Q1 2021 Westinghouse Air Brake Technologies Corp Earnings Call

[music].

Yeah.

Good morning, and welcome for Web Tech Q1, 2021 earnings call.

All participants are in listen only mode and need assistance. Please signal conference specialist by pressing the star key followed by zero.

After today's presentation there'll be opportunity to ask questions.

Please note that this event is being recorded.

The profit conference over from.

Kristine Kubacki, Vice President of Investor Relations. Please go ahead.

Thank you operator, good morning, everyone and welcome to <unk> first quarter 2021 earnings call with US today are president and CEO Rafael Santana.

For part D. Okay.

And senior VP of finance and John maxillary.

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 Wap text Corp Dot com.

Some statements, we're making today 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 and 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 I will now turn the call over to Rafael.

Thanks, Christine and good morning, everyone. We appreciate you joining us today turning to slide three we continue to share recovery across the global freight and transit rail markets with North American freight volumes and equipment utilization sequentially, improving and the first quarter and investments in transit.

Infrastructure continuing.

Here's directional trends along with the focus performance of our team and execution against our strategic plan.

<unk> on our first quarter results.

Total sales for the quarter were $1 $8 billion. This was largely driven by international freight markets services, and a recovery and transit, but offset by continued weakness in the North America OEM market.

Adjusted operating margin was 15, 1% driven by lean initiatives cost actions and favorable mix from mining and mods.

Cash conversion was strong with cash flow from operations of $292 million.

Cash generation was due in large part to good working capital management, allowing us to deliver on our financial priorities, including strategic acquisition of Northcote, which I'll touch up on more and a moment.

Total multiyear backlog was $21 7 billion.

Up sequentially over the prior quarter, providing us better visibility into 2020, one and beyond.

Overall, we ended the quarter with adjusted EPS of <unk> 89 cents.

Strong Green force meant that our teams are continuing to take the necessary steps to control what we can deliver long term growth of the company and increase shareholder value.

And the area of synergies we are on track to deliver the full run rate of $250 million and synergies. This year and we have positioned the company for long term profitable growth.

And the first quarter, we exited all shared service agreements stemming from the GE transportation merger had a schedule.

This was a tremendous execution by the team on a complex transaction.

In addition, we continued to take aggressive actions on structural cost.

This includes reducing total operational square footage by 5% since January of last year, and we will further reduce our square footage by an additional 2% for the remainder of 2021.

Moving forward, we will continue to drive additional cost reductions through lean initiatives and balance our focus on execution with strategic investments in high return opportunities that drive long term profitable growth.

You saw that with our recent acquisition of <unk>, which is a leader in the maintenance of way space with 60% of its revenues coming from aftermarket services and a significant install base of over 5000 units.

We really like this business and its leading edge technologies.

It opens up significant opportunities to expand domestically and internationally and the growing maintenance away segment, while driving long term profitable growth.

Integration activities are already underway and we expect this strategic acquisition to be accretive to earnings cash flow and return on investment capital and 2021.

On the commercial front, we're also focused on driving growth and won some key orders and the quarter, despite a challenging environment.

This included a significant deal for our <unk> advantage product, which is a fuel upgrade kit.

As we have shared before there are more than 10000 ft al locomotives running globally with just naturally on technology. We're opening up a multimillion dollar pipeline of opportunity that is helping customers drive down fuel consumption by up to 5% as well as drive.

Down emissions.

It means for a single locomotive burning 250000 gallons of fuel it can translate into a $25000 and savings per year.

Also when it comes to technology differentiation and sustainable transportation, we completed a significant operational milestone with our flex drive battery electric locomotive testing it and revenue services with BNS App.

Cross more than $13 on miles of track.

Through this demonstration that blacks drive was able to reduce both fuel consumption and emissions by more than 11% a game changer and Decarbonize and rail.

We continue to see growing interest in this next gen technology from customers in both North America and internationally.

And we expect our battery electric locomotive to become an important area of growth for the company over the long term.

And digital and electronics, we're also leading the way in rail safety and utilization.

We closed a key order for positive train control internationally.

And we are encouraged by the strong order pipeline for international BTC expansion.

Finally, we had a solid quarter and transit winning new brakes doors.

And H back contract in India, Taiwan, and France and.

Including a significant order for platform doors and gates at over 30 train stations and Lasalle.

Overall.

Our order pipeline continues to strengthen driven by multiyear orders and freight services equipment and additional electronics.

Based on this factor and orders Wap deck is and a strong position to drive profitable growth and <unk>.

Form for our shareholders for our customers and for our employees.

With that I'll turn the call over to <unk>, who will review of the quarter segment performance and our overall financial position.

Thanks, Raphael and good morning, everyone. We had a solid operational start to the year, despite the challenges and our North America.

And markets and ongoing disruption from the pandemic, we demonstrated our ability to deliver on synergies generate cash flow invest for the future and position <unk> for profitable growth.

Turning to slide four I'll review, the first quarter and more detail.

Sales for the first quarter were $1 8 billion, which reflects a 5% decrease versus the prior year driven by lower North America OE freight markets as a result of the disruption caused by the pandemic.

For the quarter operating income was $192 million and adjusted operating income was $277 million.

Which was down 9% year over year.

Adjusted operating income excluded pretax expenses of $85 million.

Of which 70 million was for non cash amortization and $16 million of restructuring and transaction costs related to the acquisition of norco, along with restructuring due to the 2020, one locomotive volumes and restructuring and our UK operations.

Adjusted operating margin was 60 basis points lower than the first quarter last year, but up 110 basis points from the fourth quarter.

Versus last year adjusted operating margin was impacted by under absorption costs at our manufacturing facilities stemming from fewer locomotive deliveries.

As well as sales mix impacted from lower digital electronics, and a higher level of transit sales.

At March 31, our multiyear backlog was $21 $7 billion up quarter over quarter on.

Our rolling 12 month backlog, which is a subset of the multi year was $5 7 billion.

And continues to provide good visibility into the year.

Looking at some of the detailed line items for the first quarter.

Adjusted.

SG&A declined 2% year over year to $224 million.

This was the result of cost actions during the downturn and excludes $11 million of restructuring and transaction expenses.

SG&A expense benefited from head count reductions and the realization of synergies.

For the full year, we expect SG&A to be up about 5% versus two.

2020.

Driven by the normalization of costs following the COVID-19 disruption.

That said, we will continue to aggressively manage head count and structural costs.

Engineering expenses decreased from last year.

This was largely due to the lower locomotive volume outlook for the year as well as some changes and project timing.

Overall, our investment and technology is still expected to be about 6% to 7% of sales.

Amortization expense were $70 million.

For 2021, we expect non cash amortization expense to be about 285 million and depreciation expense of about $195 million.

Our adjusted effective tax rate was 27, 5%, which was higher than year over year due to certain discrete items during the quarter.

We expect our full year 2021 effective tax rate to be about 26%.

First quarter GAAP earnings per diluted share were <unk> 59.

And adjusted earnings per diluted share for 89 cents.

Now, let's take a look at the segment results on slide five.

The freight segment total.

Total sales decreased 9% from last year to $1 2 billion.

Primarily driven by North America, OE and markets, but partially offset by strong services and aftermarket growth.

In terms of our product lines equipment sales were down 36% year over year, mainly due to zero deliveries and North America, which resulted in roughly 50% fewer locomotive deliveries versus last year.

Dynamic debt Unfortunately persists.

However, mining was a bright spot with units and revenues up double digits during the quarter.

In line with improving freight traffic our services sales improved a solid 13% versus last year and was up 3% sequentially.

This was largely driven by strong modernization deliveries and higher aftermarket sales from the on parking of locomotives due to the extreme weather and the quarter.

I would note that the timing of mod deliveries vary from quarter to quarter, but we expect our services sales to improve with the gradual recovery and freight volumes.

Digital electronics sales were down 10% year over year as orders shifted to the right and North America due to the COVID-19 disruption yet.

We had another quarter of strong momentum for multiyear orders and continue to see a significant pipeline of opportunities and our digital electronics product line as customers focus on safety and improve productivity.

Total net sales were down 8% year over year. This is compared to a 45% lower railcar build year over year, demonstrating the diversification with and our components business.

We continue to see signs of improvement and demand for aftermarket components as more railcars come out of storage.

Great segment, adjusted operating income was $214 million for and adjusted margin of 18, 1%.

Versus last year, the benefit of synergies and cost actions were offset by sales mix as well as under absorption due to lower locomotive deliveries.

We will continue to execute on our synergy plans and further improve cost to drive margin improvement.

Finally freight segment backlog was $18 billion.

Up from the prior quarter on broad multi year order momentum across the segment.

Turning to slide six across our transit segment sales increased 3% year over year to $647 million.

Driven largely by steady aftermarket sales and favorable foreign exchange rates offset somewhat by the disruption from the COVID-19 pandemic.

OE sales were roughly flat year over year, demonstrating continued investments and green infrastructure.

Aftermarket sales were up about 5% from last year.

We expect aftermarket sales to continue to improve as.

And as transit ridership and services increased globally.

Adjusted segment operating income was $79 million, which was up 6% year over year for and adjusted operating margin of 12, 2%.

Across the segment, we continued to drive down cost.

And improved project execution.

Demonstrated by our good operating performance, despite a challenging environment due to the pandemic.

We are pleased with the momentum underway and the teams are committed to execute on more actions to drive 100 basis points of margin improvement for this segment and.

2021.

Finally transit segment backlog was $3 7 billion.

Now, let's turn to our financial position on slide seven.

Despite a seasonally challenging quarter, we generated $292 million of operating cash flow demonstrating.

And the resiliency and quality of our business portfolio.

Cash flow was driven largely by good conversion of net income and focused working capital management.

<unk> and $93 million incremental benefit from accounts receivable securitization.

Which provides attractive financing and provides liquidity.

During the quarter total capex was $27 million.

2021, we expect capex to be about $180 million or about 2% of our expected sales.

Overall, our strong cash generation allowed us to execute on strategic plan and capital allocation priorities, including the strategic.

<unk> acquisition of <unk>, which will drive profitable growth for web tech.

Our adjusted net leverage ratio at the end of the first quarter was two seven times and our liquidity is robust and $1 7 billion.

You can see and these results our balance sheet remains strong and we are confident we can continue to drive solid cash flow generation, giving us the liquidity and flexibility to allocate capital to grow shareholder value.

With that I'll turn the call back over to Raphael.

Thanks, Pat turning to slide eight let's look at some of the market dynamics by segment. Overall, we are seeing a gradual recovery across most end markets as global economic activity improves and.

We're continuing to monitor the evolving COVID-19 situation and regions like India.

This aligns with what you've heard from our customers as well.

While we continue to work through the trough and the OE and North American market, where new local orders remained stagnant. We are encouraged by the sequential improvement and freight volumes and a broad recovery across the agriculture intermodal in the industrial markets locomotive Parking's after peaking to AR.

Record high in 2020 are improving as a result of increased freight traffic and demand stemming from wouter disruptions during the quarter.

We expect demand for reliability and productivity to improve as railroads continue to recover.

This will put us in a position of strength across our credit portfolio.

When it comes to North America railcar built railcars are coming back and to use more than 20% of the North American railcar fleet remains and storage, but it's back to pre COVID-19 levels.

Industry orders for new railcars remain weak and forecast estimate the railcar build this year to be below 30000 cars.

We have a strong order pipeline internationally and we expect long term revenue growth and several of these markets going forward.

And he and mining market conditions are also improving.

Transitioning to the transit sector ridership is uneven but recovering as economies open up we are watching short term dynamics as the pandemic evolves and salver geographies, including Asia and Europe.

Overall, the long term market drivers for passenger transport remained strong and infrastructure spending for green initiatives continue to be a focus, especially as governments globally churn to rail for clean safe and efficient transport.

Turning to guidance for the year, we are updating our sales guidance to $7 7 billion to $7 $9 billion and updating our adjusted EPS guidance to a range of $4 five.

To $4 30.

This largely reflects upside from the acquisition of <unk>, our operational execution to date and visibility to backlog.

Consistent with our initial forecast for 2021 with more growth weighted to the second half of the year. We expect second quarter earnings all is slightly higher than the first quarter.

This is in line with the positive and gradual trend and our freight markets.

That said, we are seeing disruption from the resurgence of COVID-19.

Actually and a key region for us like Andrea and we will continue to take swift and necessary action as conditions evolve.

Finally, we remain confident and delivering strong cash generation for the year as well as margin expansion to prioritize cost actions.

Turning to slide nine and to conclude I am proud of the strong execution by the team and the first quarter, despite a challenging environment.

And as we go forward, we will continue to lean into the strong long term fundamentals of the company and remain committed to executing on our strategic plan.

This includes reducing costs and executing on synergies driving margin expansion across our freight and transit segments generating strong cash flow and delivering long term profitable growth.

As we've said before <unk> and holds a larger purpose to move and to improve the world and our teams globally and leave up to this mission every day.

After demonstrating a strong performance in 2020 and in the first quarter of 'twenty. One I'm confident that this company will drive profitable long term growth and be a leader and transitioning our customers and the industry to a more sustainable future.

With that I'll turn the call back to Christine to begin the Q&A portion of our discussion.

Thank you Raphael, we will now move onto questions, but before we do and out of consideration for others on the call.

I ask that you limit yourself to one question and one follow up question. If you have additional questions. Please rejoin the queue. Operator, we are now ready for our first question.

And I will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

For us as a speakerphone, please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

This time, we'll pause momentarily to assemble the roster.

First question comes from Jerry Revich Goldman Sachs. Please go ahead.

Hi, there on the sales for the Mohit on for Jerry Revich with investments and stepping up on the decarbonization product portfolio and I'm wondering if you can provide any details on the proportion of total R&D related to next generation fuel technologies.

We're continuing to staff up and.

Investments, there and I think we've been.

Clear around the 6% to 7% to a range of investments tied to the overall sales.

We're very much committed to lead the path here to the carbonization.

And we're working on a number of areas with customers and those include really developing on some of the elements of upgrade kits.

Working on a number of areas to introduce biofuels renewable fuels, but taking all the way to electric and.

We're also of course, working along the lines to lead and fuel cells and that's kind of the stairway we see on progressing through it.

Great and then I'm just wondering if you can comment on the pace of mods activity and sort of how that's trending in 2021 and how that compares to 2020.

We've had a significant step up healthy double digit growth, you'll see that reflected and the first quarter.

Where we have significant positive from that and and we believe mobs will continue to be on area of growth for us. It's clearly a pathway for us to introduce what I'll call on.

<unk> grades into the fleet and make them more fuel efficient and make them safer and more overall just on <unk>.

Great. Thank you.

Thank you next question is from Justin long of Stephens. Please go ahead.

Thanks, and good morning, Good morning, Hey, good morning, Justin and I.

I wanted to ask about the guidance and I was curious if you could share the revenue and EPS impact that you're baking in from the Norenco acquisition. This year and if you set that acquisition. Aside can you just talk from a high level about any other changes that you've made and some of the assumptions that are underlying.

On net 2020 one guidance.

Let me start on and I'll, let.

And Pat continue, but we have narrowed the guidance we have raised the midpoint given the strong operational start for the year.

And the quarter the positives include mining.

Execution of Modernizations, and so we're continuing to see.

And strong numbers around locomotives being on parts and <unk>.

We also have the acquisition on North Dakota at the same time, just and we're good.

Continue to see supply chain headwinds with disruptions driven by COVID-19.

Tech most and thoughtful as situation. We currently have anemia, which were falling on but certainly headwinds when it comes to transportation costs and commodity price over all of that is reflected in the guidance. We've provided for your overall momentum is positive and we are continuing to see a gradual recovery and.

<unk> most of our end markets.

Hey, Justin So this is Pat.

And.

We're similar to what we.

Had disclose when we did the earnings or the <unk>.

Press release on the Norco acquisition about $175 million of sales.

On an annual basis and $40 million of EBITDA for on an annual basis. So we bought it basically at the end of the first quarter beginning of second quarter. So it kind of pro rata for the rest of the year. The EPS impact we've talked about at around six <unk> for the for the full year. So.

And that's included in the guidance and gave US a lot of the confidence obviously two to increase the bottom end of the range plus some of our good performance so far.

Ultimately, where we guided today.

Okay, Great. That's helpful and secondly, I wanted to follow up Rob Me on something you mentioned a couple of times on on parked locomotives could you give us a sense for how locomotive utilization has recently trended and what percentage of net fleet is still on storage today.

And then also as you answer that I'm curious what percentage of that store fleet you feel like is actually usable because on the railcar side. We always hear that we are effectively fully utilized with call it mid teens and maybe.

And maybe low teens percentage and of that fleet and storage show and love to get your thoughts around that.

Yeah.

Just on overall the industry is not back to pre COVID-19 levels, yet from just a little more parking sub perspective, we feel good with the progress, especially regarding our fleets I think we're well ahead of the overall industry, which is a positive for us when we look out for our overall fleets operating global.

So that's certainly a positive trend.

And so you still have a little bit thank you for.

The last for from units that were parked waterfall post COVID-19 now and when you look at the unit store part pre COVID-19.

Those units.

It's just more number that it can potentially be utilizing here. So I think the momentum is positive we're going to continue to watch that closely here, especially as youre going to on the second half of the year and we're especially pleased with the performance we are having with customers in terms of reliability and availability, which ultimately is really the differentiator for us.

Winning more share of wallet. So positive for the last few solid mentioned, you've probably seen on number of customers who are looking for while cost per power available out there, including some recent announcements I'll say the good news is those are wiped out growth modest it's a positive for us.

Great. That's helpful. I appreciate the time.

Thank you.

Thank you next question from Scott Group Wolfe Research. Please go ahead.

Yes.

Hey, Thanks, Good morning, guys. Good morning, Scott just going back to the guidance here. So it looks like you're assuming the second half.

It's about 30% higher than the first half for the year from an earnings standpoint, and give or take and we don't typically see that level of seasonality can you just.

Help us understand what's driving such a big ramp and the second half for the year.

And Scott I think consistent with initial forecast we have for 'twenty, one and we have more growth weighted to the second.

Half of the Air I think.

In that regard, we're continuing to see sequential improvements in the first quarter. If you think about the orders for book to Bill and it has increased to one point to.

Some of US are multiyear orders a while there is an impact in 'twenty, one day and that goes beyond 'twenty. One I think our pipeline of deals has continued to strength and so I think there's just good momentum coming out of our top year being last year and now we have also good progress quarter to date.

Our 12 month Rolling backlog is up about three five for <unk>.

And now we've got good momentum and to focus really on convertible and all of our pipeline of orders and to this year and.

Moving forward.

I think just thought with regard for.

And there may be yes.

We.

As previously discussed I think we've got some elements of.

Volatility, especially tied to COVID-19 disruptions. So we think those are contained very much into the quarter, but that situation will continue to monitor, especially with regards to <unk>, which is an important market for us.

Okay, and then just a follow up there so is the second half more about.

Transit on our free or domestic versus international.

Just some additional color would be great.

I think international markets continues to be robust if you think about it just die and sugar sales.

Well, we grew were grown our business.

On a more internationally than.

And the U S. So I think largely on the North American market is going to be tied to the continued on parking on locomotives internationally I think.

Growth has been and I'll call a more robust and some ways. The team is very much focused on convertibility and we've got some share.

And foreign opportunities around OE side debt teams working to convert between.

And between here second and third quarter. So those are critical elements of continuing to build profitable growth for ad.

And would you say international is back at pre COVID-19 levels.

I would say largely when.

When you think about the strength from gasoline.

Scott.

Think theres room for I'll call it more and momentum forward and if you think about it on how much of our business was let's say last year international versus now and I mean, it's it's gained about five basis points in terms of and.

Momentum there.

So you think about it we're probably at a rate close to 65% and the first quarter was international so that gives you a SaaS.

I'll call, both the strength there, but the weakness in North America.

Okay. Thank you guys I appreciate it thank you. Thanks.

Next question from Chris <unk> of Citi. Please go ahead.

Hey, Thanks, Good morning, guys wanted.

I wanted to ask about free and maybe how we can think about and the context of that sort of ramp and the second half of the year. How do you think about sort of incremental margins and that business. I know you have the synergies that youre working through low.

The fixed cost absorption obviously it has been one of the challenges for you as the volume the volume and revenue dynamic has been more challenging over the course of the last several quarters and that's something where we could see potentially somewhat large snapback as we move into the second half of the year.

Let me ask Gary and <unk> number one we are committed to I'll call improved margins on both the freight and the transit side on the transit side I think we're being more clear in terms of what we expect that to be and.

And the team is certainly working towards.

And towards driving a 100 basis points, we expect improvement on the freight side, we're working through some of those dynamics year, taking the necessary actions.

When it comes to the OE side Theres probably.

Really not much opportunity in terms of really gaining volume up for the year, but theres certainly opportunity and when it comes to on the services side and.

We also have mining really improving overall for mining is also a positive year for upside for the year. So that's maybe the way to think about it yes, Chris what I what I keep.

Reminding everybody is at quarter to quarter, there can be some margin impact from the timing of projects and the type of deliveries.

What you really need to look at the full year margin and.

And we talked about a trans and improvement explicitly.

For the full company.

At least a 40 basis point improvement and overall margin for.

As we progress through the year.

Being driven by a combination of of synergies being achieved of.

On the volumes.

Coming back on.

Offset a little bit by some cost and absorption items and normalization of our of other costs and SG&A, but that overall improvement really is is a year view and a full year view and should be considered.

Okay, Alright, that's helpful. I appreciate that and then just picking up on the synergy comment obviously you have a target for this year as you think beyond 2021, what do you think the opportunity is obviously, you've you've had the combined company now for a period of time have the opportunity to kind of go through and see what the opportunities are and obviously, it's been a challenging macro backdrop to say the least as we go into 2022 and me.

You get on a more firmer footing can you give us a sense of what you think the potential sort of bigger picture synergy opportunity synergy opportunities might be.

I think I'll qualify those beyond D share last about synergies I think we're really working hard to make sure that we progress with our lean culture approach and I.

I think there is a lot to be done there I think which started in a number of key and critical sites and.

<unk> more and in terms of how we think about productivity gains and how we can change some of the work around.

Really our rationalizing our footprint doing more I think some of you think about the acquisition of <unk> I think it provides us a good opportunity to expand internationally and utilize that footprint on sports.

Customers and.

Volume recovery will also be a positive.

In that regard so it's all around productivity and efficiency really lean mindset to make sure that we drive productivity.

Yeah, I would just for I would just add to that is we've been we've tried to be very disciplined about how we look at synergies and communicate that because it was such a big part of the strategic rationale and putting the companies together, but truthfully.

The DNA and the company has always been about productivity gains lean and lean initiatives.

All the things that Raphael just referred to so we just continuously look at how we can improve margin going into into future years, largely if you think about our sites. There has been a focus here to date specialty and 15 of them, we got expand out to really drive broader and package from a productivity moving forward.

Okay. That's helpful. Thanks for the time appreciate it.

Thank you.

Thank you next call.

Question is from Allison and Black Wells Fargo. Please go ahead hi.

Good morning.

And Alex.

Just turning to the digital side it sounded like your comment suggested and incredibly active market and meet the guidance for flattish growth and certain.

Lee.

And it leads to that as well.

And you maybe help us understand the progression of digital through the year to get to that flattish I mean, it sounds like it's going to be a significantly stronger second half for you is this something where the time from order to I would say implementation. It is pretty short and that gives you that comfort here.

So Allison and I think we continue to see a strong commitment here from customers.

And certainly saw that internationally our book to Bill was strong on both for fourth quarter last year and first quarter. This year. So that's just.

<unk> back to what I, just said, but customers when you look at last year that pushed out some.

Some of those investments due to COVID-19 without being sides, both efficiency productivity and safety remain on imperative. We expect those multiyear awards to continue the team is very focused on comparability for the year at this point so with the strong book to Bill we saw some of that and in fact a b.

Beyond this year so.

And really a lot of focus on convert ability.

And for this year at this point, we're continuing to invest in the business that business will continue to provide long term growth for us I think theres more and element here of.

Delay and keep in mind also day element of locomotive shipments whenever ship locomotives into North America that goes with what significance on.

Number of what I'll call digital.

<unk>.

<unk> digital our software and hardware so and we've got drop we're not seeing debt. So that's not an element of impact that I just I just want to highlight.

Got it. Thank you and then just on the lines of locomote instead of the flex driving it.

We did the test and revenue service you mentioned some interest in the locomotive how should we think about those in terms of the quality of the inquiries is this something that could be revenue generating and sort of 'twenty, two where is it more of a 'twenty three time frame for you.

Allison and interest is strong we have for proposals outs.

And there would not be on impact from next year, specifically, but we expect a battery electric to be part of the long term growth with the company.

And so we see a number of areas where that could be applied. So we're having some strong discussions with customers and this combines with a strong focus from the.

The ESG side and I think.

<unk> is very unique product to address these challenges so I do expect that.

And the Virginia, and we're working with customers on a number of pilots out there.

Great. Thank you.

Thanks.

Thank you next question is from Matt Alcott on column. Please go ahead.

Good morning, Thank you.

So I think youre on backlog.

Yeah.

Total backlog increased by $80 million sequentially from December.

For 12 month backlog increased by about 186 million. So I was wondering if there was some pull forward from the out years.

Or if you guys had any cancellations and the out year debt were more than offset by.

New orders for the for the next 12 months.

Next income.

We let me start with air.

And part of your question and not have cancellations.

And I think we're continuing to see momentum on both segments, whether it's freight and water.

Transits and of course, there is an element of projects and to our business, which can lead to some lumpiness.

And on quarter by quarter, but momentum is good.

We see that with the book to Bill and quarter to date. We've also had I think and good momentum to continue on that trend.

And.

That's that's just kind of debt, yes. So I would also there's an element of FX that impacted the backlog number and.

If you imagine that our international operations are more long multi year projects and and.

And the international impact of Av.

And those can be spread out over a longer period of time, and we have foreign exchange hurt our backlog number by about $170 million and so I think that that FX impact is more overly weighted into the into the full number and not the 12 month number.

Got it that's helpful. And then just for my second question.

It's been over a year now since the beginning of the pandemic.

And there were a lot of concerns about.

The long term prospects of transit.

Pat and Raphael.

Now.

Do you have any more clarity from your conversations with customers about potential secular shifts and transit long term.

We're seeing both customers and government is very committed to transit overall so.

With that just reiterating no cancellations of orders received projects and moving forwards.

And you see very much systems.

Continue to operate and that's shown and the resilience of our service numbers.

On the top of that I think critical chewing to see just.

Transit part of the solution in terms of how you decarbonize things moving forward.

Paresh on number of improvements being thought through but.

Strong fundamentals for that business moving forward.

Got it. Thank you very much thank you.

Thank you next question from Ari Rosa of Bank of America. Please go ahead.

Yes, hi, good morning.

And so you've mentioned COVID-19 impacts in India, and obviously, we're seeing regrettable surge and cases, there and maybe.

And maybe you could go into a little more detail around kind of what youre seeing there what you think the potential impacts could be and if you've had any discussions with customers. There I know India has been a big focus area in terms of the growth.

Do you see that kind of shifting the timeline there or the prospects.

So first on no really shut in terms of the prospects as we look longer term and facts. If you think about it.

Volume freight volumes and it's actually positive year to date so.

Just just to give you a perspective. So this is really more tied to disruptions associated with block down certainly impacting our supplier sub suppliers or customers as well.

We're following up closely to dish points, and we think we see it more as an impact.

Potentially to the quarter.

But we'll continue to monitor and take the necessary actions here and we'll report on any relevant.

Changes.

Got it understood very helpful and then just.

We could return to kind of the north American market on.

And maybe if you could give your.

Later thoughts on where we are in terms of.

And emerging from a cycle compared to past cycles.

How do things look in terms of the timeline do you think by 'twenty, two 2020, two 2020 three we could get back to.

Kind of a more normalized rate of of day.

Demand from customers or do you see this kind of lingering for longer.

It's good to see the momentum here, we're walking into the first half of the year, we are working with customers closely and watching on that momentum towards the second half of the air which I think will be determinant in terms of our customers will think about their fleet strategies, which will include <unk>.

Continuing modernizations that are certainly opportunities here for our parks as they continue to consider on parking of units and new locomotives is also going to be part of <unk>.

And the discussions with customers, so I see that largely as a second half discussion based on.

Continuing and momentum here for the first half of the year.

And do you typically see.

And between locomotives and railcars do you typically see one one piece of that business lead the other.

I think the tense to be connected but.

And just could be for guidance is just tied to.

And levels of parking if you think about freight cars were already back to pre COVID-19 levels. If you think from an overall locomotive fleet, we're not yet back to pre COVID-19 levels. So there could be.

And some elements of delays, there, which are sometimes really driven by just think about velocity and dwell times and the network.

Which.

It could be very determinant on determinant factors on these.

Got it great. Thank you for the time.

Thanks.

Yeah.

Thank you next question comes from Larry.

Oh, that's key and Jefferies. Please go ahead.

Hi, Thanks for taking the question.

Locomotives were down almost 6% of quota and United is largely due to north American shipments even positive on the long term deals international will come out and statistics clarity.

And our locomotives also down on the quarter and should day decline for the full year.

I think we're seeing more of a I'll call.

Our growth opportunities when and I think about the international markets. So to your point I think largely the impacts here in the quarter was driven by dropped by 50 per share on the house I think if you look at our especially our equipment business I think you've got to keep in mind debt.

Some of that we've been able to offset by really double digit growth and mining so that's b and a positive and.

I think even more significant growth and our module business.

So there's opportunities there.

So sorry, just to specific to your question about the the variance quarter over quarter or year over year is is that we had a large number of international loco shipments in Q1 of 2020 specific to the Middle East. We I think we've talked about this at various times, so we had and over weighting.

Of the of the logos and and the first quarter of last year versus this year, but our full year locomotive.

Phasing and for international purposes or are going to be largely this.

The same is true.

For the full year and we've got long term orders there tied to some key markets, which includes and Y'all includes Brazil on include Scouts extend so that's definitely on an element to keep in mind.

Okay, and then could you just provide a little bit more color on free margins, you've done a great job realizing synergies and are obviously being impacted by under absorption. When do you think you'd get back to 2019 levels and what revenue do you need for that.

Yeah, I think I don't know that we've talked about any kind of breakeven or kind of.

Contribution margin impact I think I think the way to look at it as debt.

Last year, the decremental margin on the lower volume was and the in the low 20% range and I think that you would imagine with.

You would expect that we would have a similar kind of impact with volume recovering.

But you always have to consider the mix and the timing and projects.

How how that how that volume comes back obviously services.

And parts and more Modernizations and really our and our digital electronics tend to be.

Positive mix.

The some of the OE elements of this can be below the company average ultimately what we're focused on and is that as we talked about earlier and the call is that we are.

Achieving synergies.

Driving lean initiatives productivity gains and all.

The normal continuous improvement type activity that <unk> always focused on and we're committed to improve margins and cross swap tack here and that includes on both segments for this year and.

And that's really what we're driving forward and go into next year as well.

Okay, but just given that service parts and Mas and digital are all positive margin mix and synergies is it fair to say that you should be able to reach 2019 margins on a lower revenue base.

I think at this point, it's a you know to give that kind of guidance and when we would get to back to 2019 margins a little early but.

We see.

And we're committed to that driving that margin up.

That.

It's early in 2021, and we see a lot of really good things happening that will with the volume recovery and I and I think we would consider that and the.

And the guidance for the year.

Okay. Thanks for taking my questions. Thank you.

And.

This concludes our question and answer session and I would like to turn the conference back over to MS. Christine and go back. Please go ahead.

Nick Thank you for everyones participation today, we look forward to you and speaking with you next quarter and everyone have a great day.

Yeah.

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