Westinghouse Air Brake Technologies Corporation

Good morning and welcome to the Wabtec Corporation first quarter 2020 earnings 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 touchtone phone. 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 Christine Kubacki, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to Wabtec's first quarter 2020 earnings call. With us today are President and CEO Raphael Santana, CFO Pat Dugan, and Senior VP of Finance John Mastelers. Today's slide presentation, along with our earnings release and financial disclosures, were posted on our website earlier today and can be accessed on the Investor Relations tab on WabtecCorp.com. Some statements we're making are forward-looking and based on our best view of the world and our business today. For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics. Before we begin, I'd like to extend wishes of health and safety to everyone on the line as we continue all to manage through this COVID-19 pandemic. And now, I will turn the call over to Rafael.

Thanks, Christine, and good morning, everyone. We appreciate you joining us today. We had a solid first quarter that was only possible due to the perseverance of our employees working in conjunction with customers, suppliers, and key stakeholders. These are unprecedented times that have forced us all to flex and adapt. And for that, I want to sincerely thank our WABTAC team members in our factories and in the few supporting our customers, as well as all of those working remotely for all that they're doing to deliver in the face of incredible change. The COVID-19 crisis reiterates the appreciation for the work our team members do every day, supporting essential rail services that are critical to overcome this crisis. Their work around the world has allowed our sites to remain largely operational, although we have some facilities down in places including China, India, and Europe. As a company operating in the midst of this pandemic, there's some key essential priorities I'd like to highlight to you. So please turn to slide three. First, we are committed to protecting the health and safety of our workforce, and we're taking significant efforts across our plants and sites. In many cases, we're going above and beyond the CDC's recommendations or any local government requirements. These actions include daily temperature checks at many of our facilities, limiting plant floor activity by rotating schedules, removing non-critical staff from the factory floor, restricting access to work areas, enhanced social distancing, deep cleanings, and increased disinfection efforts among other activities. Second, we're focused on maintaining our operational capabilities. Roughly eight weeks ago, we assembled a COVID response team comprised of global business and functional leaders. They meet daily to assess and respond to the extraordinary challenges at hand and implement contingency plans across our operations and supply chain. They assess government mandates as well as any impacts to our business in real time. and take decisive action to ensure WAPTAC is proactively positioned to manage through today's extraordinary challenges. As I shared earlier, we have an incredible responsibility to help keep people and product moving during this crisis. During the quarter, we began to feel increasing impact of the COVID-19 disruption across our supply chain, as well as our operations and our customers' operations. Throughout the pandemic, over 80% of our 160 plus global manufacturing sites have largely remained operational. Those that experienced disruption were primarily due to the customer shutdowns, supply chain disruptions, or government mandated lockdowns. This includes countries like China, which had several sites impacted in February, but they were all back in operations by mid-March. We had operations in countries like France, Italy, and Spain, which were required to close for several weeks in the first and second quarters. And they're mostly all back up and running now. And it also included countries like India. However, in those regions that were on lockdown, all WAPTEC service locations, few service technicians, and warehouses remained in operations to support transportation's essential infrastructure as required by the governments. In the United States, rail and passenger transportation has been squarely recognized as critical to essential operations. As such, all of our major manufacturing sites and services and parts locations across Pennsylvania and Texas and most other locations have remained open and operational throughout the pandemic. Third, we are focused on cash and preserving the balance sheet by working to reduce capex by more than 40% versus our prior guidance of $200 million. In addition, we're quickly aligning working capital for the volume environment and targeting improved cash flow conversion. Overall, our financial position continues to be strong. At the end of the first quarter, liquidity was about $1.2 billion. And we recently took additional measures to further enhance liquidity by adding a new undrawn $600 million credit facility after the end of the quarter. Fourth point, prior to the onset of the pandemic, we were laser focused on reducing costs and delivering on our synergy targets ahead of schedule. For example, Since a year ago, during a period of top-line revenue growth, the company reduced headcount, including contingent workers, by more than 1,500 people and had begun to consolidate operations, reducing our footprint by 6% and removing over a million square feet across our operations. We're on plan to reduce our operational footprint by another 9% in 2020. We also have captured significant sourcing savings from the merger. We've discontinued several shared services contracts with GE, and we've continued to drive lean across our operations to enable more cost-effective and efficient throughput. We saw the results of those actions realized in the first quarter, and while we anticipate a change in the volume assumptions for near-term synergies, we have a pipeline of actions and we remain committed to deliver our synergy targets for the year. Today, given the rapidly evolving situation and uncertainty regarding the duration and severity of the COVID crisis, we have withdrawn our previously issued annual guidance. We will continue to take the necessary measures to control what we can to protect the long-term viability of the company, continue to invest in key technologies and capabilities, and deliver shareholder value for the long term. And you're seeing that focus along with the strength of this franchise and our experienced managed team in our first quarter results. As noted on slide four, in the midst of a challenging market that included operational and supply chain disruptions in China, India, and Europe, we delivered a solid operational quarter. Sales were 1.9 billion with an adjusted EBIT margin of 15.7%, driven by strong execution against cost and synergy goals. These yielded 97 cents in adjusted earnings per share, a testament to the team's execution in the midst of a challenging market. Included in our results, we estimate over 5 cents of earnings per share loss due to the impacts of COVID-19, primarily in China and Europe during the quarter. Cash used for operations was $82 million. However, this was in line with seasonality and the one-time outflows due to previously announced restructuring, litigation, and transactional charges. Our multi-year backlog of about $22 billion continues to provide visibility across both freight and transit. And as we continue to help support our customers during these times, we are adjusting timing and specifications on some deliveries as needed and remain confident in our backlog. Looking across our freight and transit segments, we saw several dynamic market conditions throughout the quarter, many of which we related to the COVID-19 crisis. In the freight sector, North American carload volumes were down about 5% in the first quarter, and intermodal was down over 8%. This was largely driven by weak global macro conditions. Carload volumes have harder deteriorated in the second quarter as the crisis has accelerated its impact on the global economy and supply chains. This will have a near-term impact on demand for services and components, which will improve as freight recovers. At this point, it is very difficult to predict where car loads will settle for the year, given the direct dependency on restarting the economy. In terms of the North American rail car fields, all builders in North America have taken steps to slow production lines in 2020. And industry forecasts now indicate that rail car bills for the year will be less than 30,000 cars. As you're aware, some of these conditions were present pre-COVID and the collapse of the global oil market. But we had already been taking actions to adjust capacity as outlined in our investor conference in early March. To be even more proactive, we are taking additional actions to align all of our operations for the new realities we face. Reflecting on the quarter, despite of the challenging global freight segment dynamics, there were some bright spots. Our digital electronic sales were up double digits versus the prior year. This gives us further confidence that the business can grow in average faster than the overall freight segment. Our modernization deliveries showed good momentum which were up on a pro forma basis versus last year, along with steady international locomotive deliveries, which helped offset North America locomotive and freight car build declines as expected. Transitioning to the transit sector, the COVID-19 crisis and global shelter in place orders have had a direct impact on passenger transportation and near term service levels in some markets. This disruption to services and the impacts on our customers' operations will have a corresponding near-term impact on our OE and aftermarket sales. However, as I shared earlier, most of our transit manufacturing facilities remain operational. Overall, we believe the long-term market drivers remain strong, including the need for sustainable transit solutions and projected growth in both ridership and urbanization. And as buyer restrictions ease, we will see infrastructure spend also recover. I'd also add that we delivered strong margin improvements across the transit segment in the first quarter. While sales were down 7%, adjusted income from operations was up 14% due to improved mix and early absence of actions to drive margin rate improvement. Finally, as noted earlier, across both the freight and transit sectors, we have strong multi-year backlog. This helps provide stability and visibility to evolving environment demand. With that, I'll turn things over to Pat to provide more color on the first quarter.