Q4 2022 Westinghouse Air Brake Technologies Corp Earnings Call
Good day and welcome to the web Tech fourth quarter 2022 earnings conference call.
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I'd now like to turn the conference over to Kristine Kubacki, Vice President of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and welcome to <unk> fourth quarter 2022 earnings call.
With us today are president and CEO Rafael Santana CFO John Olin.
As senior Vice President of Finance John <unk>.
Today's slide presentation, along with our earnings release and financial disclosures were posted on our website earlier today and can be accessed on the Investor Relations tab on <unk> Corp Dot com.
Some statements, we're making are forward looking and based on our best view of the world and our business today.
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 ill.
Start with an update on our business my perspective in the quarter, our progress against our long term value creation framework and then John will cover the financials.
We delivered a strong fourth quarter, which is evidenced by strong sales growth.
An increase in adjusted earnings per share we.
We achieved this despite significant headwinds, including a volatile macro environment supply chain disruptions and negative FX.
Sales were roughly $2 3 billion, which was up 11% versus prior year.
Revenue was driven by strong performance across the freight segment, but partially offset by unfavorable FX.
Total cash flow from operations was $410 million, which brings year to date cash flow to over $1 billion, achieving our full year cash conversion rate of over 90%.
Overall, our financial position remains strong.
We continue to allocate capital to maximize shareholder returns by investing for future growth executing on our strategic M&A and returning cash to shareholders.
Total multiyear backlog was $22 4 billion.
$272 million year over year, and excluding the headwinds from foreign exchange backlog was up $680 million.
Or up 3% from last year.
We continued our progress against our long term growth strategies.
Overall, we had a strong finish to the year, despite a number of challenges.
As a result of the strong performance in our cost us in the future our board of directors reauthorized with $750 million share buyback and approved a 13% increase in our quarterly dividend.
We entered 2023 with strength and momentum across the portfolio and we're well positioned to continue to drive profitable 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 details.
As we look at key metrics across our freight businesses, we remain encouraged by underlying business momentum and a strong pipeline of opportunities.
North American carloads were down slightly in the quarter, but locomotive markings are down from the same time last year, despite lower freight traffic.
We continue to see significant opportunities in demand for modernization.
And new locomotives as our customers and vast endure aging fleets and they also place a greater focus on reliability productivity and fuel efficiency.
Looking at the North American railcar belt demand for railcars continue to show strength with industry backlog about 60000 cars.
Railcars in storage are below pre COVID-19 levels with about 18% of the North American railcar fleet in storage.
As a result industry orders for new railcars continues to improve and the industry outlook for 2023 is for about 40% to 45000 cars to be delivered.
Overall, we believe we have an opportunity to continue building significant long term momentum with growth in Modernizations and Youll locomotive sales in railcar belts and enrolling stock.
Internationally activity has also continued to show positive signs and we continue to execute on our strong pipeline of opportunities.
Finally, transitioning to the transit sector. The long term secular drivers are positive as the globe continues to increase investments in clean safe and efficient transportation solutions.
Next let's turn to slide six to discuss a few recent business highlights.
We recently secure additional tier four locomotive orders in North America.
These orders now total over 100 units to be delivered across 2023 and 2024.
We also signed two international deals in Asia, and South America to deliver new Rolling stock and also won two international long term service contracts in South America and in Kazakhstan.
Finally, <unk> Flex drive locomotive was recognized for sustainable innovation by the business Intelligence group and awarded commercial technology of the year by S&P Global.
Looking ahead at.
All of this demonstrates the strong pipeline of opportunities we continue to execute on <unk> well positioned to continue to capture profitable growth with innovative and scalable technologies that address our customers' most pressing needs.
Turning to slide seven I want to briefly touch on why we are strongly positioned to deliver a resilient and more predictable earnings and a volatile times.
We believe our demonstrated execution combined with favorable end markets and our leading technologies and solutions will enable us to remain resilient during times of increasing volatility.
This resiliency comes in part from our multiyear backlog and strong base of recurring revenues.
Our multiyear backlog of over $22 billion.
It provides visibility and support for both short and long term growth.
Similarly, our base of recurring revenues up 44% of total sales, which grew by three percentage points in 2022 provides high margin and stable earnings.
And finally, we have a track record of strong operating margin expansion across the business as evidenced by our ability to realize price deliver productivity and aggressively manage costs.
Now, let's turn to slide eight to.
To further illustrate the point of our ability to drive consistent predictable earnings I wanted to provide more color about our combined new locomotive and modernization deliveries in North America.
Over the past six years, North American new locomotive deliveries have been challenged due to weak carload graph <unk> and COVID-19.
Over that period the investment in the fleet has come primarily through modernization of locomotives, but still remains below historical replacement levels.
As we have discussed in past calls the core North American active mainline fleet of heavy haul locomotives is made up of roughly 16000 locomotives.
We have a replacement cycle of roughly 25 years per locomotive, we estimate the annual replacement rate overtime to be over 600, new locomotives and or Modernizations per year.
As you can see the industry has been operating at roughly half of that level for the past six years.
Yes, looking forward, we expect a growing eight four refreshment of that fleet.
And with record fleet age and growing up solid SaaS driven by next Gen technologies, along with the expectation of rail share gains versus truck.
And the need to reduce greenhouse gases by 2030 that the demand for reliable and efficient power is increasing.
As expected demand provides <unk> the opportunity to fill our existing capacity for delivery of new and modernized locomotive solutions in an effective and efficient fashion over the next several years looks.
Looking forward, we believe our execution combined with strength of our business, leading products and technology has resulted in <unk> being resilient through economic cycles, delivering more 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, Raphael and good morning, turning to slide nine our view of our fourth quarter results in more detail. We finished the year with another good quarter of operational and financial performance. Despite continue.
Challenges in foreign currency exchange still elevated input cost and persistent supply chain disruptions sales for the fourth quarter were $2 $31 billion, which reflects an 11, 2% increase versus the prior year great.
<unk> segment sales were very strong up 17, 1%, partially offset by unfavorable foreign currency exchange impacting sales in our transit segment.
Q4 sales were negatively impacted by unfavorable foreign currency exchange, which reduced our revenue growth in the quarter by four five percentage points.
For the quarter GAAP operating income was down $17 million driven by higher restructuring costs.
Adjusted operating margin in Q4 was 15, 3% down <unk> eight percentage points versus prior year, we expected our margin to be lower in the quarter on both a sequential and year over year basis. The key drivers of the year over year margin performance include unfavorable.
Unfavorable mix within business groups in particular within equipment and services due to strong sales of locomotives and Modernizations versus last year's performance some of which pushed from the third quarter to the fourth quarter and higher technology spend associated with investment in future growth and costs associated with the commercialization.
Of the first battery electric locomotives.
GAAP earnings per diluted share were <unk> 86.
Which was down 15, 7% versus the fourth quarter a year ago. During the quarter, we had pre tax charges of $32 million for restructuring largely related to our integration to <unk> initiatives to further integrate web Tex operations and to drive $75 million to $90 million of run rate savings by 2002.
One five.
We'll talk more about our progress on integration two point over in a moment.
In the quarter adjusted earnings per diluted share were $1 30 up 10, 2% versus the prior year.
Overall <unk> delivered another solid quarter of results demonstrating the underlying strength of the business and our ability to navigate through volatile macroeconomic conditions.
Turning to slide 10, let's review our product lines in more detail.
Fourth quarter consolidated sales were strong up 11, 2%, excluding foreign exchange exchange sales were up 15, 7% equipment.
Equipment sales were up 14, 1% from last year due to higher locomotive sales this quarter versus last year.
Component sales were up 10, 6% year over year, largely driven by higher OE railcar build.
Digital electronic sales were up a strong 34, 7%, which was driven by robust demand for onboard locomotive products and software upgrades along with revenue contribution from the strategic bolt on acquisitions have been the vision and Eric earlier in the year.
Our services sales grew 16, 6% versus last year the year over year increase was driven by higher sales from our larger active fleet versus last year and increased <unk> sales.
The superior performance reliability and availability of our fleet continues to drive increased customer demand for our services and solutions.
Across our transit segment sales decreased one 7% versus prior year to $637 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 nine 3%.
The momentum in this segment remains positive as Mega trends, such as urbanization and Decarbonization drive increased investments in green infrastructure.
Now moving to slide 11, as forecasted gross profit margin was lower driven by unfavorable mix adverse foreign currency exchange and higher input costs.
Really offset by increased pricing and productivity.
Pricing actions implemented to recover increased costs positively impacted our margins during the quarter mix was unfavorable, especially within our equipment and services businesses behind strong sales of locomotives in months.
Raw material costs, while down from recent highs over the last year were up again year over year.
Foreign currency exchange adversely impacted revenues by four five percentage points and adversely impacted fourth quarter gross profits by $21 million.
Finally manufacturing costs were favorable due to productivity gains, which were partially offset by higher transportation 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 12 for the fourth quarter as expected operating margin declined on both a GAAP and adjusted basis, driven by lower gross margins and increased investment in future technologies.
GAAP SG&A was up $8 million versus prior year due to higher net restructuring costs related to integration to <unk>.
Adjusted SG&A was $271 million, which was flat versus prior year, but down one three percentage points as a percentage of sales.
Engineering expense increase 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 decarbonization in digital technologies that improve our customers' productivity capacity utilization and safety.
Now, let's take a look at our segment results on slide 13, starting with the freight segment.
As I already discussed freight segment sales were strong for the quarter and GAAP segment operating income was $209 million for an operating margin of 12, 5% down two percentage points, which was impacted by increased restructuring expenses versus a year ago quarter.
Segment, adjusted operating income was $284 million down one seven percentage points versus the prior year.
The benefits of higher sales and improved productivity were offset by unfavorable mix within business groups and higher technology investments and costs associated with the commercialization of the first battery electric locomotives.
Finally segment backlog was $18 64 billion up $139 million or 0.8% from the end of Q4 last year on a constant currency basis segment backlog was up $344 million from last year.
Turning to slide 14.
Transit segment sales were down one 7% driven by the negative effects of foreign currency exchange.
Unfavorable foreign currency exchange impacted segment sales by 11 percentage points.
GAAP operating income was $63 million down to three percentage points, which was impacted by increased restructuring expenses versus the year ago quarter largely related to our integration two <unk> initiative.
Adjusted segment operating income increased by $7 million to $95 million.
Which resulted in an adjusted operating margin of 14, 8% up one two percentage points versus the prior year driven by strong productivity benefits from prior restructuring activities and disciplined cost management.
Finally transit segment backlog for the quarter was $3 8 billion up three 6% versus a year ago on a constant currency basis backlog would have been up nine 2%.
Moving to slide 15, I would like to briefly touch on our progress against our integration two <unk> initiative.
Recall that during our Investor Day last March we announced a restructuring program comprised of an estimated one time expenses.
135, and $165 million that would yield an incremental $75 million to $90 million of run rate cost savings by 2025. These savings were to be achieved through a combination of actions, which simplify streamline and consolidate parts of our operations.
A great example of the actions we are taking to drive these savings occurred in the fourth quarter, including two consolidation projects across our manufacturing footprint.
We'll eliminate a total of four facilities and a third project focused on streamlining and optimizing our north American distribution network.
With full year restructuring expenses of $46 million in 2022, we achieved an initial $5 million of savings during the year, we expect investment to increase more meaningfully in 2023 and are on track to meet our 2025 goals positioning web tech to drive multi year margin expansion.
Now, let's turn to our financial position on Slide 16, we had strong cash generation in the quarter.
Q4 cash flow was $410 million, bringing total cash for the year to $1 4 billion.
For our cash conversion rate of 93%.
Cash flow benefited from higher earnings, but was impacted versus last year by the proactive buildup of inventories ahead of our 2023 growth expectations and managing supply disruptions of critical parts.
Our debt leverage ratio at the end of the fourth quarter declined to two two times and our liquidity is robust at $2 $2 9 billion.
And finally, we returned a significant amount of capital back to shareholders in 2022 with $584 million returned through share repurchases and dividends.
And as Rafael mentioned, our board of directors approved a $750 million share buyback reauthorization.
<unk> increased our quarterly dividend of <unk> 17 per share up 13%.
As you can see in these results our financial position is strong and we continue to allocate capital in a balanced strategy to maximize shareholder returns.
Now moving to slide 17 quickly recapping the year overall the team delivered a strong year for all our stakeholders. Despite challenging dynamics, we drove revenue growth expanded our operating margins and generated robust cash flow.
The resiliency of the business and strong execution provides us a solid foundation and good momentum as we enter 2023.
And with that I'd like to turn the call back over to Raphael.
Thanks, Sean let's flip to slide 18 to discuss our 2023 financial guidance, we believe that the underlying customer demand for our products and solutions remains strong across our product lines and our backlog continues to provide visibility into 2023 and beyond we are committed to driving <unk>.
<unk> margin expansion into 2023, despite FX volatility is still challenging cost environment and continued investments in technology.
The team is committed to driving strong top line growth, while aggressively managing costs with these factors in mind, we expect 2023 sales of $8 7 billion to $9 billion, which is up nearly 6% at the midpoint and adjusted EPS.
To be between $5 15, SaaS and $5 55 per share, which is up 10% at the midpoint, we expect cash flow conversion to be greater than 90%.
Now, let's wrap up on slide 19.
As you heard today, our team delivered a solid quarter to finish out a strong year, we delivered on our full year commitments, despite a challenging and volatile environment. Thanks in large part to our resilient installed base World class team innovative technologies and our relentless.
<unk> focus on our customers.
These results were in line with our five year outlook, we provided at our Investor day last year.
With strong momentum across the portfolio increased visibility through our multiyear backlog and relentless focus on continuous cost improvement Wap tax well position to drive profitable long term growth and maximize shareholder returns with that I want to thank you for your time this morning.
I'll now turn the call over to Christine to begin the Q&A portion of our discussion Christine.
Thank you Rafael 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.
We will now begin the question and answer session.
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At this time, we'll pause momentarily to assemble our roster.
The first question today comes from Allison <unk> with Wells Fargo. Please go ahead.
Hi, good morning.
I wanted to turn to the services outlook.
As an uptick in locomote and just wondering if you could give us a little bit more context on how impactful youre thinking about that for 'twenty three days it took about playing off of that.
I'm kind of thinking bigger I know, there's a lot of moving parts in that in that business.
Now.
Ken was the comment specifically with regards to services.
Yes, yes.
Alison.
Certainly when you think about.
North America carloads being down year to date, so we're continuing to see demand for both March and Youll locomotives I think a lot of that is really tied to driving productivity driving efficiency driving reliability and Dakota piece is certainly an element. If you think about the capex for <unk>.
Class ones in the U S. We see that up for the year.
So dose.
Those are potentially some of the headwinds could come with.
I think lower carloads, right now and we're really planning for flattish.
In terms of that context, but I think what's most important it's really the elements of the backlog coverage that we've got for the year.
So I had to have what we had a year ago, probably one of the highest 12 month backlogs. We've had since 2019, which really just further strengthens our position to delivering 23 and <unk>.
Last year was signed a number of multiyear orders I think for both new locomotives, but for Modernizations as well so just.
This provides additional visibility not just into 'twenty three but in the case of models all the way through to 25% for new locomotives beyond that so we have a strong pipeline of deals and we continue to see good momentum in both the pipeline of deals in North American internationally.
No that's great and then just a point you mentioned sort of that replacement level.
Hey, Luke.
Under the assumption that you probably wouldn't reach that level this year, but how quickly I mean, ESG targets and so forth is it fair.
About 24, 25 that you think you could reach that sort of run rate.
Replacement, there or just any thoughts there on how you think this block towards that level.
Alison I wouldn't speculate as to how that will.
Progress, but I think we're certainly still coming from the trough and so when you look at some of the elements of the age of the fleet continued investment.
To make sure you have productivity, but you also drive reliability on that fleet and the elements of ESG I think we have a lot of opportunity here to help customers bridge that existing power into cleaner policies. So it comes with upgrades and then incorporating technologies like hybrid and things like that so.
I think we're well positioned on that regard.
Great. Thank you.
Thanks.
The next question comes from Jeff <unk> with Stephens. Please go ahead.
Thanks, I wanted to ask about freight margins I know you were expecting negative mix in some sequential weakness there, but the magnitude of the weakness was a bit surprising.
Especially when you look at the different businesses within freight digital electronics and services revenue was up pretty significantly on a sequential basis and equipment revenue was actually down a bit. So I was wondering if you could give a little bit more color on the mix impact you saw maybe.
Within those different businesses and I know you called out the tax costs as well so maybe a quantification of the headwind you saw there.
Hey, Justin this is John .
So again, let's step back and the full year guidance, we expected it to be up in 2022, and we talked about margin growth in the first half and margin contraction in the back half, which you had mentioned justice and Thats exactly what happened in the first half was up one four percentage points in the second.
<unk> was down 0.7 points in the fourth quarter was right in line with.
In the second half being down seven tenths of a point. So overall fourth quarter was down eight tenths couple of things driving that is versus the unfavorable mix that was the biggest driver of the reduction and just the net was business that was mix within our business groups.
<unk> had mentioned between our business groups right and some of our higher margin products did grow at a faster rate, but that was offset by unfavorable mix within the groups and in particular that was within the equipment and services group behind very strong sales of locomotives are modernizations versus last year and to put it in perspective, we sold 30.
Percent of all combined logos in mods.
Were sold in the fourth quarter, so that put that pressure on it and if you recall just in the third quarter makes the margins came in a little bit better than what we had anticipated and at that time, we talked about some of our international local Mod Dill.
Deliveries being pushed from the third quarter to the fourth quarter. So that was why it was a little bit more pronounced maybe than was expected. So that was that was a big piece of it. The other piece was really our continued investment in the future of <unk>.
Our business and de Carbonization. So part of that was the technology spend and as you can see on the face of the P&L that was up $8 million on a year over year basis.
And again that is our investment in hydrogen and battery electric as well as digital.
And the other piece with regards to our investment in the future where costs associated with the commercialization of the first battery electric locomotives. So we are about a year from now will be shipping out the first battery electrics, we couldnt be more thrilled we're excited about that and in the fourth quarter, we had costs and as you remember we wouldn't have had those same cost in 2021.
So that's what's driving the negative variance on those.
Overall, we're right, where we expect it to be on a full year basis and.
And certainly looking forward to moving into a strong 2023.
Okay. That's helpful and is there a way to quantify the costs related to the battery electric.
Commercialization that you referenced.
I would say generally overall half of it was mix and the other half was a combination of the investment in <unk>.
Both technology as well as the commercialization costs.
Got it got it very helpful. And then on the 2023 guidance, our buybacks assumed within that outlook and maybe John you could give a little bit of color on the expected quarterly cadence of that guidance because to the point you. Just made we can see some fluctuations based on the timing of.
<unk> deliveries in March.
First just the first question is is the use of the generation of cash that we expect to have in 2023.
As part of our included in our guidance.
Now you had mentioned repurchases again that could come in the form of acquisitions that could come in the form of share repurchases. It all depends on if we have the right M&A will invest it that way, but the cash generation is contemplated in the guidance that we provided this morning.
The second question is when we move to revenue and margin cadence.
I think the most important part is on a full year basis, we expect our operating margins to be up moderately versus 2022 margins of the $16 two and to be generally in line with our long term margin growth framework that we presented at our Investor day about a year ago with Justin.
So okay, let's talk about revenue and margin guidance for 2023, I want to start with 2022, because it certainly plays into what we expect in 'twenty three.
All through 2020 to re characterize our revenue and margin cadence is higher margin growth in the first half and higher revenue growth in the back half and that's exactly the way it played out.
In 2023, we expect to see the opposite cadence that we had in 2022. Consequently, we expect higher revenue growth in the first half versus the second half of 2023.
And we expect our full year margin growth to come largely in the second half of 2023 and as you can imagine the drivers of this are the cadence that we continue.
The C with Im sorry, the driver or the key as a cadence.
Is the mix impact of our international locomotive sales and Justin as we talked about it they were pretty pronounced in the back half of 2022, and we would expect more mixed headwinds in the front half of 2023.
As we execute on some of those international locomotive sales and then the second reason is that we're comping against higher 22 margins in the first half and stronger 22 revenue growth in the second half.
Great I appreciate all that detail thanks for the time thank.
Thank you Justin and thank you.
Your next question comes from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks, good morning, guys.
Any any color on the new tier four local orders is that one rail multiple rails and then can you say who it is with them.
How do you expect that order to be split out over the next couple of years and then maybe just separately as they think about like markets any update here on on ECP brakes. It's in the news a little bit how you think about that opportunity.
Scott I think first I mean, we continue to see the amount for both for new locomotives and for modernization.
You had highlighted on previous calls.
So we've been able to secure at this point over 100 units that will be delivered between 2023 and 2024.
Really a function of us working through the supply chain here, but that's how we see it.
Playing out.
We continue to look at certainly I think expanding.
Some of the penetration of some of the products that we have I think with specific what breaks that's something we've talked earlier on during when we start the integration. So it's something we're certainly looking at incorporating the new products.
It's certainly an opportunity that will continue.
To look at it.
Okay.
Okay, and then as I think about last year and now your guidance for this year.
Better revenue growth is sort of coinciding with maybe some margin pressure.
And then sort of when revenue growth slowed some some better margin is there something we can do to sort of get both at the same time.
Good revenue growth and margin improvement sort of coinciding with each other I'm. Just curious how you think about that over the next few years well I'll just start with I think we're well positioned to both revenue and margin expansion going into 'twenty, three and I think what gives us all.
I'll call greater confidence than maybe before you even is the fact that we have the backlog coverage that goes not just into 'twenty three ticket saw something on my comments when it comes down to visibility into 'twenty, four and 'twenty five.
So we believe our guidance here is pretty prudent in the light of all the headwinds we have in the past couple of years, So we feel pretty.
Really committed to be driving here strong mid single digits up on the revenue line and double digits on EPS.
Okay. Thank you guys.
Thank you.
Yeah.
The next question comes from Chris Wetherbee with Citigroup. Please go ahead.
Hey, Good morning. This is Matt on for Chris. Thanks, So much for taking the question.
If you guys could just touch a little bit more on how you're evaluating acquisition opportunities and sort of how we should be thinking about the year in 2023.
And if you think sort of you know in 2022, if there is any.
Comparable metrics on that front.
So you put the puts and takes on how.
How are you thinking about that moving forward into this year.
Hi, Matt This is John .
Just in general.
When we look at capital allocation.
We are very interested in doing strong strategic bolt on M&A that is accretive to overall margins. So that being said first if we don't have that we're very very happy to return the cash to our shareholders in the form of share repurchases and that's exactly what you saw in 2022.
We had done three acquisitions.
Totaling about $90 million of investment and then we returned $473 million in share repurchases and then another 100.
Plus in dividends, but as we look forward, we have a very robust process that we follow that we look at all the opportunities that we have we certainly have areas of focus that.
We're pressing on to largely in the digital and some of the new technologies that will be the future of rail.
But we are very focused on on garnering.
Strong acquisitions and.
We're working hard at it.
Awesome. Thanks, so much for that detail.
And just.
Following up on a little bit of a separate topic just touching on you know rail volumes in general I know that you said they came in a little bit softer in the fourth quarter and that potentially weighed on business in some aspect.
If you had any sort of comments regarding rail volumes.
You know a little bit of a weaker freight economy in the first half of this year and if you think that that you know if theres any risk associated with that 2020 guidance.
You guys issued.
So I think I mean, you got to look at all and I think we're seeing a pipeline of opportunities both strong in North America and internationally I think quarter to date, we've made more progress in some key geographies.
Some that I would highlight to is certainly counts extend in Africa Youll see us continue to expand on both new locomotive Modernizations and service orders.
We have a number of projects under discussion in Asia, where the volume dynamics continue to be a positive in.
In mining the demand continues.
Similar to what I said on previous soft quarter, our seeing services growing faster than equipment.
North America, I think despite of carloads being down.
We continue to see interest in demand on both Modernizations and to new locomotives in transit I think the infrastructure spending continues Gulf.
Governments are continuing to invest our Oems have very strong backlogs, we will see some of that converting to orders for our transit business and will continue to increase investment into technology. So when you think of battery electric.
I think we're excited about some of the opportunities there first deliveries happening next year and.
We're continued to make progress on that as well.
Thanks, so much for the detail.
Thank you.
The next question comes from <unk> <unk> with Jefferies. Please go ahead.
Good morning.
You highlighted $5 million of savings realized this year as part of integration to Plano could you provide any color on how youre thinking about these savings into 2023.
Yes, so number one integration to <unk>, we just launched about a year ago, and we couldnt be more pleased.
We spent or invested $46 million little bit higher than we first anticipated when we put the program together, which is great news and that our teams got the projects off announced and set quicker than we thought and so we would expect the savings to be garnered a little bit ahead of our schedule as well.
The first year of $5 million, we feel great because a lot of those projects didn't start until later in the year and we would expect a pretty quick ramp on that because as we exit 'twenty 2025, we will be at the run rate of $75 million to $90 million of savings. So that's just a couple of years away. So we would expect a pretty sizeable.
<unk> increased both in 'twenty, three and 'twenty four leading up to 25.
Thanks, and then one of your competitors recently took a large impairment charge on Lula and a lower outlook for locals and Matt could you maybe talk about the competitive environment and how youre thinking about market share gains.
Yeah.
On that one we continue to really focus on our partnering and creating value for our customers and that comes with a really innovative solutions that drive value for them and drives value for us as well as a result, I think we're well positioned to drive long term profitable growth for the business.
We will not comment on the specifics of.
Any announcements here at this point.
Okay. Thanks for taking my questions.
Thank you.
Your next question comes from Jerry Revich with Goldman Sachs. Please go ahead.
Yes, hi, good morning, everyone.
Okay.
I was really impressed with the transit performance in the quarter, both from margins and bookings standpoint can you just talk about.
Your expectations for margins in 'twenty three for that segment.
Particular, and if you could just give us color on.
What drove the bookings and the margin profile of what's coming in the book now.
Gary a couple of tanks number one we do expect both margin expansion across both segments and revenue expansion on both segments up for the year on transit and specifically on the fourth quarter I think there's benefit from really catch up.
Of the quarter.
Some of that was an element of supply chain disruptions, which we've had there was suddenly the cyber incident, which.
<unk> had a significant impact there in the third quarter and but we also have had what I'll call underlying growth for the business the fundamentals for the business for grudge. The book to Bill is above one <unk>.
<unk> backlog on a current basis is about 14% our multiyear backlog on constant currency basis above nine and at the same time, while we're pleased with the progress I think we still have significant work ahead to really simplify the footprint.
Farther improve margins.
We will have variation quarter to quarter, but we are committed to continuing to expand margins here and take action to drive profitable growth in the business.
Great.
Okay can I ask about mods, you folks had been growing deliveries.
Like mid teens for a bit here I'm wondering in 'twenty three as you ramp up.
Union Pacific deliveries does that growth rate for modular deliveries accelerate.
Further and can you remind us from a capacity standpoint.
What's the constraint to ramping up production, how much would you be able to ramp up with your existing footprint versus needing to make significant investments for mod specifically thanks.
Jerry modest growing double digits.
The good news there is the element of multiyear orders that give us the ability in this case here all the way out to 2025.
So it feel strong about that and when when you have that visibility are actually really able to translate that into what I'll call efficiencies our cross.
The supply chain, which should drive both quality of the product so.
<unk> performance being up.
Elements, you are able to translate that into also I'll call economies that you're able to pass along to your customer and I don't see it necessarily constraints tie to our overall capacity. The one thing I would highlight to you I mean, we're suddenly continue to operate in a very.
Challenging supply chain environment.
There are some areas that have improved but electronics I think scenario that we continue to see bottlenecks there and some of those will extend throughout the first half of this year at least thus far so we look at it. So I think that's that's the element to keep in mind.
I appreciate the discussion. Thank you. Thank you.
The next question comes from Ken <unk> with Bank of America. Please go ahead.
Great Good morning.
If I get two clarifications I guess before I jump in is the is this a legacy contract on international locomotives or is that just structurally lower margins and then mix. John you mentioned I think three times already that the mix within a category like equipment is that because you have lower margins on mods versus new equipment or is there something else that I'm.
Missing.
If I if I can understand those too.
Ken I think that the first question is just the just the cadence of the way the orders unraveled.
So we've got various orders come in various international locomotives being built for around the world and we have a period of.
Of delivery in the back half of 'twenty two in the front half of 'twenty three that's a little bit lower margin and we're seeing some of that progress through the through the system.
Other than that the book is typically lower margin for both <unk> and new locomotives versus the company average so when we talk about things that such as an increase of a strong increase in the volume related to that.
It translates into lower margins within the groups that how's those so I called out equipment and services equipment is where we book new locomotives and the services business kind of houses the modernizations so with those growing.
Very strong in the fourth quarter.
That brought those margins down in those groups and.
That's what drove the mix on favorability.
I got that Jon I, just thought you meant within the group, but if you just mean, one group being equipment versus services.
And I get that.
And then Rafael you talked about the 600 kind of run rate per year, I think you've got a question on that earlier.
Is there any reason you don't give number of mods or new builds in order to track, how you're doing versus that historical level. Obviously, we know when it was zero it it becomes irrelevant, but as it scales and gets larger is there still a competitive differentiation and giving that number to understand when we're getting back toward a normal run rate.
As we get into the few hundred in that mix.
We think there are some especially when it comes down to a number of customers that we have out there. So we just see this as an element of.
Competitive.
Nature.
We do not want to necessarily disclose on the water side I think we're trying to really make sure we provide greater visibility in terms of what.
While we are seeing in terms of.
<unk> special with regards to Modernizations and also new locomotives through that process. So.
Does that answer your question, yes, so you're saying even to break it out even to put them together, both mods and logos it still it okay.
The way to think about it today to a large extent, we're utilizing the same supply chain for that so a lot of the plants that were originally you'd really around just dedicated to new units. I mean, we've got no now really able to flex between those two so I think it makes sense to us.
Those two together and just I think through that process gives you at least visibility here in terms of.
How utilization looks like for.
For the company.
And then maybe just last one on China you had a question before about the progress on the expense cost specifically in 'twenty three right. Obviously, you had 46 million are you not talking specifically to a number and kind of what's in that guidance. Just so we can understand and then you talked about two plants being shut down or I think it was four plants. You mentioned what are the are there big <unk>.
<unk> is coming in 'twenty three that we can kind of look at as far as where you get those synergistic gains yes.
Ken So the overall program, we're expecting a.
One time spending of 130 fiber investment of 135 to 165, we saw a $46 million in 2022, we would expect 2023 to be higher than that and then we start the taper off in 'twenty four in terms of our investment and at the same time, we would expect to see those savings.
Escalate now with a $43 million of restructuring investment that we made in 2000 $20 million to $32 million of a team in the fourth quarter and again, we talked about the teams have been very good at are lining up the projects and.
An example of those three that we were doing two would take out four facilities. So they were both in Europe and I'm looking at streamlining some of the network their manufacturing network and then the distribution in North America.
So that.
They were kicked off in the third quarter, that's when a lot of the reserves are set up and will begin to see the savings in 'twenty, three and 'twenty four from those.
And are those in SG&A and corporate costs or <unk>.
No no no.
Sorry, maybe we're not talking to the same thing the $46 million is integration to point all savings.
And.
They're not in our adjusted numbers, they're in our GAAP numbers and then we've got a bridge in the financials that show the bridge between adjusted and.
And gap and that's where this this investment is recorded.
Afflicted person.
Tom or film John Thank you.
<unk>.
The next question comes from Matt Alcott with Cowen. Please go ahead.
Good morning. Thank you first just a quick follow up to the competitive landscape question earlier.
Historically, how much have you guys done in the line of upgrading non Wap deck locomotives.
And do you think there are opportunities there going forward.
We do have opportunities there.
We have I'll call. It started a process around those and were currently upgrading units are non <unk>. So that's certainly an opportunity that we look at it.
We look at it not just <unk>.
In North America, we're also doing the same internationally.
Yeah.
That's good to know Raphael speaking international I think last month.
Siemens announced that 1200 locomotive order with Indian Railways is that something you guys would have bid on and just generally any update on the India opportunity for you guys will be helpful.
Significant infrastructure effort, there and I think they just raised their capex for that for the next fiscal year to 10 trillion rupees or $120 billion.
John and I had the opportunity to be in India end of last year and certainly.
See I think growing momentum in terms of the opportunities there as you know we have.
Long term agreements.
We have at this point delivered over 500 units of that agreement I think there is good opportunities here to a foreigner built on that momentum.
The amount for more transit has a very significant footprint and I think one that we can take advantage. We've been I think earlier into the market from that perspective, when it comes down to evaluating opportunities for the business not something we we do always under PUC on opportunity to step into a market.
With a differentiated product.
We'll certainly do that.
That's something that.
We will continue to evaluate further business there certainly.
From our customer shy in various parts of the world a request that we look at some of those opportunities.
And then the ordinary Siemens that was.
For electric.
Locomotives, we are currently not in the market.
Yes.
And John I'm, sorry, if I missed it.
The sequential decrease in the total backlog.
This quarter and last quarter did you did you say anything about that I know, it's not significant but it.
Nonetheless, a decrease.
Yes.
It's just the.
Our technical term as Lumpiness of backlogs you know when we look at 2022, we had a very strong year in overall backlog. So they were both up.
But if you look at it on a quarterly basis. There is a lot of volatility. So the first half of the first quarter in 2022 were up a half a billion $600 million in the second quarter, and then down in the third quarter about four to five and down 500 in the fourth so it's just a nature of how the backlogs come in and go.
And what we're comparing to and lap and so youre always going to see a fair amount of volatility from quarter to quarter, Matt One thing Scott I think it's very important that it keeping in mind that the falling when night, yet orders Dr. Culver now three years of hatch.
Youre not going to see those repeat itself every year and we've got quite a bit of Dallas, which actually provides I think a lot of the visibility that I described to you guys. So I would be careful on looking on I'm going to call separate quarters basis, while we have as I'll call stronger coverage than probably we've had since 19 to be.
Honest as I look into the next 12 months.
And in a specific when it comes down to modernization that goes out now to 25% and for new units I mean, as we have some long term.
Agreements I mean, some of those goes way out there, especially in the case of India.
Yeah makes sense. Thanks Raphael Thanks, John Thanks for listening thank you.
Yeah.
The next question comes from Dylan Kelly with Morgan Stanley . Please go ahead.
Great. Good morning. Thanks for the question I just wanted to play Devil's advocate for a second on the kind of new local outlook I think a lot of the factors that you mentioned in terms of elevated fleet age right desire to kind of increase fuel efficiency they've been precedent in the market for a while so in terms of the visibility that you have to get to that kind of above 600 unit milestone you laid out.
Most of my short question is like.
Why is this time different right are you having conversations with class ones that are giving you visibility to that number or what's actually driving the confidence in reaching that milestone.
So I'll go back to my earlier comments I'm not going to speculate on how the recovery our volume I had it looks like what I can tell you is we've got greater coverage than we've had in the business, especially if I go back to 2019 and that's represented by the backlog we have.
Ottar pointed we wanted to make there is that we're still at trough levels and if you connect that to the Asia. The fleet. If you connect that to the elements of how you continue to drive productivity. If you start thinking about obsolescence of the.
Components into that fleets.
To get to what the component of the ESG I think you've got a lot of opportunity here to continue to build out run that momentum that's really.
The point that we want to make.
Gotcha. Thanks Rafael.
Ask one more on the digital growth in the quarter It was super strong.
M&A tailwind in there as well, but it was considering it was one of the last vertical is going to recover post COVID-19 and all the class ones that pushed out investing in that area.
So you're really materializing in your own revenue profile.
If you want us to move barricades for class, one Capex and real volume next year, just how durable that digital growth be.
Considering that that investment had been pushed out to the right for so long on the part of the class ones.
I'll start with double digits.
Last year, we see the opportunity to drive double digits again for this year, we had about $1 billion in orders for additional electronics in 2022.
This is well number one a significant increase versus the year before.
And book to Bill was really us above very positive in fact for 'twenty, one and 22.
One of the highest between our businesses. Some of these are multiyear agreements so no different than the past couple of years, we need to drive compatibility of orders in 'twenty three.
To cover that North America continues to improve internationally the pipeline continues to be very strong.
Some progress made year on recurring revenues. So I think we've talked about that a little bit until the business. We've got some additional work to be done there and supply chain has improved the back into the fourth quarter here that I think some of the goodness you saw but as I mentioned I think we're continuing to see tough dynamics and supply chain.
First half of the year in terms of chip shortages.
Semiconductors and some other ones.
Great appreciate the time.
Thank you.
Yeah.
The next question comes from Steve Barger with Keybanc capital markets. Please go ahead.
Thanks.
On the guidance slide it looks like you expect growth in all the categories. You list are those rank ordered by growth rate and do you expect anything in the portfolio will contract in 2023.
They are not listed in rank order, we have talked of at Investor day that we do expect equipment to be the fastest growing over the next several years, we certainly saw that in 2000.
22, but they are not listed in rank order Steve.
Can you give us any more color around the growth rates that you do expect for those categories.
No we don't we don't break out that.
We've talked about.
The $8 7 billion to nine is growth of 4% to 8%, we expect that to be achieved through both our freight segment as well as transit to both be up in.
In revenue and in margin, but we don't break out the individual pieces of that.
Can you tell us how much of the 6% projected growth is price.
No no. We don't we don't have that broken out we don't typically break that out as well.
As we look to next year, we got a lot of uncertainties and we feel very good about the overall emerging growth or revenue growth at the midpoint of 6%, but if I was to add color I mean of course double digit growth year into the services model is really being a key driver of that's on equipment.
So I mean, we'll continue to see the momentum internationally I think the question, it's really more around the speed in which you convert some of these orders, but there is certainly a very robust pipeline there and digital I just stop made some other comments here.
So overall I think we have the opportunity here to drive both revenue and margin expansion for our businesses and that's what we're focused on and that's really across the board.
Thanks, Raphael and just just to make sure we're thinking correctly about the cadence comments, if I assume first half great margins similar to <unk> and transit margin around the average of last year. It looks like first half EPS will be down somewhere mid to high single digit versus 2022 is that how youre thinking about that first half progression.
Steve we are not providing.
Quarterly EPS guidance so.
Suffice to say that during 2023, we expect higher revenue growth in the first half.
Versus the second half and we expect our full year margin growth to largely come in the second half of the year.
Understood, but given the mix issues that you're talking about should we assume that the first half rate margin is similar to <unk>.
But.
No, we're not providing that look.
Okay there'll be more mixed pressure in the first half and that will result in.
More margin growth coming from the second half of the year.
Got it thanks.
Thank you Steve.
This concludes our question and answer session I would like to turn the conference back over to Kristine Kubacki for any closing remarks.
Thank you operator.
You everyone for your participation today, and we look forward to speaking with you again next quarter.
Okay.
Okay.
The conference has now concluded thank you for attending today's presentation.
You may now disconnect.
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Okay.