Q2 2021 Westinghouse Air Brake Technologies Corp Earnings Call
In addition, we won a key international locomotive deal in South America, and a significant transit contract with Natura in North America.
Finally, when it comes to innovation and going after opportunities that can enhance our current portfolio, we announced a strategic.
<unk> partnership with General Motors, where we're exploring the use of battery and hydrogen fuel cell technologies to accelerate the rail industry's fab 2 zero emission locomotives.
This is an exciting space, 1 where strategic collaboration and investment will accelerate.
Celebrate the path to more sustainable rail.
Eric will share more on this in a moment.
It's because of this breakthrough advancements and a commitment to innovation that Rob Tac was named to fast company's most innovative companies in 2021 and recognition.
Of our commitment to solve some of the world's toughest challenges in the transportation sector.
It's also because of our proven commitment to innovation that we were able to forest strength in our financial position the second quarter with a successful 500 million Euro Green bond offer.
Offering to fund investments that will continue to advance sustainable rail.
<unk> forward, we have confidence wiped out will drive long term profitable growth and lead the industry in advancing its position and sustainable rail even partner with.
With that I'll turn the call over to Pat.
<unk>, who will review the quarter and segment performance and our overall financial position.
Thanks, Raphael and good morning, everyone, we had solid operational and financial performance during the quarter.
As markets continue to gradually recover and demonstrated our ability to deliver on synergies to generate strong cash flow.
That and to invest in the future and position <unk> for profitable growth.
Turning to slide 6 I'll review, the second quarter in more detail.
Sales for the second quarter were $2 billion, which reflects a 16% increase versus the prior year.
Driven by a broad based recovery across our portfolio offset somewhat.
So lower North America OE freight markets.
For the quarter operating income was $203 million and adjusted operating income was $306 million, which was up 17% year over year.
Adjusted operating income excluded pretax expenses of 103 million.
Bye.
Of which $73 million was for non cash amortization.
And $30 million for restructuring of which the majority of it was for our UK operations.
And transaction costs related to the acquisition of Northcote.
Adjusted operating margin was 10.
Points higher than the second quarter last year and up from the first quarter.
Versus last year, adjusted operating margin benefited from higher sales and the realization of synergies.
Now looking at some of the detailed line items for the second quarter.
Adjusted SG&A was $254 million.
<unk> base was 12, 6% of sales.
This was up from last year due to the normalization of certain expenses compared to the temporary cost actions taken during the depth of the pandemic a year ago.
Adjusted SG&A excludes $9 million of restructuring and transaction expenses.
For the full.
Full year, we expect adjusted SG&A to be about 12% of sales, we will continue to aggressively manage head count and structural costs.
Engineering expense increased from last year.
This was largely due to higher volume outlook for the year.
Overall, our investment in technology is still expected to be about 6% to.
Which kind of sales.
Amortization expense was $73 million for 2021, we expect non cash amortization expense to be about $290 million and depreciation expense of about $205 million.
Our adjusted effective tax rate during the quarter was 25.
7.3%, bringing.
Bringing our year to date adjusted effective tax rate to be about 26, 3%.
For the full year, we still expect an effective tax rate of about 26%.
In the second quarter GAAP earnings per diluted share were 66 and adjusted earnings per diluted share.
$1 <unk>.
Now, let's take a look at the segment results on slide 7.
Across the freight segment total sales increased 11% from last year to $1.3 billion.
Primarily driven by strong growth in services and aftermarket and higher demand for our component.
<unk> points.
In terms of product lines equipment sales were down 2% year over year due to fewer locomotive deliveries in North America.
In line with improving freight traffic our services sales improved a solid 22% versus last year.
And were up 11% sequentially.
The year over year increase was largely driven by strong modernization deliveries.
Higher aftermarket sales from the unpacking of locomotives.
And the acquisition of <unk>.
I would note the timing of mod deliveries vary from quarter to quarter, but we expect our services sales to improve with the gradual recovery in freight.
Components.
Digital electronics sales were down 2% year over year as orders shifted to the right in North America due to Covid disruption, yet we had strong momentum with book to Bill over 1 for the third quarter in a row.
We continue to see a significant pipeline of opportunities.
Volume digital electronics product line.
As customers globally focus on safety and improved productivity.
Component sales were up 15% year over year.
Driven by demand for railcar components and recovery in the industrial end markets. This is compared to a 19% lower.
Lower railcar build year over year.
Demonstrating the diversification within our components business.
We are encouraged by railcars continuing to come out of storage.
Order rates for new railcars, and the broad recovery in industrial end markets.
Great segment adjusted operating.
Operating income was 247 million for an adjusted margin of 18, 5%.
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.
Turning to slide 8 across our transit segment sales increased 27% year over year to $680 million.
Driven largely by recovery in OE projects and steady aftermarket sales.
<unk> sales were up 41% year over year as.
As the second quarter 2020 was severely impacted by disruptions stemming from the pandemic.
OE sales were also up 12% sequentially, reflecting the continued momentum for investments in green infrastructure.
After.
Sales were up about 17% from last year.
We expect aftermarket sales to improve for the full year as the economies continue to open and demand for transit services increase globally.
Adjusted segment operating income was $73 million, which was up 43% year over year.
Aftermarket adjusted operating margin of 10, 8%.
Which is slightly down from the first quarter due to a charge for a discrete warranty adjustment of over $5 million.
Across the segment, we continued to drive down cost and improve our project execution.
We are committed to drive 100 basis points of.
Margin improvement for this segment in 2021.
Now turning to slide 9 we wanted to provide a more detailed look at our 12 month and multiyear backlog.
We had another solid performance with total orders for the year exceeding 4 billion, resulting in a book to bill for the year above 1.
Orders can be lumpy quarter to quarter, but we are encouraged to see a broad based momentum across the portfolio.
Our freight segment backlog remains strong at $17.8 billion with year to date book to Bill above 1 driven by broad based order activity across the portfolio.
Our 12 month backlog.
A $4.1 billion is the highest since the third quarter of 2019, a result of improving end markets.
We continue to see a robust pipeline of order opportunities, especially in international end markets.
Our transit segment backlog ended the quarter at $3.7 billion with a 12 month backlog.
1.7 billion.
We did see some projects pushed to the right as a result of ongoing disruption due to the pandemic.
Yet our outlook remains strong as sustainable infrastructure spending increases globally.
And finally at June 30, our multiyear backlog remains strong at 21.
$1.5 billion.
And continues to provide increasing forward visibility.
Let's turn to our financial position on slide 10.
Had another solid quarter of cash generation, we generated $223 million of operating cash flow during the quarter, bringing year to date cash.
Flow generated over a half of $1 billion.
Our performance clearly demonstrates the quality of our business portfolio.
Cash flow was driven largely by good conversion of net income and focused working capital management.
During the quarter total capex was $29 million.
In 2021, we expect Capex.
X to be about $140 million.
During the quarter, we successfully completed a $500 million Euro green bond offering and paid down nearly $200 million in debt during the quarter.
As a result, our adjusted net leverage ratio at the end of the second quarter was 2.6 times and.
And our liquidity is robust at about $1.7 billion.
As you can see in these results our balance sheet remains strong and we are confident we can continue to drive solid cash generation, giving us the liquidity and flexibility to allocate capital towards the highest return opportunities and grow shareholder.
Okay.
With that I will turn the call back over to Raphael.
Thanks, Pat and shifting our focus to markets on slide 11, we are continuing to see good signs of recovery, while the trough in the OE in North American market remains we are seeing sequential improvement in freight rail.
Holder volumes total carloads were up 3% from first quarter and up 20 percentage year over year. We're also seeing strong trends in intermodal along with a pickup in the industrial sector in areas like chemicals and metals locomotive parking continued to improve due to increased free.
Rail traffic and we expect demand for reliability and productivity to increase putting our services business in a position of strength.
When it comes from North America railcar built railcars are coming back into use and about 22% of the North American railcar fleet remains in storage.
Rail volunteer Suez Encouragingly below pre COVID-19 levels.
As a result industry orders for new railcars are starting to improve and we forecast the railcar build for this year to be about 30000 cars.
Internationally, our order pipeline remains strong.
Expect long term revenue would also in several markets.
And mining market conditions also continue to improve.
Transitioning to the transit sector ridership remains a bit uneven and some markets, but overall the long term market drivers for path for passenger transport.
And remained strong.
Infrastructure spending for Green initiatives continues to be a focus, especially as governments globally churn to rail for clean safe and efficient transport.
Given this market backdrop.
Our strong performance in the first half.
<unk> and our confidence in our ability to deliver we are raising our full year revenue and earnings per share guidance.
We now expect sales of $7.9 billion to $8.2 billion.
Adjusted EPS to be between $4.
15th.
The $4.35.
We expect cash flow conversion to remain greater than 90%, resulting in a strong cash generation of about $1 billion for the full year.
So overall positive signs of recovery great execution by the team in the first.
Hal and a meaningful update to our full year view as we manage through the continued recovery with that I'd like to turn the call over to Eric Gephardt.
Thanks, Raphael and good morning, everyone and Eric Eberhard Chief Technology Officer from Lab Tech and I'm thrilled.
Here with you to share some of the transformative advancements we're driving in the clean energy transportation sector.
Turning to slide 12.
As you may be aware today rail represents the cleanest, most energy efficient and safest mode of moving freight and people on land moving 40%.
To be free per ton mile in the U S alone.
Current trends indicate that freight and passenger activity will more than double by 2050 as the sector pushes for more sustainable transportation.
At lab Tech, we're innovating to help our customers increase efficiency reduce costs and cut.
<unk> overall carbon footprint through the development of low emitting locomotive technologies.
Including tier 4 locomotives running on renewable fuels and battery electric locomotives. We're also pushing the boundaries into alternative fuels, such as biodiesel renewable diesel and hydrogen, which I will share more on in a moment.
There over the last year, we built and tested in revenue operation with BNS F Railway and the California Air Resources Board the world's first heavy haul, 100% battery electric locomotive called Flex drive.
This locomotives, which operated in a conscious between 2 other locomotives.
Battery capacity of $2.4 megawatt hours and generated most of its energy from regenerative braking.
At the conclusion of this rigorous 3 month test that spans 13000 miles the flex drive exceeded expectations delivering more than 11% average reduction in fuel consumption.
Consumption and greenhouse gas emissions.
It's the equivalent of eliminating 6200 gallons of diesel fuel and slashing 69 tonnes of Cotwo.
And it's just the beginning.
At more than 7 megawatt hours, which is the next version of the Flex drive we currently have in development and.
And expect to bring to market in 2023, we anticipate further reducing fuel consumption and emissions by up to 30%.
This reduction is tied to a tightly coupled system that <unk> is driving in the marketplace that includes batteries trip optimizer power electronics, and even our braking systems to capture.
Sure all the available regenerative braking energy.
And by owning the complete system, we can control the concepts to optimize fuel burn or emissions battery life, where speed depending on the operators need on a specific route.
Our second generation battery electric locomotive will operate independently.
<unk> and leveraged general Motors opium battery technology that Rafael mentioned earlier it is a winning combination where we bring our expertise in energy management and systems optimization for heavy haul locomotives, while taking full advantage of Gms advanced technologies and speed to market.
In addition to these efforts.
<unk>, we're also re imagining the future of rail utilization safety and logistics optimization R.
Our vision is to expand the use of freight rail enabled the elimination of over 300 million tons of carbon dioxide annually across the global transportation network reduce road congestion in our city.
Cities and make transportation significantly safer for everyone.
Put us on this path, we've installed positive train control systems and software of more than 24000 locomotives.
This technology has revolutionized rail safety in the U S over the last decade, and helped make the rail sector more efficient in effect.
<unk>, our next generation systems will take efficiency, even further by enabling moving block and virtual coupling instead of a traditional fixed block signaling use today, while still maintaining the most stringent safety standards.
Similarly, our trip optimizer solution, where smart cruise control system, which.
Which is installed on over 11000 locomotives has helped save customers more than 400 million gallons of fuel and $4.5 million tonnes of Cotwo.
Together with movement planner. These digital solutions are revolutionizing locomotive fuel efficiency and real time network planning.
So helping move goods more efficiently.
Using the existing rail network, all while reducing energy use emissions and waste.
Looking to the future on slide 13, we will accelerate the shift to green energy solutions and bring to market a heavy haul zero emission hydrogen hybrid locomotive.
And we have a clear roadmap to get there 1 that day risks across the path with batteries is a focal point across the entire spectrum and 1 that is already underway with flextronics.
Our vision is to leverage battery technology, while burning hydrogen in the internal combustion engine similar to what we're doing today with natural gas and.
For all.
This step is a retrofit of all approach, where we can take 80% to 90% of the energy content and making hydrogen driving a dramatic drop in emissions.
Parallel we will develop a hydrogen fuel cell locomotive and ruggedized with fuel cells. So they can operate in a harsh rail environment.
Floor <unk> hydrogen capabilities give us an advantage here as well theyre hydro hydrogen fuel cell power cubes are compact.
And easy to package and can be used in a wide range of applications, including locomotives.
Our vision is clear.
They have an operation fully decarbonize.
Utilizing battery electric and hydrogen technology.
The recent partnerships, we announce with Carnegie Mellon University, the nation's leading university in artificial intelligence and robotics and Genesee in Wyoming, the nation's largest short line and regional freight railroad put us on a path to do just that.
By working together, we believe the transition to a more utilized efficient and zero mission rail network is absolutely within reach and we're committed to helping the industry get there.
With that Rafael I turn it back over to you.
Thanks, Eric and a Great example of how we are driving breakthrough technology investments and scalable and sustainable products that will position wiped out and the industry for long term profitable growth.
Let's turn to our final slide.
Everything we've fault line today reinforces our strategy to accelerate long term profitable growth.
That strategy is based on our Expulsive installed base.
Deep expertise.
Vision and breakthrough initiatives and scalable technologies.
<unk> operations could choose improvement culture and disciplined capital allocation.
I am proud of the strong execution by the team the second quarter, despite are still challenging environment as.
As we go forward, we will continue to lean into the strong fundamentals of the company to execute on synergies drive margin expansion generates strong cash flow and deliver long term profitable growth.
As we've said before <unk> mission holds a larger purpose to move and improve the world.
After demonstrating strong performance in the first half of 21, I'm confident that the company will continue to deliver and leave the transition to a more sustainable future.
We look forward to sharing more on the company technologies and our long term vision in the fourth quarter, when we plan to host an investor day.
More information on deaths will be shared shortly.
With that I'll turn the call back over to Christine to begin to Q&A portion of our discussion.
Thank you Raphael, we will know me line for questioning, but before we view and out of consideration for others on the call.
Ask that you limit yourself to 1 question and 1 follow up question. If you have additional questions. Please rejoin the queue.
Operator, we are now ready for our first question.
They will now begin the question and answer session to ask a question you may price style than 1 on your Touchtone phone. If you are using a speaker phone. Please pick up your handset before pressing the key to it.
<unk>. Your question. Please press Star then too.
Our first question today comes from just in line with Steven.
Thanks, and good morning, mourning mourning dressing.
I'll start with 1 on the guidance could you share how much guidance range was a function of the second quarter, beating your expectations vs. A change in second half expectations and maybe as you answer that I got the impression last quarter that into <unk>, we'd have.
A little bit of a dip in terms of locomotive deliveries and mines and then we'd see a reacceleration in the back half. So just curious if that's still the right cadence to be thinking about.
So just and I'll start with the second quarter I think the team has been able to really overcome I think some of the headwinds that we had referred to in terms of supply chain and there are some significant challenges in India. So I think we've executed better than what we had expected which is good helps US you risk any elements of the second.
Half of the year and really feel like we're very much on track to continue.
Continue margin expansion into the second half of the year. So I think some of.
Guidance change really really fat low reflects I think I've improved.
Environment ads I think we've certainly seen that with Ah I'll call a number of our end markets are certainly internationally, we're continuing to see on parking locomotives and freight cars. So I look at freight cars. The numbers were looking at it for now and the year are better than what we have got it earlier on.
Okay and thinking about the international locomotive market. So you've noted orders have picked up here recently and it sounds like the pipeline and strengthening as well cause any way you could give us an update on your expectation for international locomotive deliveries.
This year the level of visibility you have into next year, just to help us think through that pick up.
Sure. So like you said our pipeline of deals can choose to strengthen you will continue to see the backlog expansion. This is the highest backlog we've had since second quarter and we have a stronger pipeline. We're working on we've had a number of significant international equipment deals that are under negotiation.
Haitian and day, starting to see some of those converts first 1 you saw was here in South America, but who got some of those really cutting across we see it in Asia and specific in Australia, Russia Cif's to a large extent I'd say tied to commodity exports that have really strength and for some of our customers.
With growing demand and mining.
So a day internationally, that's that's really I take something that's playing out across.
Okay I'll leave it there I appreciate the time thank you.
Our next question comes from Sarah <unk> with Jeffrey.
Oh, Thanks for taking my questions could you talk a little bit about the free 19 performance He said.
Pick up some of the higher but everything is higher margin candidly such as services person locomotives semis.
Yeah. So this is a key dry every day and what do you need to show, making improvement how are you thinking about getting back to the 19th Thank you.
Well first let me just start with you're going to see margin expansion into the air across both segments. So I think we've been very specific with regards to translate that doesn't change as you grow into the second half of the year, we expect over 50 basis points of margin.
The improvement vs. The first half of the year and with that I want to highlight you will continue to see a variation on specific quarters.
Those are tied to timing of projects that could be time that could be associated with mix. If you look at it year over year, certainly transit is growing faster than the rest of the portfolio and with being transit certainly is growing up much faster rate. There should also elements of how underabsorption plays along the year.
So as we look at it there's an element of sometimes locomotive deliveries vs. What the Bill's plan is pretty year. So overall committed to really deliver on margin improvement.
For the year and better than what we got it early in the air.
Great. Thanks, net correct and then maybe you could talk a little bit about what you've seen on the digital side you talked about this project from P. T. C. S. I P. U S meetings hope I think about what's the global opportunity Sir P. T. C. Generally and then when would you expect it doesn't get back to cleaning team.
Yeah, well 2 things I'll start with our customers continue to be focused on efficiency productivity and safety, which is what digital is all about.
We continue to see a strong commitment there.
Our book to Bill was strong and the best 3 quarters well above 1.
As you mentioned I think we've seen some significant progress internationally on expanding our penetration a good example of species, you mentioned, where non executing it in 3 different countries outside the U S. We've got a number of other countries where are we discussing the opportunity I think wanted to think solid highlight about the business. This has.
Largely as you look into past transactional business. So the locomotive order drop you would see really pressure to revenues on our digital electronics segment. Our teams continue to take steps to Florida drive while I'll call recurring revenue in the business. We expect some of this multiyear orders to continue.
And I think a big chunk of the focus for the sheer is up to drive converted bell.
For the business and improve.
The forecast for the year, but largely committed this a significant element of how are we also going to do this energy transition with battery electric it really comes down to having a strong portfolio that allows you for a really strong energy management on the conscious so very overall.
Positive I think we're still working on kohlberg relative per year at this point.
Hey, Thank you for taking my questions.
Thank you thanks.
Our next question comes from Rob Wertheimer with Melius free carriage.
Oh, Thanks, good morning, everybody.
Rob.
So I had a small 1 what was the what was the issue with the restructuring in transit.
23 million I apologize if I missed this and the third remarks.
I thought you were more or less some of that and then a bigger question is there's a bit of a you know a perception out there that.
All the efficiencies rail means locomotives or less needed in the future and wheelchair that but it's out there, but I love the overview efficiencies, you're bringing with a variety of technologies to the market and I'm just curious what the reaction of the conversations are like with your real customers on efficiency driving upgrades.
New as opposed to just months. Thank you.
Let me start I'll pass it on to bat on the specifics of restructuring but.
When we look at where we are in relative to demand for more reliable par can choose to be there with continued to see improvement in terms of non parking. So I think those were largely tied to the dynamics you solve for the last couple of years not just in terms of car loans for also in terms of <unk> I think that's largely and so when.
Look at and moving forward I think the focus on both the reliability of the fleet. That's a significant positive for us when you look at our.
Services business, the auto helm areas that can chew focus from customers now and on really making sure that you're getting a more productivity and I think that will tie very well with some of the solutions that we have out there that's ray fuel savings saw we've talked about half the al advantage.
Also I think significant elements in terms upgrades that we can put you to drive you heard about us implementing the tier 4 engine with.
<unk> now this is something that we can apply not only poor platform, but to odder.
Platforms out there as well and we're really excited about the opportunity here on this allergy transition with battery electric we are currently responding for a number of Ah really questions coming from a request for quotes and requests for information from customers not just in North America.
Around the world. So we see battery here is a significant element of how you really I'll call off renew some of the fleet to driving value for customers and driving value for ourselves. So I think we're we're really building up on on a positive momentum here out of us.
So to talk about the restructuring.
We've we've talked about this in the past, it's it's specific to the UK operations, where we're seeing some of larger projects.
Wind down and conclude and so we're looking at all of our footprint in the UK and consolidating operations.
There is an element of.
Impairment another severance it comes through in that in that number.
The majority of that cash that restructuring is non cash so.
Just a lumpiness hearing the second quarter I would tell you that when you look at the full year.
We still expect our restructuring to be less than it was a year ago.
We also expect that restructuring is going to continue as we drive that margin improvement for our transit segment.
We we are are consolidating footprints.
Taking taking steps to improve our productivity and improve margin overall, so this there'll be more in the future but.
Down year over year.
Okay. Thanks.
Our next question comes from Scott Group with Wolf Research.
Hey, Thanks, good morning, guys.
I wanted to just come back to the margin outlook for a second because when we look at the the revenue the new revenue guidance and earnings guidance. It looks like it implies the margin implied margins come down a little bit from from the prior guidance and.
Just wanted to get your sense on why that is maybe why we're not seeing better leverage on on the sales upside is it just mix or is there anything else going on thank you.
Scott I'll really go back to what I said, you're going to see margin expansion going through the second half of the year by more than 50 basis points vs. The first half if you look at the whole regional guidance, we have given a per year, we're going to be seeing margin is expanding battered <unk> dot or regional guidance was I think there's always going to be again elements of variation in the <unk>.
Porter as I had highlighted in terms of timing of projects mixed can also be an element here, especially as you would think about.
Well the speed the growth year on the transit segment vs. The freight segments, but as we look into some of the auto elements.
Even ask G&A were consistent with.
12%, we have guidance earlier in the year, so very much committed.
Executing for the $250 million of.
Synergies that we have talked about we expect to deliver dose earlier in the second half of the year. Then later and I think there are positives.
Moving forward into what I'll call, a second phase of integration to Dot all which a lot of it it's really tied to a continuous improvement.
Culture and that will continue to drive up productivity. So we are committed to continuing to drive.
Profitable growth with improved margin is going to next year as well.
Okay, and then you've talked about logos getting on parks, maybe can you just talk how how many low goes where I'm parked in the second quarter. What your outlook is for the back half of the year and then what what the what's the revenue opportunity for you from from each loco getting them parked.
I think the best way to answer you the areas, we look into the second half I think we expect sure certainly could change rebound out of gradual pace of course.
When he compared the vs year over year, they become a little more challenging I think the good news is.
When you look at the fleet, that's running out there I mean, you're really looking for reliability and availability and those locomotives are running harder than they were before even though if you look at the overall fleet, you're not necessarily back to pre COVID-19 levels I think.
We are positioned well here with the newer fleet.
Police have really provide cell called the Bachelor reliability for customers, which is certainly needed right now when you look at improving service levels I had so our net speculate in terms of of the levels of on parking. This is an active dialogue, we have with customers and it involves not just the elements of umpire.
It involves a strategy around modernizations new locomotives. So it's a broader equation then just by too.
On party of existing fleets, which will potentially come with some sometimes penalty site to reliability of the overall system.
Okay. Thank you guys appreciate it thank you.
Our next question comes from Gary results with Goldman Sachs.
Yes, hi, good morning, everyone or furniture Raphael can you talk about the my pipeline and where it stands today and nice to see the really strong deliveries in the quarter, where you had the tough comp from a year ago and I am wondering what's the backlog looked like what what's what's the pipeline and level of activity overall.
Jerry was months' was a significant step up this year vs last year that helped us I'd say, partially offset even some of the elements of.
New locomotive deliveries.
Look at moving forward I think good momentum they are so if.
If you think about thanks that we're bringing to market that allows us to you then upgrade some of the existing fleet Swift batter fuel efficiency some of the elements of Alto nation. So we see that as.
A trend continuing.
Certainly going to next year.
So now lament here of just.
Step off in growth, we saw year over year I do not expect out in Australia.
The same going to next year, but mots does.
Does have a significant opportunity fries and you look at internationally as well it has been a significant element of discussions with international customers too.
Very interesting and you know on the international locomotive pipeline can you help us put a finer point on the timing and magnitude of project opportunities and if you can comment.
Comment on whether they're from countries, where you have existing operations vs areas, where you might need to.
Build assembly capacity thanks.
That's really a.
Part of the good dynamics were saying those are countries that we largely operate in we have strong relationships with customers and.
We see that.
Momentum, they're picking up so it's.
I'm not going to speculate here with specific elements of.
When some of those orders converts, but what I will tell you as I look into the framework for a lot of call 22, 23 timeframe. That's Australia positive. There's good momentum I'm, just not going to speculate and the elements of exactly when orders get finalized.
But the.
The momentum their pipeline stronger and would feel positive about growth and international.
Market moving forward.
Just to clarify twenty-two twenty-three timeframe is that when you expect to deliver the locomotives or when you expect the firm orders now we would expect the firm orders. This year. So that's more of an element of delivery as you look into the future. So that's why I don't want to expect laid on much. It goes into the specifics of next year or 2003, but it took.
Positive as I look at it and those are units that will.
Largely b.
Building in that timeframe.
Terrific. Thank you.
Thank you.
Our next question comes from Alison Prolinea with Wells Fargo.
Hi, good morning.
Okay I'm Gonna go back to the dish at all business is free you know obviously it sounds like a lot of momentum building Baxter net.
Well I guess 1 question you had mentioned the thought behind the building that recurring revenue how big is that as a percentage of digital day and I think as you enter this year you were expecting digital B flat is that still the case with them momentum really impacting next year and more importantly, any thoughts there. So alison when you look at the record.
Revenue I'll go back a couple of years ago.
Whereas in the teens I look at it today is about 20% and I think the team continuing to work on that regard so.
More.
I think just more recurring revenue as a function of that I think some of the challenges tied to the year is really getting orders that he kept convert in the year. So I think we still have.
Some challenging the ear in terms of.
Increasing the revenue in any significant manner, but it feels very positive in terms of multiyear orders, we've been able to get for the past 3 quarters. So that men are.
Book to Bill has been well above 1 and think that translates into growth for the business going through next year and beyond.
I think we've often talked about growing 2 to 3 times faster on that segment.
That that's the story that doesn't change as you look into also they ought to comment I made with regards to battery electric that's such a critical portfolio in terms of how you manage a cautious.
You will have the opportunity to hear more on it but.
Thank you will need that portfolio a trip optimizer with 020 with wallets Molly make sure that you're really.
Taking advantage of.
Improved fuel savings moving forward.
Great. That's helpful. And then just he made a comment about projects being pushed to the right a little bit more tingling in general.
Heard that I would say across manufacturing complex and do you feel like people are getting a better handle on where you're seeing more conversion on time as we entered the back half or does it feel like it's going to be an ongoing situation, where I could continue to get pushed into maybe next year evening.
My eye again, as we look into the year, we feel cost them otherwise wouldn't have raised the guidance overall and as you look into the dynamics going to next year.
It really points out to a profitable growth year for us I think the elements year of.
Projects I think we well if you're talking about transit well if you talk about.
Ah freight in transit, we see a largely all parties and governments committed to invest in the transit system. So that continues we haven't really.
Seeing again, any cancellations or anything like that if anything I think there is opportunity for growing momentum there, especially as you look at a number of stimulus packages going across and on freight my common here, sometimes more on the elements of the timing of orders I mean, certainly I'd say.
Requires more I think negotiations then.
Some of the elements of North America, but.
Positive momentum forward.
Perfect. Thanks I personally.
Thank you.
Our next question comes from not Al Cock Ray Kelly.
Good morning. Thank you so on the synergies from I think most of your synergies have been on the cost side from the deal so far.
And that's understandable given that you guys inherited a backlog from G E. But as you taken more new orders are there are you finding opportunities on the revenue synergy from.
Yes, we are.
It's really 1 that goes into various areas.
I'll start with transits I think some of the relationships that we've had with.
With the broader company it is allowing us to grow our share into some markets that traditionally.
We would not be as president.
I think that's a positive and you we are seeing the opportunity here to be early on projects respect in and to really work on wall call up a category of products that we are able to supply into transit. It's certainly true also for.
A number of regions. So what if I think about eastern Europe latter quite think about Russia. Ncis. Those are areas that are traditionally we've had a very strong footprint strong relationships with customers and you see that as a function of opportunities for us to grow transits.
Faster and more profitably as well.
I think cant phrase side.
Some of the house.
We've talked about it in the past.
Certainly an opportunity for us to continue to do that in a piece of that is.
Also looking at taking advantage of competitors platforms and being able to.
Implement some of the elements of mods and things like that which were capabilities that.
We brought with.
Merger of the company, so you'll see more of that.
Opportunities for us to be expanding our solutions into otter competitive platforms.
Got it so rough world you do think that.
<unk> legacy content in new locomotive orders would be it should be higher than creed deal and.
And for New order now says, yes, it should especially as you look at like new platforms that we're launching we're certainly taking advantage of a lot of this I'll call core technologies that really ultimately guarantee the value for the customer. So if you think about the Ah.
Core we call them vital organs I think that has expanded those platforms largely will reflect that so it's a growing up penetration of our of our products into this.
Future platforms.
Got it and just 1 and then my second question on the infrastructure Bill sorry, if I missed any commentary you made but as you know the $560 billion infrastructure Bill took a step forward yesterday I think there's about $100 billion for rail in public.
Transit can you talk about any potential benefits for you guys from this.
The sector will benefit from the build this as a positive for <unk>.
Think there is a couple of opportunities here on on both fronts I think certainly in transit I think we will see some of that reflected in terms of some of the opportunities as we have but also the free side as we talk about.
Some of the technology development those are some of the.
Discussions that continue in terms of really government supports to accelerate some of the elements of decarbonisation and efficiency for our customers. So we.
We see it largely is positive news.
Something that will benefit rail and will benefit us.
Great. Thank you.
Thank you.
Our next question comes from Steve Furniture, Ray Keybanc capital in that day.
[noise] hey, thanks.
I fail you brought up how things can be lumpy quarter to quarter should we be thinking for Q sees the typical step up and revenue in EPS from 3 Q or can you just talk about back half cadence.
So I'd be thinking about sequester improvements as you go into the second half of the year.
Darius of course and elements from tons of seasonality between third and fourth quarter traditionally you would've seen third quarter.
I'm going to call, especially stronger with some of the elements of mix.
But.
I'll call sick question improvement that's yeah, I I, just I think if you go back it's we're still seeing some.
Disruption of a little bit in the season, the normal seasonality because of everybody coming off of Covid, but if you go back to 19 and even before you would see third quarter was really usually strong in the free services side, it kind of ties to the.
Our customers some maintenance cycle and when they do things my way.
Well in the fourth quarter.
There's there's usually some strength in the transit aftermarket business. So.
All those all those things are kind of play out here in the second half of the year I think we have a lot of confidence in with the with the second half of look like there's still looking at.
<unk> improvement.
Considering those things might be coming back from more normal situations.
So just so I understand sequential improvement, meaning 3 Q better than <unk> and force you better than 3 Q.
This year, which is our expectation yep, Okay got it from a new perspective from an EPS perspective, correct sure.
And if I model out to the mid point of your guide I get mid 15% range operating margin, which gives about a low 20% incremental for the year can you tell us what the impact of mixer unusual items, where this year in terms of margin impact relative to your original thinking.
And just remind us how we should think about incremental margin going forward in an environment, where you can drive high single digit growth.
So here's.
He'll emphasize the element we will expand margin this year and will continue to expand as we go into next year I think it would be worth taking some time off line with you just walk into some of these elements is mix.
Certainly up plays out.
Through especially the element here of the year per se, but that's variational quarter over quarter I think.
Again, 50 basis points margin improvements going.
Into the second half of the year, we're going to be better than the 50 basis points and profitable growth I add.
Yeah.
I understand your math I think you just want to to to factor in the full year impact and that you're going to have some.
<unk>.
Variation quarter to quarter, we don't give quarterly guidance on on on on margin percentages, but really focus on the full year and the and the.
The impact of of all the costs and productivity savings and synergy savings as well as sales mix and and how that would impact us.
Yeah, that's really the motivation of the question is thinking about annuals on a go forward basis, which is to say if we're in an environment, where you can drive high single digit gross in the future.
And as you think about your backlog mix can you do better than a low 20% incremental for a full year.
So the short answer is in terms of Incrementals, yes, we expect that.
Got it I think.
The volumes I mean, I think we've demonstrated on the on you know on the on the variations in the past and with the increasing revenue and absorption you get those those kind of countries from margin you were talking about.
And I know we're late in the call can I ask a quick 1 for Eric or if there's someone behind me I'll just jump out of Q.
How do I have a question.
Yeah mm slide 13 is great for showing us the technology progression to carbon zero locomotives I know you're inventing a lot of this so it's hard to predict timing, but any any best guess on timing for battery electric lead and then hydrogen or are we talking 5 years 10 years.
So when when we look at the the battery electric coming off the successful testing that we get out in California.
Already in the process of quoting the battery electric and should be shipping in 23 is kind of the the timeframe. We're looking at there so that should be getting out there and twenty-three and that will come with the league capability and what I mean by the lead capability is that it won't have to run in a conscious between 2 diesel electric you can have multiple battery.
Electric working together at at that point. So we are very proud of moving forward on that and then the hydrogen will lag by a couple of years behind that there's more invention happening in the hydrogen but when you look at what we're doing with GM right now.
That's accelerating us both on the batteries as well as the hydrogen site. There and then I think we are the key points also is that we're also developing all the elements around it it's a system that really works together so.
The battery system working with the power conversion working with trip optimizer to optimize all of that even the braking working to breaking in there. So that you can capture as much energy as possible and that's how we get to the 30% emissions and 30% fuel improvement.
So if I'm hearing you ray it sounds like you expect a hydrogen freight locomotive in this decade.
Ah Yes, yes in the next few years.
Alright, alright. Thanks.
Thank you.
Alright next question comes from Christabel, that'd be with Citigroup.
Hi, guys just non again on for Christmas I think you'd talked about 50 basis points of margin expansion in the back half was wondering if you could.
Talking about your expectation for margin expansion in the back half the free and then understanding how much of that might be due to mix or the flow through synergies or anything else.
So when you think about margin expansion, all we have not brake and so.
Saw on freight we haven't guided specifically, but for transits.
We have got it to 100 basis points and we continue to be on that track. So that's part of that guidance.
That includes.
Continue to expand.
[noise] trends in margins year over year by more than 100 basis points for this year and on freight. We've also I think being very clear about margin expansion there too.
So I picked up.
A 50 basis points sewers more to really make sure we give a framework of how we expect margin to grow into the second half of the year with greater than 50 basis points overall expansion when you look at the.
The segments combined.
Got it and then there was.
Start improvement in services revenue, just and then I think you've called out the unpacking of equipment.
To do with it just kind of wondering could you give us an understanding of sort of like what the business is running at in July so far maybe in June.
The amount of on parking and equipment, that's come out of storage. So far and then just maybe sort of understand how essentially as activity picks up do you expect.
Sort of.
<unk> services revenue to accelerate through the back half.
So so.
Then parking's really haven't commented on anything specifically, we see these locomotives coming back into service that I mean, it and it very much is correlates exactly with the overall free traffic for that for North America.
Really to not something that to comment on and you know like in July or anything like that as you asked.
But we just see the this trend to continue and it it gives us a lot of low confidence in a lot of visibility as to the strength of what's gonna happen with our free services business.
So.
Maybe you just to add on in terms of rebound from and we expect more of a gradual base here until the second half of the year. So the comps are again different I think 1 of the things that we are seeing is a stronger demand for reliable power and.
The newer locomotives are running and running I'm going to call la harder so more megawatt hours. So that's what I think largely drive so I think I could eat echo generation of some of <unk>.
Dynamics, you've seen services. So we see strongest services I had not necessarily as low down going to the second half.
Got it thank you.
This will conclude our question and answer Johnson I'd like to turn the call back over to Christine tobacco for any closing remarks.
Thank you. Thank you to everyone participation today, we look forward to talking with you and speaking with you through the quarter. Thank you have a great day.
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