Q3 2022 Westinghouse Air Brake Technologies Corp Earnings Call
Hello, and welcome to the web Tech third quarter 2022 earnings conference call.
All participants will be in listen only mode.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.
To withdraw your question. Please press Star then two please note today's event is being recorded and that all the teleconference over to your host today Kristine Kubacki, Vice President of Investor Relations. Please go back. He please go ahead.
Thank you operator, good morning, everyone and welcome to <unk> third quarter 2022 earnings call.
With us today are president and CEO Rafael Santana.
Oh, John Rowan as senior Vice President of Finance John <unk>.
Today's slide presentation, along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on the Investor Relations tab on <unk> Corp Dotcom.
Some statements, we're making are forward looking and based on our best view of the world and business today for more detailed risks uncertainties and assumptions relating to our forward looking statements. Please see the disclosures in our earnings release and presentation.
We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics I will now turn the call over to Rafael.
Thanks, Christine and good morning, everyone, let's move to slide four.
Start with an update on our business from my perspective on the third quarter and progress on our long term value framework, John will down cohort to the financials.
We delivered a strong third quarter, which was evidenced by strong sales growth and then the increase in adjusted earnings per share. We achieved this despite significant headwinds, including the loss of business in Russia supply chain disruptions and negative FX.
Sales were roughly $2 billion, which was up 9% versus prior year revenue was driven by strong performance across the freight segment, but partially offset by unfavorable FX.
Cash flow from operations was $204 million, which brings year to date cash flow to $628 million overall, our financial position remains strong.
We continue to invest for future growth reduce leverage and return cash to shareholders.
Total multiyear backlog was $22 $6 billion up $767 million year over year and excluding the headwinds from foreign exchange backlog was up one $5 billion or up 7% from last year, we continued our progress against.
Our long term strategies.
It's down by continued expansion in the total backlog versus last year overall, we have a strong quarter, which was very much in line with our plan for the year, we continue to invest for the future as we execute commercially and operationally with discipline and rigor and we are well positioned to continue to drive.
<unk> long term growth, even with near term uncertainty and volatility in the global economy.
Shifting our focus to slide five let's talk about our end market conditions in more detail.
As we look at key metrics across our <unk> businesses. We are encouraged by underlying business momentum and strong pipeline of opportunities North America carloads were up slightly in the quarter after being down for the four previous quarters and locomotive Parking's are down from the <unk>.
Same time last year, despite lower year to date freight traffic.
We continue to see significant opportunities and demand for new locomotives and modernizations as our customers invest in their aging fleets and place a greater focus on reliability productivity and fuel efficiency.
When it comes to the North American railcar built demand for railcars. So he is increasing from what we believe were trough levels in 2021 railcars in storage are below pre COVID-19 levels with about 17% of the North American railcar fleet in storage.
As a result industry orders for new railcars continue to improve and the industry outlook for 2020, Q4 about 40000 cars to be delivered.
Overall, we believe we have an opportunity to continue building significant long term momentum with growth in modernization and new locomotive sales in railcar belts and enrolling stock.
Internationally freight activity also continues to show positive signs we have been growing our international fleet in the mid single digits on average over the last five years and we continue to execute on our strong pipeline of order opportunities. This strength is reflected in this quarter's equipment sales.
All of 32%.
Finally, transitioning to the transit satcher the long term secular drivers are positive as the industry continues to trend towards clean safe and efficient transportation solutions.
Next let's turn to slide six to discuss a few recent business highlights.
During the quarter, we signed a strategic $600 million Mou with <unk>, The National Railway company in Kazakhstan.
Cremant will bring state of the art technologies to both their yards and mainline operations that will significantly reduce greenhouse gas emissions and operating costs.
This historic framework includes a 150 flax drive battery electric <unk>, along with kits to convert the traditional diesel locomotives to LNG. We will also collaborate on digital solutions for the fleet beginning with trip optimizer.
We also recently signed two key deals in Australia to deliver additional locomotive kits.
These locomotives will be built in Australia, and so two areas Eastern Australian Railroad customers. We also closed an order for new locomotives in Africa during the quarter.
Finally in transit, we secured a key order to supply platform doors for Panama's Monorail station, which March swapped ask first transit project in Central America we.
We also signed a strategic five year services contract with a key.
Leading at RPM Rolling stock leasing company, which provides the critical maintenance for hundreds of locomotives in France and in Germany.
Turning to slide seven.
Before turning it over to John I want to briefly discuss our ability to deliver predictable earnings through the economic cycle during our Investor day earlier. This year, we talked about our track record of managing through challenging markets and significant disruptions as a company we are uniquely positioned.
<unk> to deliver a resilient and predictable earnings given our favorable end markets, a robust backlog of high level of recurring revenues and disciplined execution.
All of which drive profitable growth and value for our shareholders.
We believe our favorable end markets combined with our leading technologies and solutions will enable us to remain resilient during times of increased volatility.
In freight demand continues to accelerate the need to grow and refresh our expansive global install base accelerates the adoption of next Gen technologies and expand our international footprint.
In transit the investment in Green infrastructure continues with structurally high energy prices and climate change, making the need more urgent.
Our multiyear backlog of over $22 billion provides significant visibility and support for long term good of the.
The backlog has consistently grown over the past two years, despite the challenging economic backdrop.
In addition, we have a strong level of recurring revenues, which is over shared and its profit contributions of approximately 60%.
And finally, we have consistently demonstrated our ability to execute our strategies and deliver growth.
Our track record of strong operating margin expansion across the business is evidence of our ability to realize price deliver productivity and aggressively manage costs are.
Our execution combined with the strength of our business leading products and technologies.
Result, in <unk> being resilient to economic cycles, delivering predictable earnings and superior shareholder returns.
With that I'll turn the call over to John to review the quarter segment results and our overall financial performance John Thanks.
Thanks, Raphael and good morning, turning to slide eight I will review, our third quarter results in more detail. We had another good quarter of operational and financial performance. Despite continued challenges in foreign currency exchange supply chain disruptions and still elevated input costs.
Sales for the third quarter were $2 8 billion, which reflects a nine 1% increase versus the prior year <unk> segment sales were very strong up 18, 2%, partially offset by lower year over year sales in our transit segment.
Q3.
Sales were negatively impacted by unfavorable currency exchange, which reduced our revenue growth in the quarter by five two percentage points.
For the quarter adjusted operating income was $343 million, which was up five 5% versus the prior year adjusted.
Operating margin in Q3 was 16, 4% down 0.6 percentage points.
While we expected our margin to be down in the quarter behind unfavorable mix margins came in modestly higher than we had expected.
We now anticipate Q4 operating margins to be slightly lower than our Q3 operating margins.
In the third quarter adjusted earnings per diluted share were $1 22 up 7% versus the prior year GAAP earnings per diluted share were <unk> 88.
Which was up 27, 5% versus the third quarter a year ago.
During the quarter, we had pretax charges of $9 million for restructuring and other one time charges largely related to our integration to <unk> initiative to further integrate web tech operations and to drive $75 million to $90 million of run rate savings by 2025.
We are pleased with our Q3 results, especially in the face of significant foreign currency exchange headwinds continued supply disruptions and strong mix headwinds, which were expected in the quarter, we remain diligent and proactive as we focus on execution and work to minimize these challenges.
Turning to slide nine.
Let's review our product lines in more detail third quarter consolidated sales were strong up nine 1%, excluding foreign currency exchange sales were up 14, 3%.
Equipment sales were up a strong 32, 2% from last year due to higher locomotive deliveries this quarter versus last year.
Component sales were up four 5% year over year, largely driven by the higher OE railcar build.
Digital electronic sales were up 26%, which was driven by a robust demand for onboard locomotive products and software upgrades along with revenue contribution from the strategic bolt on acquisitions of being a vision and Air Inc. Last quarter.
We are particularly pleased with our organic growth in Q3 as it was delivered in the face of continuing chip shortages.
Our services sales grew at 14, 8% versus last year the year over year increase was driven by higher sales from our larger active fleet versus last year and increased my deliveries the superior performance reliability and availability of our fleet continues to drive increased customer demand for our <unk>.
Services and solutions as railroads increasingly seek predictable outcomes across their fleets.
Across our transit segment sales decreased 10, 1% versus prior year to $550 million sales were down versus last year due to the negative impacts of foreign currency exchange absent the impacts of foreign currency transit sales would have been up two 6%.
We believe the medium and long term outlook for this segment remains positive as mega trends, such as urbanization and Decarbonization drive increased investments in green infrastructure.
Now moving to slide 10, our adjusted gross margin declined as expected by one four percentage points to 31, 4%.
Gross profit margin was lower driven by unfavorable mix adverse foreign currency exchange.
Higher input costs, partially offset by increased pricing and strong productivity.
Pricing positively impacted our margins higher pricing was realized from price escalations incorporated into many of our long term contracts along with other price actions that were implemented to recover increased costs mix was unfavorable in the quarter as we significantly increased our sales of locomotives at a lower margin than the average.
Raw material costs were up again year over year led by dramatically higher energy cost and increased metal costs.
Foreign currency exchange adversely impacted revenues by five two percentage points and adversely impacted third quarter gross profits by $20 million.
Finally manufacturing costs were favorable due to productivity gains, which were largely offset by higher transportation and logistics costs.
Our team continues to execute well to mitigate the impact of these cost pressures by driving operational productivity and lean initiatives.
Turning to slide 11 for the third quarter adjusted operating margin declined <unk> six percentage points versus last year as expected our margins were lower due to mix and increased investment in future technologies, but were partially offset by lower adjusted SG&A as a percent of sales.
Adjusted SG&A was $256 million, which was largely flat versus prior year, but down one two percentage points as a percent of sales to 12, 3%.
Engineering expense increased from last year. According to plan, we continue to invest engineering resources and current business opportunities, but more importantly, we are investing in our future as the industry leader in the carbonization in digital technologies that improve our customers' productivity capacity utilization and safety.
<unk>.
Now, let's take a look at the segment sales results on slide 12, starting with the freight segment.
As I already discussed freight segment sales were strong for the quarter and segment adjusted operating income was $307 million for an adjusted margin of 19, 9% down <unk> seven percentage points versus the prior year the benefits of higher sales and improved productivity were offset by unfavorable mix and higher end.
<unk> investment.
Finally segment backlog was $19 $1 7 billion up $961 million or five 3% from the end of Q3 last year on.
On a constant currency basis segment backlog was up 1.2 dollars 6 billion.
From last year.
Turning to slide 13 Transit segment sales were down 10, 1% driven by the negative effects of foreign currency exchange and the cyber incident that occurred late in the second quarter unfavorable.
Foreign currency exchange impacted segment sales by 12, seven percentage points and we estimate an additional five percentage points due to the cyber incident.
Adjusted segment operating income decreased by $17 million to $60 million, which resulted in an adjusted operating margin of 11, 8% down one five percentage points versus the prior year.
We estimate that the temporary labor inefficiencies driven by the cyber incident was roughly $8 million during the quarter.
Excluding these temporary inefficiencies adjusted operating margin would have been largely flat to prior year.
We do not expect an adverse impact to our transit sales or earnings due to the cyber incident in the fourth quarter.
Transit continues to focus on driving down costs, implementing lean and improving operational efficiencies despite the volatile environment.
Finally transit segment backlog for the quarter was 344 billion.
Down five 4% versus a year ago. However, on a constant currency basis backlog would have been up seven 2%.
Now, let's turn to our financial position on slide 14 during the quarter, we generated $204 million of operating cash flow, resulting in a cash conversion rate of 72%.
This brings our year to date operating cash flow to $628 million.
Cash flow benefited from higher earnings, but was impacted by the proactive build of inventories ahead of our strong second half growth expectations and managing supply disruption of critical parts.
Our adjusted net leverage ratio at the end of the third quarter declined to two three times and our liquidity is robust at $214 billion.
During the quarter, we amended and extended our existing credit facility, increasing liquidity by $300 million and extended the facility through 2027. In addition, we established an 18 months delayed draw term loan for $250 million.
As you can see in these results our financial position is strong and we are confident that we can continue to drive solid cash generation, giving us the liquidity and flexibility to allocate capital towards the highest return opportunities and to grow shareholder value.
With that I'd like to turn the call back to Rafael.
Thanks, John let's flip to slide 15 to discuss our 2022 financial guidance, we continue to feel strong about our portfolio of businesses and we have delivered against our original plan financials. Despite the loss of business in Russia high input costs ongoing supply chain disruptions on.
Favorable FX and a cyber incident, we are adjusting our sales range to wait $15 billion to wait $35 billion, which reflects the expected impact from unfavorable FX in the second half.
We're also narrowing our adjusted earnings per share range to $4 75 to.
To $4 95.
While keeping our full year cash conversion guidance of greater than 90%.
Now, let's wrap up on slide 16.
As you've heard today, our team delivered a strong quarter, despite a challenging and evolving environment. Thanks in large part to our resilient installed base best in class technologies, and our team's focus on our customers.
Produce reasons and more we are confident <unk> is well positioned for long term profitable growth.
Looking forward, we will lean harder into the strong fundamentals of the industry and our company to extend our leadership position in rail to delivering innovative and scalable technologies for our customers and harness the power of our continuous improvement culture with that I want to thank you.
For your time this morning, and I'll turn the call over to Christine to begin the Q&A portion of our discussion Christine.
Thank you Raphael, we will now move onto your questions, but before we do and out of consideration for others on the call I ask you 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.
Thank you and once again as a reminder, please press star one to ask a question on straws into Australia. Your name from the list.
And our first question today comes from Justin long with Stephens.
Thanks, and good morning good.
Good morning, Justin.
John I wanted to start with the comment you made about fourth quarter operating margin stepping down from the third quarter slightly I would think with mix add supposed to improve I believe mod should be app and cyber security.
And it seems like it's behind US I would think that margin should be getting better sequentially. So can you just help us understand what might be offsetting some of those tailwind as I mentioned sequentially and then I know youre not giving guidance on 2023 today, but any directional thoughts on on margins next year versus this X.
Hit rate in 2022.
Thanks, Justin.
Nothing has really changed since we've come out on the year the back half is going to be lower.
In the prior year and certainly the first half.
Largely driven by mix and Justin to zero win on the fourth quarter, we do expect mix to still be the largest driver of the lower.
Margin, what we said last quarter, though was that we expected the third quarter to be the lowest margin of the year and the reason I am sorry, and given where we ended up at $16 four that came in exceeding our expectations and really what that does just it just pushes the fourth quarter down to be slightly.
More than the third quarter, Justin I would add a couple of things that are just keeping in mind, we have over 60% of the new locomotives being shipped in the second half of the year. So with that we've got some givens and takes between third and fourth quarter. I think most important is we expect margin expansion in 'twenty two.
And most importantly, our teams are executing well and we are in a strong position to continue our margin expansion into 'twenty three and beyond.
Okay, Great that's helpful.
And thinking about next year, there's a little bit more concern around rail volumes and where we shake out if we're in an environment where rail volumes are down low single digits, maybe even mid single digits.
Still an environment, where you feel like you can grow freight segment revenue given your backlog for mines than international locomotives in digital.
Yes, it's early certainly to provide guidance in 'twenty three but we continue to see strong demand across the business.
When we think about the pipeline of deals we have relevant opportunities across geographies. We have progressed with the pipeline of opportunities both in North America and internationally. We expect finished the year with book to Bill Justin above one for all of the businesses as we did in 'twenty. One I'd say, we're very much on track to finish 'twenty two.
With double digit increase on orders versus prior year. Despite of FX and that just provides us strong coverage for 'twenty three and beyond.
If I was to expand a little bit on what we're seeing across various geographies.
Certainly saw some wins, we had in Australia and Africa volume dynamics continue to be positive in Kazakhstan, we have a number of projects under discussion in Asia.
Even mining demand continues to hold.
At this point services actually growing faster.
Equipment sales as we go into 'twenty three in North America, I think despite of the carloads being down year to date, we continue to see demand for bulk mods and Youll locomotive. So a number of discussions going to that and certainly a significant opportunities for some of the class ones to further improve operating ratio and to also bring.
And back to their ESG targets.
So.
Transits Tech infrastructure spending continues to be a positive for us.
I think all in all going to 'twenty, three we're well positioned from a backlog coverage and a half from a backlog coverage from what we had a year ago.
Got it thanks for your time.
Thank you.
Next question comes from Jerry Revich with Goldman Sachs.
Yes, hi, good morning, everyone, Hi, Gerry good morning Gerry.
I'm wondering if you could talk about the pricing cadence that you folks have seen in the freight segment over the course of the year really strong organic growth for the quarter, what proportion of that is pricing and what we're seeing from other industrials is actually pricing accelerating.
Into early 'twenty three I'm wondering if you could comment on whether that cadence supplies for your business as well please.
Yes, Jerry I think the year is unfolding very much the way we expected with regards to the cost that we're seeing and they are continuing to rise and we saw them rise quite a bit from the second quarter ended the third quarter. In addition, we are seeing our pricing rise.
You talked about as we exited the second quarter, we read price.
<unk> equilibrium at that point, we continue to remain there.
Your point, Jerry we did see a large jump in the pricing recovery that we got during the quarter as well as the.
Higher costs that we matched up well with the higher cost that we realized.
Jerry I'd say near term, we expect inflation to persist and as an organization.
We remain diligent on both cost management.
And pricing.
Okay.
As you look forward to hopefully the supply chain loosening at some point over the next two.
<unk> to 18 months, how should we think about the efficiency gains in that environment should.
Should we think of the company getting to keep.
That spread is.
We have less rework.
Just waiting for parts et cetera, do we keep that as a margin at some point using the lower cost structure that you folks have established.
Improved margins versus the pre supply chain environment is that an opportunity.
We would expect the same thing as we saw going up is coming down hopefully the cost will come down we're seeing a lot of mixed signals. Some are moving in the lower direction and others are actually still rising, but if they do come down there'll be very similar in the fact that remember that about 60% of our revenue is tied up in long term.
<unk> that have price escalators, so they will adjust as we see those prices adjust and the additional 40%.
If costs are going up or go out and get more pricing and as they come down we may see a little bit of a benefit there.
Okay Super Thanks.
Yes.
Thank you and the next question comes from Matt <unk> with Cowen.
Okay.
Good morning. Thank.
Thank you Raphael I think before the GE acquisition acquisition, you guys did two to three bolt on acquisitions per year.
Do you think youll ease back into that base.
Next year or the year after.
Any update on the.
Acquisition opportunities would be helpful.
Well, we're continuing to explore bolt on acquisitions I think we're going to be again opportunistic here they will need to be strategic with stronger returns in helping us drive ROIC higher and driving faster, but also continue to evaluate opportunities there.
I think there is opportunity for prices to still come down on dose.
And with that.
And we're committed to ultimately adjust.
<unk> cash towards higher returns to shareholders. So share repurchase we will also be something we're looking at.
Got it and then just my second question is you are on pace for 'twenty two revenue that's about 37% of the yearend backlog in 2000 at the end of 2021.
Yes, I know thats not necessarily a perfect metric to gauge.
Future.
Revenues, but.
Is there any reason why that percentage should be vastly different.
Next year.
Well as I had mentioned before I think go into 'twenty, three or well position from a backlog coverage certainly ahead of what we were.
A year ago, I think even the underlying performance of the business, we're really very well positioned to deliver on the five year guidance that we provided during the Investor Day last March. So this is less than just about 'twenty three it's really making sure we're progressing towards the guidance we provided during investor day.
Our 12 month backlog adjusted for currency is up approximately 15% at this point in the year versus prior year.
Got it.
Thanks Raphael Thanks, John Thank.
Thank you.
And the next question comes from Scott Group Wolfe Research.
Hey, Thanks, Good morning, guys Scot.
Scott I wanted to ask.
The one year freight backlog was down about 5% from last quarter I don't know if theres any FX impact there, but any color and then you talked about mix as a headwind for Q4 any early thoughts about mix as a headwind or tailwind for for next year.
Scott with regards to the backlog, we certainly saw it come down sequentially by 4.7%. However on a year to date basis, we're up nine 8% prior to currency and when you adjust for currency.
It up about 15% and again, we've talked about backlog, sometimes it can be a little bit lumpy.
So sequentially, we're down a little bit, but I think the right way to look at it is over time and we certainly feel very good about the fact that ex currency were up 15% for the 12 months backlog.
The second question was with regards to.
Mitch you talked about it as a headwind in Q4, just if you have any thoughts on next year I think that overall Scott over the next several years mix is going to be a headwind right and this is what we had talked about at Investor day as we look to the railroads are starting to renew their fleets and we saw some of that activity this year with the upenn.
CN as well as the NFS mods deals.
We're going to be some.
Lower or headwinds mix headwinds over the next several years, but having said that we've got a lot of growth and a lot of fixed cost to absorb and we would expect to see our margins grow by 250 to 300 basis points over the next five years, so call it an average of.
About a half a percent overrun over that period of time, that's inclusive of mix headwinds.
Okay and then just last thing is there anything in this bill that benefits your guidance for next year.
The IRI Bill.
Inflation reduction Act.
That could help you guys next year.
No.
No there's not.
With regards to the inflation reduction Act Theres a couple of things one is the tax on share repurchases that everyone's aware of.
<unk>.
There is a minimum tax that could have.
And impact on our cash next year.
This point, we don't know enough because there's not enough of the regulations are out but they should be out in the first half and we'll know a little bit more of the overall impact of the company then.
I was thinking maybe along the lines of the investment in battery or hydrogen that you guys are doing.
There are something that we are seeing some specific opportunities is really tied to the railroad and some of the operators there.
Scott.
We're following up with those opportunities.
We work along.
The following comments would be just in battery electric overall I think.
The interest continues to be strong on that portfolio that we continue to built certainly saw that with the order or the Mou signed with <unk>.
<unk> and the level of interest continues across various geographies. So to your point, we could see some benefit coming from some specific projects customers will look at driving in North America.
Thank you guys.
Thank you.
<unk>.
Thank you and our next question comes from Allison <unk> from Wells Fargo.
Hi, good morning.
And a little bit I know you talked about infrastructure benefiting.
As we think it absolutely can be over the next few years does it become more impactful in 2000, and 324 or is it more ebay and just trying to understand how I should think of that in your model.
Let me start.
Allison on transit just overall I think our.
Think about really underlying drivers for the business to a positive if you look at the backlog coverage for the year down over the third quarter were five points ahead of the same time last year, our 12 month backlog Culver backlog. If you look at constant currency, it's up 16, 5%.
Our total backlog is up seven 2% on the same basis.
We will finish 'twenty, two with a book to bill above one so.
With that being said I think we're continuing to take action to drive profitable growth in the business and we're continuing to see.
In <unk> <unk>.
In that regard.
Allison when we look in the near term we are certainly seeing some headwinds in our transit business currency being the.
Most notable and again when you look at the quarter with.
Revenues being down 10, 1% reverse out currency.
You'd be up to six and then again, we had the other headwind of the year, which is the cyber event that largely hit our transit group.
That held back about 5% of revenue in the third quarter.
So we'd be up over 7% in the underlying business and that's the best we've been in.
Numerous quarters, so we feel good about that and again from a margin standpoint.
While margins were down in the quarter one five points. That's explained again by the cyber incident, we had about $8 million of temporary variable labor inefficiencies. So this is on labor that was idled more severely underutilized as we worked through the cyber incident and.
With those are those both behind us and as we look forward.
Would expect.
No impact from cyber to moving forward.
Great. Thanks.
And then just made.
Maybe I missed it but the capex there is a slight reduction there just anything notable driving the change in the number no I think it's just the fact that the team is very focused on.
Doing more with less kind of the overall lean principles that are being deployed throughout the company is coming through in our capital budgets as well.
We've noted from 2% of revenue estimate we're down to one and three quarters percent and also to note that we didn't talk about in the prepared remarks is our effective.
Effective tax rate is down from an expectation of 26% to 25.
Great. Thank you.
Thank you and once again. Please press Star then one if you would like to ask a question.
And the next question comes from Chris Wetherbee with Citi.
Yeah.
Hey, Good morning, this is Matt on for Chris.
We wanted to touch a little bit more on just broader demand topics. We are wondering what you guys are seeing in terms of the trends in <unk> and more specifically, how the inflationary environment supply chain dislocations.
That's impacted ordering and where do you see those trends moving forward.
You touched a little bit on <unk>, but also if you could give any additional color on 2023 that would that would be fantastic as well.
Let me start all of that.
That's from them to John but.
With transit and specific.
At this point, we're not seeing any operational disruptions with regards to Ciber as Jon described and in fact, when we think about the fourth quarter, we would actually expect some level of.
Both manufacturing production and revenue catch up during the fourth quarter on that in terms of overall dynamics, we're continuing to see a strong pipeline of opportunities out there.
I did mention here that strength really playing out across various geographies and in many ways across the business. It's all about really driving converting <unk> into that so we're certainly proud of what we've seen in the digital electronics business, which is.
One debt.
We are continuing to also see very positive dynamics.
Year to date being one of the highest step businesses from the book to Bill perspective.
So it's all about converting that.
<unk>.
Our pipeline of opportunities and we.
We are certainly in a stronger position to.
To be driving profitable growth and to 'twenty three than we were a year ago and we feel certainly strong about five year outlook, we provided in the business during the day.
<unk> Investor day.
Great. Thanks, so much.
Thank you.
Thank you and the next question comes from Dillon Cumming with Morgan Stanley .
Good morning. Thanks for the question I just wanted to go back to the discussion on freight margins for a second.
It wasn't kind of as much margin dilution in the quarter that would've expected just given the step up in local deliveries.
Can you just talk to you if that was more of a function of maybe better than expected volume leverage on the on those deliveries or that there was kind of a mix element to it and then John you mentioned that you thought it makes it kind of quarter on quarter headwind going into <unk> I think historically, you've had some like maintenance activity in aftermarket activity in the past when the pulled forward into <unk> I'm not sure that was kind of a driver in the quarter as well, but I was wondering if you can kind of tweak that.
Those dynamics in the quarter, yes.
Great margin and coming in a little bit higher than expected I think theres two things to look at the all in number one is mix was a little bit less unfavorable and then secondly, the foreign currency exchange rate that was actually a benefit margins during the quarter and it came in.
Little bit more than we had expected in terms of the overall impact on our business, but again, it hurts profits, but helped out margins a little bit.
Got it thanks, John and then maybe just last one in terms of the progression of locomotive on parking.
Given that carload volumes kind of move positive year on year in the quarter I know last year was really a story of network disruption and network congestion kind of driving higher active fleets, but now that kind of carload trends seem to be stabilizing a bit is the message from the class ones that they actually need more fleet. The service more carloads or do they feel like fleets are relatively right size the level of kind of volume growth that.
We've been seeing in <unk> and maybe into the end of the year.
I think it's early to describe what we will see in 'twenty three from a volume perspective, but certainly I think with some of the elements. Why do you described in both terms of network velocity, improving and well time re dosing that could be a headwind to our parking.
<expletive> on the auto side, I think we've got enough tailwind to offset that with both the amount for mods and demand for services overall.
Thats.
I think up down or they are positive for us.
Okay, great. Thanks for the time.
Thank you.
Thank you and the next question comes from Alan Ruskin with Bank of America.
Hi, Adam on for Ken extra Thanks for taking my question.
Maybe just to drill down on the.
One of the last questions I believe you mentioned about you expected a third of the locomotive deliveries in 2022 to happen in the third quarter. So is that relatively in line.
Just give me a sense of that and where you expect in <unk>.
And maybe also if that was part of the mix.
Benefit into the queue. Thanks.
So my comment was with regards to the second half of the year and I said over 60% of the new locomotive deliveries would have happened in the second half with that Darius again, some give and takes between third quarter and <unk>.
Fourth quarter.
Yeah.
As you would expect we could see some variation here as.
We progressed through that.
Got it and then maybe just clarify so.
<unk> improving volumes, improving and also dwell time coming down a little bit. So net net as we think about 2023 should we be still be thinking.
Growth in the freight services business with demands built into that and maybe just any thoughts on mix and margins as well. Thanks.
So yes, we do expect growth in the service business. Despite of the dynamics you just described there.
And.
I think I'll go back to.
We continue to drive towards margin expansion.
Phil we're not strong position here to do so.
As we look at the coverage we've got going to next year. So that's a positive we've got strong digital growth as you see it.
And the numbers as well.
So yes, we do expect margin expansion going through 'twenty three and beyond.
Alright, thank you.
Thank you.
Thank you and the next question comes from finished <unk> with Raymond James.
Hey, good morning, everybody.
Morning.
Hey, John I was hoping we could hone in on the cost side of things real quick I think you mentioned that price cost equilibrium in the quarter. Just wanted to understand if that was a comment inclusive of the higher energy costs and if you have any more directional color on how operations are tracking in Europe and in light of all of that.
Yes, the comment was inclusive of all of our costs rising cost of goods sold basically.
Yes, we're at price cost equilibrium as we exit the third quarter.
With regards to I think.
And specifically on energy.
We're managing the best we can.
Sure.
Got a lot of alternative energy sources, and our facilities in Europe , but costs are rising quite a bit we're certainly happy to see some of the cost controls coming out and but we are in the same boat as all of our competitors are and probably from a locational standpoint, maybe a little bit better positioned than some of the countries that we're in.
But we're managing through it the best the best we can.
I'll just add our teams continue to work through contingency plans. So we're certainly looking at dual supplier sourcing that's something they've been looking at as we really prepare ourselves for an outcome.
It's still uncertain a lot of ways.
We have invested on.
Really moving some of our sites into lower energy and tasks to us.
Turning to invest on alternative energy sources there.
And also the cost side of that is like any other rising costs, we will look to price to cover it.
The manage our margins regardless of whether it's an energy spike or a metal spike or labor Spike, we're very focused on continuing to build those margins.
Okay. That's super helpful. And then just secondly for me I think norcal has been the model for just over a year at this point.
I'm just curious if you could maybe touch on how north coast performing against the original estimates maybe both on the top line.
Jean perspective, if that's possible.
So we're happy with the acquisition of Northcote. We're ahead of the pro forma the team continues to progress very well, we're certainly excited about the opportunity to share to drive growth beyond.
What we have planned for especially in the international markets.
That's something the team is very focused on it's about utilizing the footprint that we already have tablets in all the countries to be able to drive that product line Theres a couple geographies. They are really key for us here.
You'll hear more on some of the progress there on the following quarters.
Thank you.
Thank you.
Thank you.
And this concludes our question and answer session I would like to turn the call to question come back can you Vice President of Investor Relations for closing comments.
Thank you operator, and thank you everyone for participating today, we look forward to speaking with you next quarter. Thank you goodbye.
Thank you the.
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