what the railroads will do well utilized so the fact that they might have capacity available in their shops to do a lot of waterfall at assembly and apply the labor hours to get more I'll call a efficiency.
Level loads.
Their plants.
So this is really a case by case is.
Basis, what I'll tell you I don't think we've been able to really deliver on the strong reliability and availability numbers for the units that we do.
Got it and just one last question or should we expect you guys in anytime in the next.
Few quarters to give us an update its a long term goals and maybe give us some more color around some sort of quantification of the digital opportunities because I know that's.
Pretty big part of your Oh thesis going forward.
Yeah, So up to this point I would say, we had really being very focused on the integration and synergies and making sure that we are.
Working on delivering.
Our commitments we are starting the process of really doing just long term planning for the second half of the year.
Oh, we do intend to have an investor day I at this point are likely to happen in the early parts of next year.
Perfect. Thank you very much.
Thank you.
The next question will come from Matt Brooklier of Buckingham Research.
Hey, Thanks, good morning.
I was wondering if you could talk to.
The cadence of S. and in the second half of the year I think Pat reminded us that you do have some seasonality in your transit business from from Twoq into Threeq you.
But this is kind of a different ballgame in the fact that we have gene. There's obviously more kind of project timing that.
Influences numbers, but just curious if you could give us maybe a little directional guidance in terms of how we expect you know threeq and Four Q4 q you guys to play out.
Yes, Matt.
You know, we've we've never given any kind of quarter guidance before it gets it gets kind of difficult.
We definitely.
We'll have a.
In impact on on on the transit business, which is largely European.
Not only our customers or or or we'll we'll get into shutdowns and other kind of slowdown in their own production. So so it kind of has a trickle effect into our transit business.
The other thing is.
We have.
With our.
With GE tea.
There is an impact on kind of timing of service and the underlying contracts and projects that we have and so right now. It's it's it's it's probably not as dramatic an impact as it has been in the past.
But.
Kind of a little bit.
You know there is still a factor still matters, so and that's why we pointed that out.
Okay. That's helpful.
And then Rafael you you talked about you know, it's pretty clear, there's there's weakness in the North American locomotive market you do have some offset from your modernization.
Program could you talk about where you are from a utilization perspective on Modernizations. You know is there the opportunity the potential growth that program as we move into 2020 to offset maybe continued headwinds in terms of you know North American do locomotive orders.
What I'll tell you is we are growing that specific product line by.
Double digits into this year.
So it's there's certainly an element of opportunity here to continue to drive growth there.
And being a significant part of what we do.
We also continue to.
Aldrich for new locomotives as we continue to invest some of the product offering.
Improved fuel efficiency and to improve.
Al termination as part of that.
I think.
We had a strong first half for the year I think we feel we're on track to improve as well again, the low end of the guidance, we're continuing to watch in monitoring our end markets I think.
One of the elements to offset some of that softness is.
The services franchise.
The global footprint that we have them the offering that we have to get more out of the install base gas just are remaining in operations, they're demanding more services, they're demanding more parts you want to ultimately move guarantee that you have a more reliable assets Ronnie and we're seeing a services business that is growing.
This year and.
Just to point out again.
In a lot of these dynamics have been in place for some time I mean, we've been saying locomotives being parts as of early part of second half last year and a year later, we're sitting here and one of the highest levels of what most part.
Carlos have been coming down since January here for the business. So I think we like some of the opportunities we have here with with the services franchise.
Okay. That's helpful. Those are my two thank you.
Again as a reminder, if you like to participate in todays today. Please press Star then one on a touchtone phone again that is star then one to ask a question that's sort of Steve Barger of Keybanc capital markets. Please go ahead.
Hey, good morning. Thanks.
Morning.
Good morning.
With North America traffic levels down can you talk about the aftermarket and friction product inventory in the channel I'm, just trying to get a sense for if you need to adjust production levels in the plants to balance supply and demand and where you are with that.
[noise]. So Steve you are asking about specifically the friction business yeah, the legacy web deck freight.
Yeah, So you know that that that or the impact of.
Of Ah you know volumes, it's really been an ongoing you know factor in how we operate the business is as you know, especially our plant in North Carolina.
You know and so they they have adjusted their their their working capital model for exact for that demand. It really in the end. It's it says that that North America friction business. It is only a small small component of our overall friction business because we have multiple plants in Europe , which are which are serving the transit side too as well as Australia, India and and Ah South America. So all in all I would say the impact of any kind of slow down on friction is definitely behind us and reflected in the results.
Got it.
And just thinking about the Fedex freight segment margins you talked about sequential improvement in the back half, but do you expect the freight margin in one Q1 is kind of a high watermark for the year I'm just trying to think about how we should calibrate to half in that segment.
Yeah, you know the first quarter first quarter freight margin was definitely impacted by the the five week GE T. results, a little bit about sales mix and the timing of how they were delivered and recognized as part of Wedtech versus part of GTT for GE excuse me.
But also you have to factor in the the recurring TCPA.
You only had about a month of recurring PPA in the in the first quarter.
With that that real favorable mix, where you are you. Most of your revenue was kind of delivered for the quarter in the five weeks with web Tech.
When you take the full the full impact of a of a quarter.
You know a more balanced the sales mix of OE, and aftermarket and and that recurring PPSA.
You get that variation on the.
On the on the freight margin is the the way I've been looking at it is is is you look at our Q2 you know we're at about 16.6%.
Freight margin, Okay. Once you add back or one time adjustments.
And then if you add back all that recurring P.P.A. you actually have a margin for the freight segment, that's in excess of 20% and.
And very consistent with what are the kind of the legacy Wedtech freight business has been.
Right, but you will report the back out the same way you did this.
This quarter right.
Yes, correct.
Okay, and then just one more rough fail going back to the locomotive commentary you've seen the mods really step up based on.
Customer thoughts around traffic levels, and PSR, but do you still expect positive year over year growth in domestic locomotive orders in two half two of 19 or is that less likely due to just the idle equipment that's out there.
Oh say well, we're seeing certainly growth in terms of delivery so for this year.
I think our discussion next year I mean this is still early I mean, we're working on a number of opportunities are the bulk of the pipeline is really a lot of international markets for new locomotives and.
Those tend to be a little more volatile in terms of the timing, but we we're working to make sure that we prove that pipeline.
Understood. Thank you.
Well that's the problem, we're showing no further questions. We'll go ahead and conclude our question answer session.
I would like to turn the conference call back over to Ms. Kristine Kubacki for any closing remarks ma'am.
Thank you for participating in today's call. We look forward to talking with you soon bye.
We thank you ma'am and also to the rest of the management team for your time also today again. The conference call is now concluded at this time you may disconnect. Your lines. Thank you take care and have a great there everybody.
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