Westinghouse Air Brake Technologies Corporation

Good morning and welcome to the Web Tech second quarter 2020 earnings conference call. All participants will be in a 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 Christine Kubacki, Vice President of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to Wabtec's second quarter 2020 earnings call. With us today are President and CEO Rafael Santana, CFO Pat Dugan, President of Freight Services Pascal Schweitzer, 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 our Investor Relations tab on WAPTECCorp.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 presentations. We will also discuss 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 over the call to Rafael.

Thanks, Christine, and good morning, everyone. We appreciate you joining us today, and I hope you and your families remain healthy and safe. Before we get started, I'd like to once again thank our employees out in the field, in our factories, and those working from remote locations for continuing to keep our facilities safe and operational through this pandemic. I'm very proud of how our teams has responded to the challenging environment, delivered for our customers, and supported one another during a time when healthcare, economic, and social tensions run high. And you see that reflected in our second quarter results in long-term focus. Turning to slide three, we had a strong execution in the second quarter despite a difficult environment. Total sales for the quarter were $1.7 billion, driven largely by the international freight market and services, but offset by disruptions due to COVID in both the freight and transit end markets. Adjusted operating income was $262 million, resulting in an adjusted margin of 15.1%, which was impacted by the drop in sales across freight and transit, but somewhat offset by synergies. Cash flow from operations of $311 million was driven by strong cash conversion and good working capital performance. This allowed us to further strengthen our financial position, pay down debt during the quarter by $300 million, and increase our liquidity position by $700 million. Total multi-year backlog was over $21 billion, providing us continued visibility across freight and transit despite market conditions. And finally, we ended the quarter with adjusted EPS of 87 cents, demonstrating that we're taking the steps necessary to control what we can, protect the long-term viability of the company, and deliver shareholder value. With that, let's dive into some actions underway. As you know, we remain committed to our synergy targets, and we're accelerating our efforts here. We have $150 million of net synergies planned for 2020. Year-to-date, we are on plan with over $70 million in net synergies realized, and we remain confident that we will deliver on the full run rate of $250 million in synergies ahead of schedule. Of particular note, we continued the aggressive action on structural costs and lowered the SG&A expense by 26% year-over-year. During second quarter, we reduced headcount by 5%, and we're down more than 10% year-over-year. We have also reduced our operational footprint year-over-year, and we're actively driving cost reductions through lean initiatives. To date, we have exited more than 60% of the shared service agreements from GE Transportation merger ahead of schedule. Looking ahead, the rail transportation market and impacts from the pandemic remain challenged and fluid. While we anticipate market conditions to remain somewhat mixed, as I'll share with you in a moment, We believe volumes largely bottomed in the second quarter, and we will see a gradual recovery. With this in mind, and based on our first half results, as well as based on the backlog coverage for the rest of the year, we are issuing a new outlook for the 2020 year. Pending no further lockdowns due to COVID-19 pandemic or resulting negative impacts on our business, we expect revenues in a range of $7.3 billion to $7.6 billion for the year. We will continue to adjust our variable and fixed costs to align with volume realities, and we are committed to improving segment margins. We anticipate adjusted EPS to be in the range of 350 to 380 and cash conversions to be greater than 90% for the full year. This includes roughly $130 million from prior restructuring and transactions cash outflows. Cash conversion within the company's core business is expected to be over 100%. Turning to slide four, I'd like to discuss the market conditions and drivers we are seeing across the sector. Pascal Schweitzer, President of Freight Services, will also hit on some of this in a few minutes. In both freight and transit, we are experiencing mixed conditions as economic recovery begins and commuter travel resumes. And we're carefully monitoring the ongoing impact of the virus in some regions. In North America, rail volumes had a record decline, down roughly 20% year-over-year in the second quarter. However, we have seen rail volume improve since bottoming in the second quarter. Likewise, locomotive parkings, after peaking to a record high in the second quarter, have also shown gradual improvements, and we remain positive on the aftermarket sector. In terms of the North American rail car builds, A record one-third of the North America rail car fleet is in storage, and builders are taking continued steps to slow down production lines in 2020. Industry forecasts currently indicate that the rail car build for the year will be less than 30,000 cars. Reflecting on the quarter, I want to share a couple highlights. Internationally, rail volumes were more resilient, driven largely by agriculture and mining tailwinds. International locomotive shipments were off versus last year and helped offset North American locomotive and freight car build declines, as expected. We continue to see demand for new locomotives in Russia, CIS, Brazil, and Australia. Some tenders have pushed to the right due to COVID-19, but we expect this to resolve as economies stabilize. New growth opportunities for next-gen sustainable solutions also remain strong, especially for hybrids and fuel-saving technology. We are doing some really innovative work in reducing fuel consumptions by 5% through our engine overhaul process. Pascal will share more on this in a moment. We're also currently fuel testing our flex-drive locomotive, the first 100% heavy-haul battery-powered locomotive in the world operating in a hybrid consist. So far, we are seeing an opportunity to reduce fuel consumption for our customers by 10% to 30%. We are extending battery technology to passenger transit as well and just closed a significant deal with New York City Transit to drive down their overall carbon footprint. Finally, we continue to see our digital electronics product line provide significant productivity and improve safety for our customers. Sales for the quarter were up 4% versus the prior year. Transitioning to the transit sector, the COVID-19 crisis has had a significant impact on ridership and service levels in early second quarter. Since then, particularly in Europe and Asia, ridership trends are showing as low recovery as economies reopened. This has resulted in some positive activity internationally with new brake, new doors, and HVAC contracts in regions like Australia, Canada, India, and the UK. Overall, we believe the long-term market drivers for passenger transport remain intact, especially as governments look to rail as the cleanest, safest, and the most efficient mode to address the world's public transportation challenges. Across the segment, we also continue to drive costs down. We continue to improve project execution and profitability. Lillian and the team are on track to expand margins over time while delivering over 100 base points of improvement in 2020. With that, let's flip to slide five and I'll turn things over to Pascal.