Westinghouse Air Brake Technologies Corporation

Good morning, and welcome to the Wabtec Corporation first quarter 2019 earnings release conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Tim Wesley, Vice President of Investor Relations. Please go ahead.

Thank you, Nancy. Good morning, everybody, and welcome to our 2019 First Quarter Earnings Call.

We do have a lot to cover, so let's get started. I'm going to introduce everybody else here in the room with me. First of all, our Executive Chairman, Al Newfaber. President and CEO, Ray Bettler. Pat Dugan, our CFO. Rafael Santana, President and CEO of our freight segment. Corporate Controller, John Mastelers. And our new VP of IR, Christine Kabaki, who has recently joined us. We think Christine is familiar to many of you. She's got a lot of experience on the sales side, covering not just Wabtec, but many other companies in transportation and equipment. So we'll make our prepared remarks, as usual, and then we'll take your questions. We do ask that you limit yourself to one question and one follow-up, and of course, if we can't get to everyone's questions in the allotted time, we'll reach out following the call. We will make forward-looking statements during the call, so please review today's press release for the appropriate disclaimers. And also during the call, we will discuss non-GAAP financial metrics. We encourage you to read our disclosures and the reconciliation tables we've provided as you consider these metrics. So I'm going to turn the call over now to Al Newthaber. Thanks, Tim. Good morning, everyone. It's good to talk with you today. We're happy to report that we had a good performance this quarter and that we're on track to hit our guidance for the year. So we're off to a good start in 2019, especially as we begin to integrate lab tech and GE transportation after completing our merger in late February. Thanks a lot to a detailed plan and hard work prior to closing. We believe the integration has been seamless to this point. We have already validated our annual savings target of $250 million by year four. Before we get to the first quarter financials and discussion, I'd like to start off by talking about the management succession plan that we announced this morning. After conducting a thorough external and internal search, our board is named Rafael Santana, the company's next president and chief executive officer and a board member, to become effective July 1st of this year. He succeeds Ray Butler, who will retire as a Wabtec executive and board member. I will continue to serve as Wabtec's executive chairman. This transition comes at a time of strength at Wabtec given our diverse portfolio, excellent management team, and strong backlog and balance sheet. Raphael, as you know, joined WebTech earlier this year with the GE Transportation merger after serving as president and CEO of that division. Raphael held a wide range of executive leadership positions at GE and has spent more than a decade in the transportation industry. He's the right leader for this role. bringing to Webtek a passion for operational excellence and technology and a strong track record of growth and performance. A native of Brazil, Javier brings 25 years of commercial, product management, and executive leadership experience to this post. He has a proven track record of transforming businesses while delivering top and bottom line growth. While leading GE Transportation, he significantly expanded the company's regional footprint, built a strong overall and modernization capability, and backlogged through multi-year programs. Prior to that role, he was President and CEO of GE in Latin America, where he helped transform the market into one of GE's largest and fastest-growing regions. He also served as President and CEO of the Turbo Machinery Solutions business of GE Oil and Gas, where he drove significant margin improvement and growth in a contracting marketplace. Raphael has a degree in engineering from the Federal University of Engineering in Brazil and will be based at WAPTEC's new headquarters in Pittsburgh.

Congratulations on your new role. Hey, good morning, and thanks, Al. I'm deeply honored that the Board has selected me to succeed Ray. as the next president and CEO, and to really build on Wabtec's solid foundation of growth. Our company has a rich history of meeting the needs and expectations of our investors, customers, and employees. Since merging GeoTransportation and Wabtec, we have really been working hard to ensure that we hit both our operational, financial, and synergy commitments, and I'm fully committed to delivering on these efforts. based on our first quarter results. We're off to a solid start. I'm really excited about the year. I'm really excited about the future. With that.

Okay, thanks. And Ray, on behalf of our board and shareholders, I'd like to thank you for serving Wabtec over the last 11 years, including the past five as president and CEO. Ray's leadership at Wabtec has been extraordinary. Since joining the company, He has been an integral part of Wabtec's growth story, increasing revenues five-fold from $1.5 billion in 2008 to more than $8 billion this year. Ray also has been instrumental in reshaping our global footprint, strengthening our technology leadership position, diversifying our portfolio through the acquisition of Favela Transport and the merger with GE Transportation. The board is very confident that Wabtec investors, customers, and employees will benefit from these achievements for years to come. And, of course, we wish you all the best in retirement.

Thank you, Al. And I want to say that I'm grateful to you. I was just following the strategy that you set up to grow this company, and it's been an incredible experience over the last 11 years, and I want to thank every employee in this company for the support that they've given me, as well as the board, the management team, and our shareholders. After 40 years in the transportation industry and a career that started with Westinghouse Transportation Division out of Westinghouse Corporation and now has culminated with Wabtec, the time's right for me to transition my leadership of this great company to Rafael Santana. I'm absolutely confident that he will build on our success and he will ensure that this corporation is strong and more capable in the future than it has been in the past. Throughout my career, I've been humbled by the commitment and hard work of our people and their passion to create a purpose-driven company. Together, we've raised the bar on safety, on quality, on engineering, on talent, and on value. And with that, I'd like to ask Pat to now review the first quarter numbers.

So let me add my thanks to you, Ray, for everything you've done for me and for the employees of Wabtec, and I'd like to offer my congratulations and thanks to Raphael as you begin the next phase of your career. So as you can see from our press release this morning, we discussed both the gap and adjusted numbers, so I want to encourage you to review all the reconciliations we have provided. In addition to the adjustments we discussed, other factors are worth noting as you model your quarterly results for the rest of the year. So just as a point of emphasis, the first quarter results included about five weeks of GE Transportation's results, and it was a particularly strong period based on the delivery of products and projects, meaning the schedules of our customers. Going forward, I want to point out that we will see some fluctuation or variation in our quarterly results based on the timing of project deliveries and also the impact of normal seasonality in our transit business due to the European slowdowns in the summer months. And just a reminder, our share count will change again in the second quarter. The first full quarter, we will own GE Transportation. the second quarter share count will be about 193 million shares compared to about 121 million in the first quarter. So taking this into account, I'd like to emphasize that today we affirmed our guidance for sales for adjusted income from operations, excuse me, adjusted EPS and adjusted EBITDA, which shows that our business is performing up to expectations. Looking at the income statement, sales for the first quarter were $1.59 billion. The adjusted sales would be $1.64 billion. That's excluding the gap numbers, exclude the effects of accounting policy harmonization. Our freight segment sales increased 131% to $876 million. The increases due to the GE transportation merger, which added about $495 million, and organic growth of about $9 million, offset by some small impact of FX. As I mentioned, the GE transportation had a strong five weeks to finish the quarter. Quarterly run rate for the rest of the year will fluctuate based on the delivery schedules and other factors I mentioned earlier. Transit segment sales increased 6% to 717 million, driven by a strong growth in our OEM sales. The increase was due to strong organic growth, adding about 77 million, and acquisitions, about 15 million, which more than offset the impact of a negative FX of about 51 million. This is the fifth quarter in a row we've seen organic sales growth, which shows that our backlog has started to kick in. Just to comment on the legacy Wabtec business, our first quarter sales were about $1.1 billion, about 4% higher than a year ago quarter. Switching to consolidated operating income for the quarter, operating income was $67 million and adjusted operating income was $220 million, or 13.4% of adjusted sales. Adjusted operating income excluded pre-tax expense of $153 million related to the merger with GE Transportation. Just to highlight those adjustments, we had $80 million for one-time non-cash purchase price accounting charges, $59 million for transaction and restructuring costs, $14 million for non-cash accounting policy harmonization. And just to help, I would reference the reconciliation table for all the details. In addition to these expenses, the company also had pre-tax expense of $20 million for non-cash recurring purchase price accounting charges, which is not added back to the adjusted income from operation. Looking at some of the more detail on the line items, our SG&A was $260 million, including $59 million of the $153 million I mentioned above that We expect the adjusted number to be about 280 million per quarter going forward. Engineering expenses increased to 35 million on the face of the income statement due mainly to the addition of GE transportation. Amortization expense of 29 million included 20 million of recurring PPA for the GE transportation merger. Going forward, we expect amortization expense to be about 70 million per quarter. Looking again at just legacy Wabtec, adjusted income from operations was about $121 million, slightly lower than a year ago due to increased sales in the lower margin transit segment. Moving to our segments and the operating income in our segments, our freight operating income was $75 million and adjusted operating income was $175 million for an adjusted operating margin of 18.9%. transit operating income was 59 million for an operating margin of 8.2%. That was impacted by some product mix items and certain discrete expenses that we recorded in the quarter. Compared to a year ago quarter, we had a significant sales increase from lower margin OE projects, about 22% higher, and a slight decrease in aftermarket revenues about a decline of about 5%, this mixed shift accounted for the majority of the margin decrease. We expect the margin to improve during the year as we continue with our restructuring and cost reduction initiatives. For the full year of 2019, we expect adjusted operating margin improvements for both segments compared to last year. These improvements will come through better 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 want to emphasize that the quarterly results can fluctuate due to product mix and other factors, which is why we don't guide to quarterly segment margins. Interest expense, net interest expense for the quarter was 45 million due to higher debt balance after the GE transportation merger. Adjusted interest expense was $30 million to reflect the timing of the merger. If you recall, we had borrowed the money several months earlier than we actually closed the transaction. Going forward, we expect interest expense to be about $55 million per quarter. Remember that we are focused on generating cash to reduce this debt and therefore the interest expense. Other expense was $8 million due to certain losses on the remeasurement of foreign currency denominated contracts. income tax expense was $19 million. Excluding the net tax benefit from transaction costs for the GE transportation merger, adjusted income tax expense was $41 million for an adjusted effective rate of about 23%. Just to recap a lot of that information on an earnings per share basis, for The Q1 EPS, we had a loss per diluted share of $0.04 and an adjusted earnings per share of $1.06. To reconcile that first quarter EPS, you can find those details in our press release, but just to reiterate, GAAP was a negative $0.04. Add back a one-time non-cash PPA, that's a positive $0.46. Add back the cost incurred for transaction and other restructuring costs, that's about 42 cents. Add back the impact of changing accounting policy, that's about eight cents. Add back a tax benefit, that's 14 cents. And that gives us an adjusted EPS of about $1.06. In addition to the expenses noted above, the company also had after-tax expense of 12 cents per diluted share for non-cash recurring purchase price accounting charges but we do not add that back into the adjusted EPS. EBITDA, which we define as income from operations plus depreciation and amortization, was $123 million, and adjusted EBITDA was $276 million. Adjusted EBITDA excluded the pre-tax expenses of $153 related to the GE transportation merger that I had discussed earlier. Okay. Moving to the balance sheet, I just want to point out again that we believe it provides the financial capacity and the flexibility to invest in our growth opportunities. We have an investment grade rating, and our goal is to maintain it. In the quarter, we generated $31 million of cash from operations, mainly due to improved working capital. I'd also like to point out that cash from operations was reduced by about $50 million of cash transaction costs for the merger. Excluding those costs, our cash from ops would have been about 81 million. Working capital at March 31st, our receivables were about 1.7 billion. Inventories were about 1.9 billion. Accounts payables were about 1.2 billion. Receivables included unbilled receivables of 456 million which were more than offset by customer deposits of about 573 million. And March 31st, we had about 513 million in cash and total debt of about 496 billion with a net debt to EBITDA of about three. By year end, we are targeting a net debt to EBITDA of about 2.5 times. Just miscellaneous items and covering our backlog. Our depreciation was 27 million versus 18 million in a year ago quarter, increased due to the merger. For the full year of 2019, we expect it to be about 175 million. Amortization, 29 million in the quarter 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 or about $70 million per quarter. Our CapEx, about $30 million in the quarter compared to $17 million a year ago, increased again due to the merger. We expect to spend about $200 million in 2019. impacted obviously by the merger at March 31st, our multi-year backlog was 23 billion, and our rolling 12-month backlog, which is obviously a subset of that multi-year backlog, was 6.1 billion. GE Transportation added about 19 billion to that total backlog number. So looking to our 2019 guidance, Based on our first quarter performance and our current backlog and our assessment of the conditions in our key markets, today we affirmed our full-year guidance for revenues and adjusted earnings per diluted share. Our guidance is for sales to be about $8.4 billion, adjusted EBITDA of about $1.6 billion, adjusted income from operations of about $1.2 billion, and adjusted earnings per diluted share between $4 and $4.20. For the year, we expect GAAP cash flow from operations to be between 500 and 600 million, impacted by about 300 million related to the GE transportation merger. Excluding all of our costs related to restructuring one-time purchase price accounting and non-cash accounting policy harmonization, our adjusted operating margin for the full year is about 14%, and our effective tax rate for the full year is expected to be about 24%. For the full year, we expect adjusted cash flow from operations to exceed our adjusted net income. I'd also like to point out that our adjusted guidance includes after-tax expense of about 80 cents per diluted share for non-cash recurring purchase price accounting charges. In other words, We are not adding back the recurring purchase price accounting for our adjusted EPS guidance. If you do that, I'll just also point out that our adjusted operating margin would be about 16% for the year. Regarding Q2, a couple things that need to be highlighted compared to our first quarter results. We expect our second quarter sales, our second quarter adjusted in income and adjusted EBITDA to be higher than the first quarter with adjusted earnings for diluted share expected to be lower due to the fully diluted share count increasing to about 193 million as a result of the merger. Based on the expected timing of project deliveries, we also expect our product mix and adjusted earnings for diluted share to improve during the rest of the year. So with that, I'd like to turn it over back to Ray.

Thanks, Pat. Before I ask Rafael to talk about the freight business, I'd like to briefly discuss our transit business and reiterate the strategic rationale for our merger with GE Transportation. In transit, we have a very strong backlog that started to kick in, as you can see from our numbers and sales growth. We have not, however, started to see the margin improvement that we're targeting due to a less favorable product mix and higher project costs. We're taking actions to continue to improve on our profitability, and our goal is still the same, to drive transit margins higher by 1% annually during our strapped period, and we expect to achieve this goal by applying a more rigorous upfront bidding process, improve project management, improve cost structure from ongoing new restructuring initiatives, and transfer of work to lower cost countries. Through a new discipline, deployment of lean and sourcing initiatives that we can leverage the GE experience now in addition to our own. In addition, as OEM projects begin to result in aftermarket revenues from these projects, we'll see a better mix of aftermarket versus OEM, which will improve our margins significantly. Leading these efforts will be a new president of our transit business, Lillian LaRue. Lillian joined WAPTEC with our acquisition of Feble Transport. About 20 years experience he has in the transit industry and he's accepted this challenge with enthusiasm and is developing an action plan to take steps toward accomplishing these objectives. Just to pause here to give you a little background on Lillian. He's been in the industry about 20 years. As I said, he has an engineering degree in France and he has a graduate degree from INSEAD. Lilian worked for customers like SNCF early in his career. He's worked on multiple continents and he also is fluent in multiple languages and has an extremely good grasp of the industry and of our business and I have tremendous confidence in his ability to lead and improve the overall operating performance of the transit business. Worldwide, the state of the transit market remains strong, and we continue to bid on and win significant orders in all of our major markets. We've won significant door contracts on high-speed trains, in excess of 20 million in Europe, We've won door contracts on metros in China and Taiwan in excess of 10 million, brake contracts on metros in Canada and India in excess of 15 million, brake contracts on coaches in excess of 50 million in India and Canada, and on locomotives in excess of 30 million in India and Canada. So you can see that we're winning good orders. diverse technologies, diverse geographical areas across the globe. Multiple aftermarket service contracts including anti-fire systems in Italy and maintenance contracts for our equipment in Asia. We were also either awarded or signed train control contracts in the transit agencies in North America that are associated with our PTC technology the latest of which is in New Mexico, in excess of $50 million. And for a full year, we expect to book the bill of greater than one. And remember that our OEM orders typically lead to long-term aftermarket contracts with good profitability of 30 to 40 years. So as a true global player over time, our transit business should have better visibility and stability more growth opportunities both organically and through acquisitions, and improved margins as we benefit from increased scale and market share, and as those aftermarket revenues increase. Let me talk for a minute about the strategic rationale of GE Transportation. As you know, I've been calling this a once-in-a-lifetime opportunity, and I truly believe that that's what it is. We're excited by both the short-term and long-term opportunities it creates, Paul, we just shared with you some of the benefits in the short term already in Q1. We have combined WAPTEC's freight and transit components with GE Transportation's locomotive manufacturing and service capabilities. We've combined electronics and digital product portfolios that are unmatched in the industry. Based on our integration and synergy planning initiatives so far, we're seeing strong cultural fit, which is enabling a seamless combination of our business. WAPTEC is now a member of the S&P 500, and we're a global transportation leader in rail equipment, software, and services, with operations in more than 50 countries around the world. We have validated, as Al said, our operating synergies, which will drive value creation. We estimate about 250 million of rum rate synergies by year four, mainly through cost reductions. Our combined electronics and digital technologies can lead to fully automated operations in the class one network, for instance. WAPTEC is positioned to meet the growing demand for trained intelligence and network optimization given the increased electronic scope of our business with GED. And we do not plan to disclose, from this point forward, individual revenues segmentation on PTC. We'll report on a total electronic basis from this time forward, given our new combined portfolio. We will benefit from a recurring revenue in the high margin aftermarket and services are complimentary Global customer relationships will drive substantial cross-selling opportunities in dampened cycles, and our pro forma financials are compelling, especially at this attractive point in the cycle. We expect to have significant skill, a rapid growth trajectory, superior margins, and strong free cash flow. We have a strong free cash flow profile to enable rapid deliverance. We remain committed to retaining our investment grade rating and our dividend. And with that, Rafael will address the freight segment.

Hey, thanks, Ray. Let's talk about overall freight markets. I'll say overall mixed market conditions. In North America, freight rail traffic is down about 1% year-to-date, with most of the railroads really citing bad weather as a factor. rolling stock and storage has increased during the quarter, partially due to lower volumes and partially due to railroads implementing PSR, which I'll talk to you more about it in a couple of minutes. On the other side, I'd say we're seeing good activities in some critical and key international rail markets. I'd say we're well positioned to really take advantage of this. and really working on some critical opportunities in Southeast Asia, in Brazil, in Africa. I think it's worth mentioning that of our current pipeline of prospects, about two-thirds are coming from international opportunities. Considering all of this, I'd say our freight business performed about as expected in the first quarter, with locomotive deliveries maybe a bit stronger than expected. In India, I think we are on pace to really significantly increase deliveries this year. This is a 10-year, 1,000 locomotive unit order. During the first quarter this year, we delivered our first AC6000 unit. That was built in our new India facility. Deliveries of locomotives, locomotive modernizations, and mining wheels. are on pace for what I'll call double-digit percentage increases for 2019. The freight car market is tracking towards 52 to 55,000 deliveries this year. It's about in line with the expectations, and the industry backlog did decline during the first quarter. During the quarter, we also had strong water intake in our wayside and track products, business portfolio, indicating really continued capital spanning by the railroads. Our engine cooling group maintained a strong backlog, and we also saw strong orders intake in our part generation products business. With that, let me talk a little bit about PSR, which is really a topic on a lot of minds. I'll probably just start with making railroads more competitive is a good thing for us. and in the long run really leads to growth in the business. We believe our business model of being both a technology and service provider is very much aligned with what railroads are trying to accomplish. As a result of PSR, we're seeing really railroads very focused on efficiency, costs, getting the most out of their existing equipment, their fleets, WAPTEC has both a strong service and technology offering to really help support that. We're currently working close with customers to both improve performance, reliability, and efficiency of their fleets. I think the locomotive modernization programs is a great example of that. I think I've mentioned in addition to our backlog of about 2,000 new locomotives, we have a backlog of about 900 modernizations. And we expect to deliver a few hundred mods this year. And that's compared to just maybe dozens a few years ago. Of our global installed base, 23,000 locomotives. We've got about 70% really covered by long-term service agreements. Running locomotives fleet harder does create also additional aftermarket opportunities for us. On our automation suite of products, we're really geared here towards improving on-time performance of trains, increasing efficiency, improving safety, and as railroads seek to optimize their assets, our portfolio of digital solutions can really create a greater fuel efficiency. That's what we see with products such as TRIP Optimizer, which drives fuel savings by 7% to 13%. So if in North America, railroads for a time might be buying fewer new locomotives, we do have the opportunity here to continue to work on really tackling large fleets to be modernized and we have a significant pool of fleet that we can attack there, investing in technology to really help achieve this PSR efficiency goals. So we feel we're well positioned to respond to these opportunities. Finally, I'd like to point out that we're well positioned in the key international freight corridors around the world. We feel good about the opportunities that are out there. And with that, I'll defer the back to Ray.

Thanks, Rafael. I'd like to conclude our prepared remarks by reiterating some of the comments Al made at the beginning of the call. We reported good performance this quarter. We're on track to hit our guidance for the year. That means we're off to a good start with the integration of WAPTEC and GE Transportation after completing our merger in late February. We have validated both the strategic rationale for the merger as well as our plan to deliver 250 million of operating synergies by year four. We're excited that Rafael has been chosen by the board to lead this corporation into a new era of growth and performance. And we believe this transition comes at a time of strength, and Wabtec, given our diverse portfolio, our excellent management team, and our strong backlog and balance sheet. So with that, we'll open to questions that you have, and Tim will facilitate. Go ahead, Nancy, if you want to poll for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Matt Elcott from Cohen. Please go ahead.

Question. First, congratulations to Ray and Tim on the planned retirement and to Christine and Raphael on the new roles. My first question, Raphael, and I'm sorry if this question is a bit too early, but can you maybe talk about your key priorities, focus areas in a new role, both immediate and long-term, more strategically?

Absolutely. Well, first of all, I'm very humbled with the opportunity. Certainly a lot to learn. I'd probably highlight three areas here. First and foremost, I'll say execution. We've got very clear plans laid out for what I'll call our former businesses and we're really laser focused on making sure that we execute for both cash and for our EPS numbers for the year. The second piece, it really comes down to what I'll call continuous margin improvements. I think here we've got a couple opportunities. One of them is We've really started to the integration, identified a lot of great opportunities on synergies, and we see that as an opportunity to continue to drive competitiveness of the business. We do have opportunities with some specific business units on really driving and turning around some of the margin results. I think the third piece is, of course, growing the business. I think there's an element of organic, which we're very committed to our programs in technology. I would highlight here the aspects of automation, which I think we've been very clear about it. But there's also really a pillar around energy management that speaks to bringing efficiency, full improvement. Hybrid is a big program for us. And as part of that, we'll also continue to be looking to inorganic opportunities in an opportunistic way. We are going to be starting a lot of, I'll call it strategic planning, and we'll be coming to you with more specifics as we progress.

That's very helpful, Rafael. Speaking of strategic planning, when should we expect maybe a multi-year guidance for the combined company, and what kind of segment reporting will you be doing, and when should we expect that to kick in?

We'll be developing that through the year, and we'll be back to you with more specifics here.

Great. Thank you very much.

Our next question comes from Allison Poliniak from Wells Fargo. Please go ahead.

I want to echo Matt's commentaries. Best wishes, Ray and Tim, and congrats, Rafael and Christine. First, can we just delve into some of the commentary on Q2 in terms of the mix? Is that more transit-related, Ray, as you were talking about with the OEM shift, or is it freight as well? Just trying to understand that a little bit more.

As far as the mix goes, Our growth is coming from both sides. The mix within the transit side is greater OEM contracts that are coming out of the backlog. In terms of future, longer-term mix, I was talking about the aftermarket opportunities that come with that, but in the short term, it's more OEM.

Just to help a little bit, we definitely had more OE sales in Q1 in the transit versus aftermarket. We highlighted that in the overview of the first quarter results when we talked about the transit margin.

But is that sort of moving into Q2 as well? Is that what we should be thinking of? Just looking at that commentary around Q2, I think you highlighted mix as being an issue as well.

Yeah, there was actually two issues. There was mix and then there was – There was a couple other items that impacted the margin in the quarter. We expect that going forward that we're going to come back to better margins, but there will be some variation related to the timing of OE projects versus aftermarket projects. We looked at this margin as an improving item throughout the year.

But to answer directly to your question on the second quarter, it's in both segments, Allison, both freight and transit.

Great. And then, Raphael, you highlighted PSR and the interest around increasing efficiency of the network. Railroads have obviously been very slow to technology. Have you noted, just because of the focus on PSR, an urgency or an elevated interest now on the technology side? as they're looking to gain these efficiencies going forward?

I think it's been a continuous effort and continuous work between ourselves and our customers. When I mentioned the modernization programs, I think it's important for me to highlight you've got at least a group of what I call another 6,000-plus locomotives, which are DC technologies that are out there. I'd say we've been fairly successful in really converting some of those fleets into AC, which really allows the railroads to do what used to be done with three locomotives, with two locomotives, so that's a big part of a program. The other piece is really updating some of the control systems that you might have there, and that allows you to put what I call more software and more tools to enable battlefield efficiency. So I think there's been a continuum, and I think We've got a lot of those tools to help drive efficiency and productivity here through PSR.

Thank you.

Our next question comes from Sari Broditsky from Jefferies. Please go ahead.

Good morning, and congratulations to everyone on the new roles in retirement. Thank you. I appreciate the additional color on cash generation this year. Could you just help us understand the details behind this forecast, including any working capital, cash tax assumptions, and the timing of the $300 million in merger-related expenses?

So the $300 million is really, you know, you have restructuring costs, you have purchase price accounting, And all of that is impacting the cash flow in the year. So what we did today was affirm and maybe even slightly improve our guidance on cash flow. And if you wanted to think of it as you take that 300 in terms of cash flow and include it and add it back, you would end up with a result that I think you can use to model in your adjusted rules. In terms of the balance sheet, I mean, I think we're still working through the combination, but we've done a really, I think, an excellent job of addressing some of the supply chain, financing, factoring-type items in the first quarter. I think that that has de-risked our guidance a little bit in terms of cash flows, so we feel good about that. But, you know, it's still very early. We're only five weeks into this combination, and I think we wanted to make sure that we got a cash guidance out there that was conservative, achievable, and that you could use.

Thank you. That was helpful. And then just my second question. GE Transportation had obviously really great sales performance in the quarter. Could you give us any color on the timing of the deliveries for the remainder of the year?

So, I'm sorry, I'm trying to understand your question.

So, in the five weeks... The locomotive, what was the locomotive deliveries this quarter and maybe the timing for the remainder of the year, the cadence?

So, well, we're not going to break down specific numbers of locomotive deliveries. But what I will reiterate here is, as you look into the numbers we have last year, we're looking at double-digit growth into what I'll call all core segments. That includes new locomotive shipments. That includes modernizations. That includes mining wheels as well.

Okay, I appreciate that. That was helpful. Thank you.

The next question comes from Justin Long from Stevens. Please go ahead.

Thanks. Good morning. And I know there's a lot of transition, so congrats all around as well. And for Ray and Tim, it's been a pleasure working with you both over the years. Maybe to just start with a question, a follow-up on locomotive deliveries. Rafael, you mentioned I think two-thirds of the pipeline being international-related versus North America. Could you talk about your mix of locomotive deliveries this year between North America and international, and when you look at deliveries going into kind of 2020 and beyond, how you see that progressing?

Okay. Well, first of all, as I look into the year for new locomotives, we're well north of I'll call 95% of the backlog to be delivered for this year. I think we're continuing to build on good dynamics for next year. We're not providing any guidance at this point, but I think if you go back to the vision, we settled on really more than doubling the locomotive deliveries by 2021. I think we're well into that. You're going to see a significant step coming off of that. I'd say this year it's probably more balanced between North America and international, but as we look ahead, I think there's probably greater opportunities internationally.

Okay, that's helpful. Rafael, you gave some good color on PSR and your view that it will be a long-term positive, but I wanted to ask about this year and some of the assumptions that you're making for the freight segment in North America. Are you baking in any headwind from PSR and the North American order environment that seems to be slowing down recently? Just curious if that's factored into your guidance for the aftermarket or even deliveries as you think about the tail end of this year.

It's certainly in for this year, so we have taken that in consideration. Keep in mind, last year was a trough year for us with only 272 locomotives being delivered. And we have really a strong backlog to be able to really deliver on the guidance we've provided.

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

Thank you. Thank you.

Our next question comes from Matt from Buckingham Research. Please go ahead.

Hey, thanks. Good morning and congratulations to everyone. Kind of a nuanced question, but the $20 million of targeted synergies to be achieved this year, when, you know, from a timing perspective, when is that $20 million going to be realized?

Yeah, this is Al speaking. I'm actually working pretty closely on the whole integration process. And we've already seen some of those because there was some quick changes that we would have made on a HR basis. But what you should see is it should start building up as the year goes on. We're also seeing a lot more cost at first in order to obtain those synergies. What we right now have modeled is that we may spend close to $50 million to obtain that $20 million this year. And those will be one-time costs. And we'll see it ramp up over the next three years in a similar fashion.

Okay, that's helpful. And then, Rafael, you talked about international being a bigger percentage of GE transportation's locomotive business across the board, could you think and look five years out and talk about regions of the world where you see the greatest opportunity for incremental demand on the locomotive side? I think you did talk to some countries that you're currently in, but are there countries that you want to get into, and where do you think the most robust demand potentially originates over the next, let's call it five years in different parts of the world?

Well, a couple of points. Number one, it's tough to speculate on really how projects will materialize over the next five years. But what I'm really excited about is we have established what I'll call a significant footprint in what I'll call all key rail freight markets. And that speaks to countries like Brazil, Kazakhstan, India, South Africa, and those really have become platforms for us where we have scalability, where we've been able to work locally, where we've really grown significantly our share over time. Ultimately, they have become poles that have translated into having a more competitive business, and we're utilizing those platforms to actually export into other countries. So I think we're really excited about that. and we'll continue to make use of that.

That's great. Appreciate the time.

Our next question comes from Mike, but it didn't stall, from Stiefel. Please go ahead.

Thank you. Just wanted to ask you to sort of put the PSR into context. If there's some way to quantify or give us a percentage of how much of your revenue is specifically tied to newly built locomotives, newly built rail cars. I'm just trying to gauge the impact there.

Let me give you a reference on the following. If I look at the guidance we've provided to you for 2019, I'd say the revenues coming from new locomotives for this year will be probably around 15% of the total revenues for the company.

Okay. Got it. That's helpful. And then just wanted to ask you on the cash flow operations, you know, guidance, you know, adjusted to $800 million. Is there any reason to think if the results were similar in 2020 that that would be any higher or lower from changes in working capital or other things?

Yeah, I think, you know, we've had this discussion. We don't give guidance in the next year, but I think your point is that, you know, there is a lot of things happening in year one of this combination. And it does have an impact on the cash flow, but, you know, so we can see cash from operations that would be strong in the future years. And I'll leave it at that, really. Yeah, I mean, I think I've had this conversation with a lot of people, a lot of questions. I mean, the EBITDA is strong in, you know, in kind of a normal year with good, you know, with our expected working capital performance that we would end up with cash from operations that would be higher.

Got it. And then just wanted to ask you, you used to talk about, before the merger, the 12 months backlog, about 57% of the revenue just wouldn't go in there because we had a lead time of less than 30 days. Is there an update to that number?

No, I don't think we have an update to that number yet, Mike.

Okay. Okay. That's all from me. Thank you, and congrats to everyone.

Thank you. Our next question comes from Steve Berger from Key Bank. Please go ahead.

Hi. Good morning, everyone.

Good morning.

Thinking about your comments on backlog mix of new locomotives versus modifications, how should we think about average revenue for a new build versus a mod?

I'm going to give you really a wide range because it really varies across the board, but I'd probably say, well, a new locomotive might be going anywhere from, I'll call it, $3 million to $4 million. You'll have an average ticket item that's about a third to half of that for mods.

That's great. Thank you. And margin profile, is a mod higher or lower?

We do not comment on specific margins on those segments.

Okay. Just given some of the uncertainty around timing of when railroads might acquire equipment because of PSR or anything else, with more technology getting installed in the fleet, are you getting a better look at utilization rates for the installed base to help you forecast demand?

So we work very closely with the railroads in the day-to-day of their operations. And I'd say it's really part of the value that we bring is really just productivity tools to improve efficiency and productivity availability. And that's really part of our day-to-day. We monitor closely fleets that are being parked. We monitor closely all the aspects of opportunities to potentially extend the life of certain assets or modernize some other assets so you can potentially look at last assets operating. So that's really part of our day-to-day.

And can you tell us how the change in the utilization rate for the fleet has evolved over the year, just given where traffic levels are?

I'd say we're seeing, I mean, as you look into PSR being implemented, that certainly – growing, I'll call it, deficiency in terms of number of cars being pulled by locomotives. It's a little bit different railroad by railroads. And it would be, I'll say, difficult to give you specific data on each one. It really varies based on the model that's being utilized. But in general, you would say it's improving, right?

Oh, it is improving. The utilization rate is improving.

Yes.

Okay. And just one last one. What were core freight margins in the quarter X the five weeks of GE inclusion?

Sorry. Say it again. Question again.

The legacy Wabtec freight margin X GE for the five weeks? It was about 18. About 18. Okay. Thanks.

Again, if you have a question, please press star, then 1. This concludes our question and answer session. I would like to turn the conference back over to Tim Wesley for any closing remarks.

Okay, thanks everybody. We will talk to you over the next weeks and months. Have a good day. Bye-bye.

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