Earnings Call Transcript - WAB Q1 2020

Operator, Operator

Good morning, and welcome to the Wabtec Corporation First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Kristine Kubacki, Vice President of Investor Relations. Please go ahead.

Kristine Kubacki, Vice President of Investor Relations

Thank you. Good morning, everyone, and welcome to Wabtec’s first quarter 2020 earnings call. With us today are President and CEO, Rafael Santana; CFO, Pat Dugan; and Senior VP of Finance, John Mastalerz. 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 to manage through this COVID-19 pandemic. And now, I will turn the call over to Rafael.

Rafael Santana, President and CEO

Thanks, Kristine, 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. I want to sincerely thank our Wabtec team members in our factories and in the field supporting our customers, as well as 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 overcoming this crisis. Their work around the world has allowed our sites to remain largely operational, although we had some facilities down in places including China, India and Europe. As a company operating in the midst of this pandemic, there are some key essential priorities I'd like to highlight to you. First, we are committed to protecting the health and safety of our workforce, and we are 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 on-site activity by rotating schedules, removing non-critical staff from the factory floor, restricting access to work areas, enhanced social distancing, deep cleaning, 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, consisting 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 impacts to our business in real-time and take decisive action to ensure Wabtec is proactively positioned to manage through today's extraordinary challenges. As I shared earlier, we have an incredible responsibility to help keep people and products moving during this crisis. During the quarter, we began to feel the 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 customer shutdowns, supply chain disruptions or government-mandated lockdowns. These disruptions include countries like China that faced several site impacts in February, but they were all back in operation by mid-March. We had operations in countries like France, Italy, Spain, which were required to close for several weeks in the first and second quarters, and are now mostly back up and running. This also included countries like India. However, in those regions on lockdown, all Wabtec service locations, field service technicians and warehouses remained operational to support transportation's essential infrastructure as required by governments. In the United States, rail and passenger transportation has been 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% compared to our prior guidance of $200 million. Additionally, we are 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 stood at approximately $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. 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 over 1,500 people and began to consolidate operations, reducing our footprint by 6% and removing over 1 million square feet across our operations. We're on track to reduce our operational footprint by another 9% in 2020. We also captured significant sourcing savings from the merger. We've discontinued several shared services contracts with GE and 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. While we anticipate a change in the volume assumptions for near-term synergies, we have a pipeline of actions and remain committed to delivering our synergy targets for the year. Today, given the 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. You're seeing that focus, along with the strength of this franchise and our experienced management team in our first quarter results. 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 reached $1.9 billion, with an adjusted EBIT margin of 15.7%, driven by strong execution against cost and synergy goals. This yielded $0.97 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 $0.05 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, but this was in line with seasonality and 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. As we continue to support our customers during these times, we are adjusting timing and specifications on some deliveries as needed and remain confident in our backlog. In the Freight and Transit segments, we saw several dynamic market conditions throughout the quarter, many of which relate 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 further 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's difficult to predict where carloads will settle for the year given their direct dependency on restarting the economy. In terms of North American railcar builds, all builders in North America have taken steps to slow production lines in 2020. An industry forecast now indicates that railcar builds for the year will be less than 30,000 cars. Some conditions were present pre-COVID, along with 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 more proactive, we are taking additional actions to align all of our operations with the new realities we face. Reflecting on the quarter, despite the challenging global freight segment dynamics, there were bright spots. Our Digital Electronics sales were up double digits versus the prior year. This gives us confidence that this business can grow on 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 American locomotive and freight car build declines as expected. Transitioning to the transit sector, the COVID-19 crisis and global shelter-in-place orders have directly impacted passenger transportation and near-term service levels in some markets. This disruption to services and impacts on our customers' operations will have a corresponding near-term impact on our Original Equipment (OE) and aftermarket sales. However, most of our transit manufacturing facilities remain operational. We believe the long-term market drivers remain strong, including the need for sustainable transit solutions and projected growth in both ridership and urbanization. With wider restrictions, we will see infrastructure spending recover. In the first quarter, we delivered strong margin improvements across the Transit segment. While sales decreased by 7%, adjusted income from operations increased by 14% due to improved mix and early evidence of actions to drive margin rate improvement. Finally, across both the Freight and Transit segments, we have a strong multi-year backlog, providing stability and visibility to the evolving demand environment. With that, I'll turn things over to Pat to provide more color on the first quarter.

Pat Dugan, CFO

Thanks, Rafael. Turning to slide 5, you can see that we had a good operating quarter despite an increasingly challenging environment. Sales for the first quarter were $1.9 billion, which reflects a 21% increase versus the prior year. Increased year-over-year sales were mainly due to the merger with GE Transportation, along with higher Digital Electronics and Services sales, offset somewhat by decreased revenues in Freight, Equipment, Components and Transit, as well as a negative impact due to foreign exchange. For the quarter, operating income was $217 million, and adjusted operating income was $303 million, up 30% year-over-year, driven mainly by higher Freight sales, good performance in Digital Electronics, realization of synergies, and better mix of sales as well as improved operational performance in Transit. Although there are limitations on visibility into the full effect of the pandemic, we estimated that the COVID-19 impact on our customers, suppliers, and operations during the quarter negatively impacted our operating income by approximately $50 million or $0.05 in earnings per share. For the quarter, adjusted operating income excluded pre-tax expenses of $86 million, of which $69 million was for non-cash amortization and $17 million of transaction and restructuring costs. Please see Appendix B of our press release for the reconciliation of these details. Now, looking at some of the detailed line items. SG&A was $243 million, including $16 million of restructuring and transaction expenses I just discussed. Engineering expenses increased to $49 million, due mainly to the addition of GE Transportation. The amortization expenses were $69 million, but remember, starting this year, we are excluding amortization expense, which is all non-cash, from our adjusted operating income. For 2020, we still expect non-cash amortization expense to be about $280 million. Other expense was $15 million versus $8 million of expense a year ago. The variance year-over-year was due to severe fluctuations in the FX rates late in the quarter, most notably from the Mexican peso and the Brazilian real. Income tax expense was $38 million, and adjusted income tax expense was $63 million for an adjusted effective tax rate of about 25%. We expect the tax rate for the full year to still be about 26%. In the first quarter, we had GAAP earnings per diluted share of $0.58 and adjusted earnings per diluted share of $0.97. The details that bridge GAAP earnings per share to adjusted earnings per share of $0.97 can be found attached to our press release. As of March 31, our multi-year backlog was roughly $22 billion and our rolling 12-month backlog, which is a subset of the multi-year backlog, was $5.6 billion. Our backlog continues to provide visibility across both Freight and Transit. Now let's take a look at the segment results on slide six. Across the Freight segment, sales increased to $1.3 billion in the first quarter. This increase was due to the GE Transportation merger, which added $506 million. Organic sales decreased by $108 million, primarily due to lower sales of freight car components, due to the decrease in car builds, along with lower sales in freight equipment, due to the timing of deliveries. Segment operating income was $162 million, and adjusted operating income was $241 million for an adjusted margin of 18.5%. I'll note that the margin in the prior year quarter benefited from the timing of deliveries after the close of the GE Transportation merger. Finally, the Freight segment backlog was $18 billion. Across our Transit segment, sales decreased to $629 million, driven by disruptions stemming from the COVID-19 virus. Organic sales declined by $34 million versus the prior year, but were also impacted by foreign exchange, which reduced sales by an additional $18 million. Segment operating income was $69 million for an operating margin of 10.9%. The adjusted operating margin for the segment was 11.9%, an improvement of 220 basis points year-over-year. This improvement is evidence of some early success in the plans and actions the Transit team outlined at our Investor Day in March. Now let’s turn to the balance sheet and cash flow on slide seven. We entered the year with a very different expectation of what has ultimately transpired. While the pandemic presents uncertainty and many challenges, Wabtec is essential to a recovery, and we are confident that our solid financial position and ability to generate strong cash flow will enable us to emerge stronger. From a cash flow perspective, the quarter played out about as expected. Our cash flow from operations was a negative $82 million in the quarter. We had about $80 million of one-time impacts due to prior year restructuring, litigation, and transaction charges, which we identified in our last earnings call. Our leverage at the end of the first quarter was about 2.6 times, flat with year-end. Our total liquidity at the end of the first quarter was $1.2 billion, down from about $1.6 billion at the end of the fourth quarter. This $1.2 billion does not reflect the new $600 million, 364-day credit facility that we entered into as part of our liquidity planning subsequent to the quarter end, which further strengthened our liquidity position. We have also stress tested our balance sheet under a variety of scenarios and expect to remain in compliance with all of our covenants. In terms of the working capital items I typically review, they are the following: As of March 31, receivables were $1.2 billion and inventories were $1.8 billion. Payables were $1.1 billion, all roughly consistent with the end of the fourth quarter. Our unbilled receivables were $523 million, which were more than offset by customer deposits of $603 million. Now turning to Slide 8, I'll describe some of the actions we are taking to further strengthen our financial position. First, we are lowering our costs across the business. We are swiftly aligning our operating costs with volume realities while remaining focused on achieving our synergy targets. We are taking further actions to lower our fixed costs by driving down SG&A, eliminating discretionary spend, suspending merit increases, implementing a hiring freeze since January 1, along with other actions. Considering our cost structure, about 85% of our cost of sales are variable. Within SG&A, about 15% of our costs are variable or semi-variable in the short term. We expect the incremental cost actions we are taking to drive down SG&A. Second, we are aggressively managing cash and looking to further strengthen our balance sheet. We expect improved cash flow conversion as we reduce our working capital levels in line with the volume environment. We are also reprioritizing some of our 2020 spend to essential and critical items. We've evaluated expenditures that can be paused or canceled, and we are targeting to reduce CapEx by more than 40% versus our prior guidance of $200 million of capital spend. In terms of capital allocation, our approach remains consistent with what we've said at our Investor Day, and we will continue to smartly invest in our people and the business. We recognize the current uncertainties of the macro environment but believe our framework allows us to be flexible and make discretionary adjustments as necessary. Like many companies, we are focused on our business and balance sheet. We are targeting to reduce debt levels and increase liquidity. We did recently announce our dividend payable on May 22, but for the short term, we paused our share repurchase program. We have no major debt maturities due until mid-June of 2021 and remain confident in our ability to access the markets, given our financial profile. We are already taking steps to identify solutions to retire or refinance debt well ahead of maturities, including opportunities from government stimulus programs and other long-term forms of issuances. With that, let's move to slide 9, and I will turn the call back over to Rafael.

Rafael Santana, President and CEO

Thanks, Pat. As you've heard throughout today's call, the company performed well and delivered a solid first quarter despite a weakening environment. Moving forward, we remain committed to executing on our strategic plans as communicated during our Investor Day, and we will continue to carefully assess the markets in which we operate. This includes reducing costs, aggressively managing cash and enhancing our liquidity position while focusing on what we can control. We’ll also lean into the strong long-term fundamentals of this company. This includes our $22 billion multi-year backlog, recurring service revenues, broad after-market reach, significant install base, technical capabilities, expansive international footprint and a proven leadership team with deep industry domain. Additionally, we will continue to invest in technologies and capabilities that will advance our competitive advantage and drive long-term growth. These are the tangible differentiators that will help us successfully navigate today's market headwinds over the long-term and will assist us in emerging as an even stronger and more resilient company. Before I turn the call over to questions, I want to personally thank each and every member of the Wabtec team for all they’re doing. Every day, I hear stories about people jumping into action to ensure we keep our customers' operations moving and critical medical supplies flowing into the hardest-hit communities. But I also hear about team members going above and beyond to make a difference in our communities. Like our technology team, who are using additive technology to produce thousands of face shields for healthcare workers and first responders, or our teams in Tennessee and in the U.K., who quickly provided radiators for generators at the University of Southern California Hospital and East London's ExCeL Exhibition Center, which both delivered emergency medical care during the pandemic. These moments and so many more are stories that fill me and our team with pride. They demonstrate how we will emerge from this crisis even stronger. With that, I'll turn the call back over to Kristine.

Kristine Kubacki, Vice President of Investor Relations

Thank you, Rafael. We will now move on to questions. But before we do, out of consideration for others on the call, I would ask that you limit yourself to one question and one follow-up question. If you have additional questions, please rejoin the queue. With that, operator, we are now ready for our first question.

Operator, Operator

We will now begin the question-and-answer session. Our first question comes from Allison Poliniak with Wells Fargo.

Allison Poliniak, Analyst

Hi, guys, good morning.

Rafael Santana, President and CEO

Morning, Allison.

Allison Poliniak, Analyst

Rafael, you had talked about your European and Asian sites from a Wabtec perspective coming back online. But could you maybe talk about how the recovery is playing out in those regions on the demand side? I suspect there's a little bit of a lag there.

Rafael Santana, President and CEO

Sure. I think a couple of comments there, Allison. Number one, currently, of our 162 manufacturing sites, we only have two that are still closed, and they have specific plans to be open within the next 10 days. That’s encouraging. However, as sites resume, we're dealing with ongoing government restrictions, which will need to be observed. We’re staying aligned with our customers to understand the pace of that recovery. Most of our customers would describe volumes bottoming out between April and May and beginning to recover through the end of the second quarter and into the second half of the year. Therefore, we expect a significant impact in the second quarter due to the bottoming of that volume.

Allison Poliniak, Analyst

Got it. Understand. And then that $15 million profit impact to the quarter from the closures, is there any way to help us understand what percent went to Freight versus Transit?

Pat Dugan, CFO

Hey, Allison, I would say that the majority of it was in the Transit area. The impact was mainly due to disruptions in our operations, affecting our ability to complete and ship recognized revenue on orders, caused by both supply chain and our own operational limitations. Most of that was felt in Europe and Asia.

Allison Poliniak, Analyst

Great. Thanks so much. I'll pass it along.

Rafael Santana, President and CEO

Thank you.

Operator, Operator

Our next question comes from Justin Long with Stephens.

Justin Long, Analyst

Thanks, and good morning.

Pat Dugan, CFO

Good morning.

Rafael Santana, President and CEO

Good morning, Justin.

Justin Long, Analyst

Maybe to start with the balance sheet. Pat, you mentioned you've stress tested the balance sheet and expect to stay in compliance with your covenants. But can you provide any color on the EBITDA downside scenarios that you're modeling? Additionally, could you talk about the range of free cash flow outcomes in 2020 under different scenarios?

Pat Dugan, CFO

Justin, thanks for the question. Our covenant ratios are about 3.5 times for this quarter and the next, then it reduces to 3.25. We have looked at various scenarios, considering percentage drops, most likely deeper cases and changes within quarters. As we came out of those views, we expect to stay within our covenants, with cash conversion aligning with our previous guidance of 90%. This should improve due to our working capital management, and we are confident in our strong cash performance.

Justin Long, Analyst

Okay. That’s helpful. And then secondly, just because things are changing rapidly, could you provide any updates on the quarter-to-date trends you are seeing in the business, maybe from a revenue perspective? Also, is there a way to look back at the last recession as a proxy, considering the different changes in your business? What did the aftermarket business do during that time?

Rafael Santana, President and CEO

Let me begin here. We see an opportunity for cash flow conversion to improve from the guided 90% above that, considering the first quarter. Looking ahead for the aftermarket business, it grew by 8% against last year's performance. We have seen positive momentum here, with Services being one of the bright spots. Digital Electronics has also shown good growth and there are opportunities across varying customer demands, affecting dependably on commodities or global trade, impacting freight.

Pat Dugan, CFO

Yes, it’s difficult to compare to previous crises directly. This situation is unique, and we've taken proactive measures during this downturn to ensure our core business and cash generation efficiencies remain intact.

Rafael Santana, President and CEO

We're confident about our backlog and continue to stay close with customers. While we anticipate impacts from the pandemic on shipments, we believe backlog strength allows for a positive long-term outlook.

Justin Long, Analyst

Thanks. And Pat, regarding quarter-to-date performance in April, any insights into how it trends?

Pat Dugan, CFO

It’s a bit premature to discuss our April results. We're looking closely at our KPIs, cash flow, and backlog, but our overall performance supports a strong outlook; detailed guidance will come later.

Justin Long, Analyst

Fair enough. Thank you.

Operator, Operator

Our next question comes from Chris Wetherbee with Citi.

Chris Wetherbee, Analyst

Thanks. Good morning, guys.

Rafael Santana, President and CEO

Good morning.

Chris Wetherbee, Analyst

Can you help us think about cash flow and working capital dynamics? What were the working capital dynamics in the first quarter, and how do they improve as the year progresses?

Pat Dugan, CFO

We faced impacts from one-time items in Q1 that negatively affected cash flow. Our working capital typically becomes a source of cash in later quarters, and we expect to see similar trends this year, capitalizing on the seasonality and current volume realities to improve cash conversion.

Chris Wetherbee, Analyst

That's helpful, thank you. Regarding the Transit outlook, how do you view government budgets impacting this business in the next three to five years post-COVID-19?

Rafael Santana, President and CEO

In the short term, ridership has declined, but as economies restart, we anticipate investments in Transit. Systems will need more trains and resources for safe distancing, which may drive demand for our solutions. Long-term, we are optimistic about transit fundamentals.

Chris Wetherbee, Analyst

Got it, thanks. I appreciate the insights.

Operator, Operator

Our next question comes from Matt Elkott with Cowen.

Matt Elkott, Analyst

Good morning. Thank you. Many North American freight railroads are still looking at locomotive modernization, some may even utilize the downtime. Where do you stand on the outlook for modernization this year? Will we see fewer modernizations or remain in line?

Rafael Santana, President and CEO

At this point, we see a continuous commitment to modernization programs, as they drive efficiency and productivity into customers' operations and help reduce costs. We're also discussing a few international opportunities to drive upgrades.

Matt Elkott, Analyst

But it's too soon to quantify whether modernization revenue will be down or in line with your expectations?

Rafael Santana, President and CEO

We have a secure backlog but anticipate a reduction in both modernization and new locomotive shipments in the first quarter. However, we remain confident in demand dynamics for modifications.

Matt Elkott, Analyst

Can you talk about the broad impact of lower oil prices on different parts of your business?

Rafael Santana, President and CEO

Lower oil prices impact about 7% of North America's Railroads, but less than a third is tied to price variations. We'll monitor how energy markets evolve but remain focused on making necessary cost adjustments.

Matt Elkott, Analyst

Thanks very much.

Rafael Santana, President and CEO

Thanks.

Operator, Operator

Our next question comes from Jerry Revich with Goldman Sachs.

Jerry Revich, Analyst

Hi. Good morning everyone. I'm wondering if you could talk about opportunities to accelerate cost-reduction targets as a result of the weaker demand environment? Can you also discuss your expectations for synergies and their cadence over the course of the year?

Rafael Santana, President and CEO

Certainly. We've reduced SG&A by about 70 basis points from the first quarter, and we remain committed to taking necessary actions to adjust our strategy to the current environment. We plan to implement a 9% reduction in our operational footprint this year.

Pat Dugan, CFO

We are strategically distinguishing between synergies and merely adjusting to volume realities. We're dedicated to executing our synergy plans and focusing on overcoming challenges in today’s environment.

Jerry Revich, Analyst

Regarding services and electronics, how discretionary are those product lines in this environment? Do you expect to continue outperforming services relative to freight volumes?

Rafael Santana, President and CEO

While some service demands are impacted, we maintain confidence in our service offerings. Our younger fleet positions us well to navigate downturns, and our digital electronics offer operational cost savings, ensuring continued strength across those products.

Pat Dugan, CFO

The service side drives efficiencies and reduces operating expenses for customers. We believe this segment will remain critical throughout the recovery.

Jerry Revich, Analyst

I appreciate the discussion. Thank you.

Operator, Operator

Our next question comes from Scott Group with Wolfe Research.

Scott Group, Analyst

Thanks. Morning guys.

Pat Dugan, CFO

Good morning, Scott.

Scott Group, Analyst

Can you help us think about Transit, considering ridership compression? Is that affecting OE or aftermarket more, and how do we view margins within Transit?

Rafael Santana, President and CEO

Customers remain committed to projects, but near-term impacts on services due to declining ridership affect timings. However, we believe the outlook remains positive, considering future recoveries and investments.

Pat Dugan, CFO

In the near term, the shift in ridership impacts services, but we anticipate pent-up demand and continued commitment to maintenance and safety will bolster revenues moving forward.

Scott Group, Analyst

I would like to get direction on revenue trends. Is revenue down mid-single or high-double digits?

Pat Dugan, CFO

It's challenging to discuss specific revenue outcomes currently. April performance is still being assessed. Our maintain expectations in cashflows and backlogs support a strong outlook.

Scott Group, Analyst

Understood. Thank you.

Operator, Operator

Our next question comes from Saree Boroditsky with Jefferies.

Saree Boroditsky, Analyst

Good morning. You mentioned mining being less impacted than the freight market. Can you discuss the industrial business in the quarter and your demand outlook for the remainder of the year?

Rafael Santana, President and CEO

We are closely monitoring energy markets due to risks on that front. However, opportunities in services persist. Mining is still showing positive demand and lessening impact compared to other sectors.

Saree Boroditsky, Analyst

Thank you. Regarding continued strength on the Freight Services side, are rails performing more in-house services due to lower volumes?

Rafael Santana, President and CEO

We haven't seen significant shifts towards in-house servicing. We still have ample opportunities to assist railroads in driving efficiency without compromising our revenue streams.

Saree Boroditsky, Analyst

Thanks for the clarity.

Operator, Operator

Our next question comes from Courtney Yakavonis with Morgan Stanley.

Courtney Yakavonis, Analyst

Hi. Thank you for the questions, guys. Can you explain the situation in India? Considering their significant backlog on the freight side, what are the prospects of catching up?

Rafael Santana, President and CEO

Our sites in India resumed operations today, except for one, which has plans to open within a week. We believe we can catch up over the year and recover lost shipment volumes.

Courtney Yakavonis, Analyst

Great. And can you comment on quantifying the COVID-related drag of $0.05 or $15 million? What does that break down between Freight and Transit?

Pat Dugan, CFO

The $15 million EBIT impact is primarily revenue disruptions due to operations in India and significant impacts experienced in Europe. Shipping delays and project completions were major contributing factors.

Courtney Yakavonis, Analyst

Thanks. Were your 9% footprint consolidations part of your previous plans to achieve synergy?

Rafael Santana, President and CEO

Yes, the 9% reduction is aligned with our plans to achieve the previously committed synergy targets.

Courtney Yakavonis, Analyst

Great, thank you.

Rafael Santana, President and CEO

Thank you.

Operator, Operator

Our next question comes from Ken Hoexter with Bank of America Merrill Lynch.

Ken Hoexter, Analyst

Hey, good morning, Pat and Rafael. Can you discuss customer engagement regarding backlog shifting? How might committed spending be impacted?

Rafael Santana, President and CEO

While we assist customers closely, we remain confident in our $22 billion backlog. Adjustments have occurred and will occur as projects progress, but our team is focused on maintaining that level of support.

Ken Hoexter, Analyst

Have customers asked for delivery delays? How do these negotiations typically work?

Pat Dugan, CFO

We’re in constant dialogue with customers about timing and delivery. It's not a simple query; rather, it's an ongoing discussion with various contexts that impact commitments and schedules.

Ken Hoexter, Analyst

Understood. And regarding the footprint consolidation, are you accelerating any changes due to lower demand or just adjusting the synergy target?

Rafael Santana, President and CEO

We’re committed to the $150 million synergy target while evaluating potential opportunities for acceleration under current challenges. We will continue to take appropriate actions.

Ken Hoexter, Analyst

Thank you.

Operator, Operator

Our next question comes from Jeff Gates with Gates Capital.

Jeff Gates, Analyst

What can you tell us about seasonality in the GE business relative to Wabtec?

Pat Dugan, CFO

Seasonality is driven more by the service side, as it tends to peak in Q3. Discrepancies in revenue recognition standards may exaggerate perception of seasonality, but generally, the service business is weaker in Q1.

Jeff Gates, Analyst

So, the first quarter tends to be weaker compared to legacy Wabtec?

Rafael Santana, President and CEO

Historically, there have been weaker trends in Q1, but that is mainly attributed to project timing and overall market behavior.

Jeff Gates, Analyst

Thank you.

Operator, Operator

This concludes our question-and-answer session. I'd like to turn the call back over to Kristine Kubacki for any closing remarks.

Kristine Kubacki, Vice President of Investor Relations

Thank you, Rafael. We appreciate everyone’s participation today. I hope everyone stays safe and healthy, and we look forward to speaking with you soon. Goodbye.

Operator, Operator

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