Good morning, and welcome to the Wabtec Corporation First Quarter 2019 Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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 Neupaver; our President and CEO, Ray Betler; Pat Dugan, our CFO; Rafael Santana, President and CEO of our Freight segment; Corporate Controller, John Mastalerz; and our new VP of IR, Kristine Kubacki, who's recently joined us. We think Kristine is familiar to many of you. She got a lot of experience on sell side covering not just Wabtec, but many other companies in transportation and equipment. And 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 Neupaver.

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 good start in 2019, especially as we begin to integrate Wabtec 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 has named Rafael Santana, the company's next President and Chief Executive Officer and a board member to become effective July 1 of this year. He succeeds Ray Betler, 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. Rafael, as you know, joined Wabtec earlier this year with the GE Transportation merger after serving as President and CEO of that division. Rafael held a wide range of executive leadership positions at GE and has spent more than a decade in the transportation industry. He is the right leader for this role, bring it to Wabtec a passion for operational excellence and technology and a strong track record of growth and performance. A native of Brazil, Rafael 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's significantly expanded the company's regional footprint, built a strong overall and modernization capability and backlog through multi-year program. 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 Turbomachinery Solutions Business of GE Oil & Gas, where he drove significant margin improvement and growth in a contracting marketplace. Rafael has a degree in engineering from the Federal University of Engineering in Brazil, and will be based at Wabtec's new headquarters in Pittsburgh. Congratulations on your new role.

Hey, good morning, and thanks Al. I'm deeply honored that the Board have 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 GE Transportation to 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 are 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 fivefold 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 Faiveley 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.

Yes, thank you, Al. And I wanted to say that I'm grateful to you. I was just following the strategy that you set out to grow this company, and it's been 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 it's culminated with Wabtec, the time is 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, for the employees at Wabtec, and I'd like to offer my congratulations and thanks to Rafael as you begin the next phase of your career. So as you can see from our press release this morning, we discussed both the GAAP 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 and meeting 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 delivery, and also the impact of normal seasonality in our transit business due to the European slowdown 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're affirming -- we affirmed our guidance for sales for adjusted income from operations. Adjusted EPS and adjusted EBITDA, which shows that our business is performing up to expectations. So, 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 GAAP numbers exclude the effects of accounting policy…

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 in 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, due to our -- during our sharp 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 our 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. And 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, Lilian Leroux. Lilian joined Wabtec with our acquisition of Faiveley 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 towards accomplishing these objectives. Just to pause here to give you a little background on Lilian. He's been in the industry about 20 years, as I've said. He has an engineering degree in France and he has a graduate degree from NCI. Lilian worked for customers like SNCF early in his career. He's worked…

Thanks, Ray. Let's talk about overall Freight markets. I'll say, overall, mixed market conditions. In North America Freight, rail traffic's down about 1% year-to-date, with most of the railroads really citing bad weather as a factor. Rolling stock and storages increased during the quarter, partially due to lower volumes, and partially due to our railroads implementing PSR, which I'll talk to you more about it in a couple 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 are well-positioned to really take advantage of this and really working on some critical opportunities. In Southeast Asia, in Brazil, in Africa, and I think it's worth mentioning that, of our current top line of prospects, about two-thirds are coming from international opportunities. So 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. And during the first quarter this year, we delivered our first AC6000 units. 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 52,000 to 55,000 deliveries this year. It's about in line with the expectations. The industry backlog did decline during the first quarter. During the quarter, we also had strong water intake in our waste side and our track products business portfolio, indicating really continued capital spending by the railroads. Our engine coiling group maintained a strong backlog and they also saw strong intake in power generation products business.…

Thanks Rafael. I'd like to conclude our prepared remarks by reiterating some of the comments I made at the beginning of the call. We reported good performance this quarter. We're on track to our guidance for the year, and that means we're off to good start with the integration of Wabtec and GE Transportation after completing our merger in late February. We have validated both 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 pool for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Matt Elkott from Cowen. Please go ahead.

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

Absolutely. Well, first of all, I'm very humbled by the opportunity. There's certainly a lot to learn. I'll probably highlight three areas here. First and foremost, on the execution. We have 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. On the second piece, it really comes down to, what I'll call, continuous margin improvement. I think here we've got a couple opportunities. So, one of them is we really started to the integration that's by a lot of great opportunities on synergies, and we see that as an opportunity to continue to drive competitiveness out of the business. And 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 are very committed to our programs in technology. I would highlight to you the aspect of automation, which I think we've been very clear about it, but there's also really a pillar around management that speaks to bringing efficiency, a full improved 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 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 multiyear guidance for the combined company? And will you be -- 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'll echo Matt's commentaries, best wishes, Ray and Tim, and congrats for Rafael and Kristine. First, can we just delve into some of the commentary on Q2 in terms of the mix. Is that more transit related, Ray, you were talking about the OEM shift or is it freight as well? Just trying to understand 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. That's what we -- we highlighted that in the overview of the year -- first quarter results and when we talk about the transit market.

But is that sort of moving into Q2 as well? Is that what we should be thinking of? Just the commentary in the Q2, I think that highlighted mix is an issue as well?

There was actually two issues, there was mix and then there was a couple other items that impacted the quarter -- margin in the quarter. We expect that, going forward, that we're going to come back to better margins and -- but there will be some variation related to the timing of OE projects versus aftermarket projects, but we look at this margin as improving items 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 Rafael, you highlighted PSR and the interest around increasing efficiencies in the network. It really obviously very slow technology. Have you noted that because of the focus on PSR and urgency and elevated interest now on the technology side? Are they looking to gain these efficiencies going forward?

I think it's been continuous efforts 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'd call, 6,000 locomotives, which are DC technologies that are out there. I'd say that they have been fairly successful in really converting some of those suites 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 our program. The auto piece is really updating some of the control systems that you might have there, and that allows you to participate -- what I'll call, more software and more tools, to enable better fuel efficiencies. 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.

Okay. Thank you.

Our next question comes from Saree Boroditsky from Jefferies. Please go ahead.

Good morning and congratulations to everyone on new roles and retirement. 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 have restructuring cost, you have purchase price accounting. And all of that is impacting the cash flow in the year. So when we -- what we did today was affirm and maybe even slightly improve our guidance on cash flow. And if you want to think of it, you think that $300 million in terms of cash flow and include it and added back, you would end up with a result that I think you can use to model in an adjusted -- in your adjusted rule. In terms of the balance sheet, I mean, I think we're still working through the combination, and we've -- but we've done 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 derisked our guidance a little bit in terms of cash flow. So we're -- we feel good about that. But it's still very early, we're only five weeks into this combination, and I think we wanted to make sure that we got cash guidance out there that was conservative, achievable and that you could use.

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

I'm sorry, I'm trying to understand your question. So in the five weeks…?

The locomotive, how many – like 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 the specific numbers of locomotive deliveries, but what I'll 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, core segments. That includes new locomotive shipments that includes some modernizations that includes mining wheels as well.

Okay, appreciate. That was helpful. Thank you.

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

Thanks, good morning. And I know there's a lot of transitions, so congrats all around as well, and for Ray and Tim, it's been a pleasure working with you both over the years. Maybe just to 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 in international? And when you look at delivery going at the kind of 2020 and beyond, how you see that progressing?

Well, first of all, as I look into the year for new locomotives, we're well north of, call it, 95%, so the backlog to be delivered for this year. I think we continue to build on the 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 mode of deliveries by 2021. I think, we're well into that, even as you see 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. And Rafael 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 certainly in for this year, so we have taken that into 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 have provided.

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

Thanks.

Thank you.

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

Hey, thanks good morning and congratulations to everyone. So, kind of a nuanced question, but the $20 million of targeted synergies we achieved this year, when -- from a timing perspective, when is that $20 million going to be realized?

Yes, this is Al speaking. I'm actually working pretty closely on the whole integration process, and we've already have 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 cost. 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 the 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 that the most robust demand potentially originates over the next, let's call it, five years in different parts of the world?

Well, a couple 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 significant footprint, and 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 on locally, where we've really grown significantly our share over time. Ultimately, they have become falls 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 Baudendistel from Stifel. Please go ahead.

Thank you, Just wanted to ask you to sort of the put the PSR into context. Is there some way to quantify or give us a percentage of how much of your revenue is specifically tied to a newly built locomotives, newly built railcars, just trying to gauge the impact there?

So 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 want to ask you on the cash from operations guidance you adjusted the 100 million. Is there any reason to think if results would be similar in 2020 that would be any higher or lower from changes in working capital or other things?

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

Got it. And then I just wanted to ask you, you use to talk about -- before the merger, the 12 months backlog, about 57% of the revenue just wouldn't go in there because it was you 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. That's all for me. Thank you. Congrats to everyone.

Thank you.

Our next question comes from Steve Barger from KeyBanc. Please go ahead.

Hi, good morning everyone. Thinking about your comments on backlog mix of new locomotives versus modification, 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's really across-the-board. But I'd probably say, while new locomotive might be going anywhere from call it, $3 million to $4 million, you'll have an average ticket item that's about one-third to half of that for mods.

That's great. Thank you. And margin profile as 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 a part of the value that we bring gives really just productivity tools to improve efficiency and productivity, availability. And that's really part of our day-to-day. We monitor closely of fleets there been parts. We monitor closely all the aspects of opportunities to potentially extend the life of certain assets or modernize some 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 level are?

I'd say we're seeing -- I mean, as you look into PSR being implemented, that's certainly growing, I'll call it, deficiency in terms of number of cars being pulled by locomotives. It's a little bit different to railroad by railroads. And I would be -- I'd say, difficult to give you a 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?

Yes, it's improving, for sure.

The inflation rate is improving?

Yes.

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

Sorry, say that again -- the question again?

The legacy Wabtec Freight margin, ex-GE for the five weeks?

It was about 18.

About 18. Okay. Thanks.

[Operator Instructions] 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.