Q1 2023 Westinghouse Air Brake Technologies Corp Earnings Call
[music].
Good morning, and welcome to the web check first quarter 2023 earnings conference call.
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I would now like to turn the conference over to Chris Kristine Kubacki, Vice President of Investor Relations. Please go ahead.
Thank you operator.
Everyone and welcome to <unk> first quarter 2023 earnings call with US today are president and CEO Rafael Santana CFO , John Olin and senior Vice President of Finance John Masterless.
Today's slide presentation, along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on our 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 our business today.
For more detailed risks uncertainties and assumptions relating to our forward looking statements. Please see the disclosures in our earnings release and presentation.
We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics.
I'll now turn the call over to Rafael.
Thanks, Christine and good morning, everyone, let's move to slide four I'll start with an update on our business my perspectives on the quarter and progress against our long term value creation framework and Dan John Who'll cover the financials, we delivered a strong start to the year, which is our desk by robust sales and earnings per.
But all.
We achieved this despite a volatile yes.
Certain macro environment.
Sales were roughly two points your $1 billion.
Which was up 14% versus prior year.
Revenue was driven by strong performance across the freight and transit segments, but partially offset by unfavorable FX.
Total cash flow used for operations was $25 million.
Overall, our financial position remains strong.
We continue to allocate capital to maximize shareholder returns by investing for future growth executing on strategic M&A and returning cash to shareholders.
Total multiyear backlog was $22 3 billion.
Down 2% year over year.
And excluding the headwinds from FX backlog was down four tenths of a percent from last year.
12 month backlog again grew to a new high of $6 9 billion.
Overall, we had strong start to the year, the underlying strength and momentum of the business is avnet and we're well positioned to continue to drive profitable growth, even with uncertainty and volatility in the global economy.
We remain confident in our ability to execute on our rigorous operating principles as we continue to deliver for our customers and make progress against our long term growth strategies.
Shifting our focus to slide five let's talk about our 2023 and market expectations in more detail.
As we look at key metrics across our freight businesses, we remain encouraged by the underlying business momentum and our robust pipeline of opportunities.
North America carloads were down in the quarter, but locomotive markings are slightly lower than the same time last year, despite lower freight traffic.
We continue to see significant opportunities in the amount for modernization and new locomotives as our customers invest in solutions that continue to drive reliability productivity and fuel efficiency.
Looking at the North America railcar build demand for railcars continue to show strength.
As a result, the industry outlook for 2023 is for 40% to 45000 cars to be delivered.
Overall, we believe we have an opportunity to continue building significant long term momentum with growth in modernization and locomotive sales in railcar belts and in digital solutions.
Internationally activity also continues to show positive signs and we continue to grow our installed base of locomotives around the world.
Finally, transitioning through the transit sector. The secular drivers remain in place as the need for clean safe and efficient transportation solutions continues to increase across the world.
Next let's turn to slide six to discuss a few recent business highlights.
We recently signed a strategic order for new locomotives in Brazil, with CLI, which results from the growing vast Mets in Brazil's infrastructure to support growing rail volumes.
We also secured a key order for our new Ultra class mining drive system, specifically targeted for high altitude applications.
Reflecting on the resilience of the business the strength of our balance sheet.
And our ability to generate strong cash flow Moody's recently upgraded <unk> credit rating.
And finally, our team in Asia achieved a significant milestone by delivering 500 locomotives in a 1000 unit order to Indian Railways.
As one of the region's largest rail equipment suppliers the team house position <unk> and our customers for growth for years to come.
All of this demonstrates the underlying momentum in the business the team's relentless focus on execution and the strong pipeline of opportunities we continue to deliver on.
<unk> is well positioned to continue to capture profitable growth with innovative and scalable technologies that address our customers' most pressing needs with that I'll turn the call over to John to review the quarter segment results and our overall financial performance John Thanks, Rob.
And good morning.
Turning to slide seven I'll review, our first quarter results in more detail.
We started the year with another good quarter of operational and financial performance. Despite continued challenges in foreign currency exchange and still elevated input costs.
Sales for the first quarter were $2 $109 billion, which reflects a 13, 9% increase versus the prior year sales.
Sales were driven by very strong freight segment sales, which were up 18, 5% from last year.
Q1 sales were once again negatively impacted by unfavorable foreign currency exchange, which reduced our revenue growth in the quarter by two nine percentage points.
For the quarter GAAP operating income was up $37 million driven by higher sales.
Adjusted operating margin in Q1 was 16, 4% down <unk>, one percentage points versus the prior year as we had expected the.
The benefits of higher sales were offset by a less rich mix of sales between business groups and how your next generation product development costs.
GAAP earnings per diluted share were <unk> 93.
Which was up 16, 3% versus the first quarter a year ago.
During the quarter, we had pre tax charges of $9 million for restructuring, which was related to our integration to <unk> initiatives to further integrate web tech operations and to drive $75 million to $90 million of run rate savings by 2025.
In the quarter adjusted earnings per diluted share were $1 28 up 13, 3% versus the prior year.
Overall, we have tech delivered another solid quarter of results demonstrating the underlying strength and momentum of the business and our ability to navigate through volatile macroeconomic conditions.
Turning to slide eight let's review our product lines in more detail.
First quarter consolidated sales were very strong up 13, 9%, excluding foreign currency exchange sales were up 16, 8% equipment.
Equipment sales were up 43, 4% from last year due to higher locomotive sales this quarter versus last year.
Component sales were up 21, 8% versus last year, largely driven by higher OE railcar build and an increase in our market share due to product availability.
Along with increased demand for industrial products.
Digital intelligence sales were up 22, 2%, which was driven by robust demand for onboard locomotive products and international PTC, along with revenue contribution from the strategic bolt on acquisitions of Bina vision and ARINC last year.
Our services sales grew six 2% versus last year. The increase was driven by higher sales from a larger active fleet, partially offset by the timing of <unk> deliveries in the year.
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 increased three 8% versus prior year to $628 million absent the impacts of foreign currency exchange transit sales would have been up nine 6%.
The momentum in this segment remains positive as secular drivers such as urbanization and de carbonization accelerate the need for investments in green infrastructure.
Now moving to slide nine as forecasted gross profit margin was slightly lower driven by a less rich mix unfavorable foreign currency exchange and higher manufacturing costs.
Exxon was unfavorable driven by strong sales of locomotives in our equipment business.
Raw material costs, while still elevated are largely flat on a year over year basis.
Foreign currency exchange adversely impacted revenues by two nine percentage points.
And adversely impacted first quarter gross profits by $14 million.
Finally manufacturing costs were positively impacted by productivity gains and higher absorption.
We offset by higher digital development 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 10 for the first quarter GAAP operating margin improved zero two percentage points to 12, 6%, while adjusted operating margin declined slightly to 16, 4%.
GAAP SG&A was $263 million and adjusted SG&A was $258 million.
Both of which were up versus prior year, but down as a percentage of sales.
Engineering expense increase from last year According to plan.
And was flat as a percentage of sales at two 3%.
We continued to invest engineering resources and current business opportunities, but more importantly, we are investing in our future.
Industry leader in de Carbonization, and digital technologies that improve our customer's productivity and capacity utilization and safety.
Now, let's take a look at the segment results on slide 11, starting with the freight segment.
As I already discussed freight segment sales were strong for the quarter up 18, 5%.
GAAP segment operating income was $227 million for an operating margin of 14, 5% of 0.2 percentage points versus last year.
Segment, adjusted operating income was $297 million up 14, 7% versus the prior year.
Adjusted operating margin in the freight segment was 19, 8%.
Adjusted operating margin was down six tenths of a percentage point on a year over year basis, the benefits of increased sales, including fixed absorption and lower SG&A as a percentage of revenue.
More than offset by unfavorable mix and higher next generation product development costs in our digital group.
Finally segment backlog was $18 $4 billion.
Down three 5% from the end of Q1 last year.
On a constant currency basis segment backlog was down two 3%.
The year over year reduction in backlog was driven by lapping last year's multiyear order for Modernizations.
Now turning to slide 12 transit segment sales were up three 8% driven by higher aftermarket sales, partially offset by negative effects of foreign currency exchange.
Unfavorable foreign currency exchange adversely impacted segment sales by five eight percentage points.
GAAP operating income was $69 million up six 2%.
GAAP operating income increased as a result of higher sales improved mix from aftermarket sales and benefits from our integration to point or activities, partially offset by higher restructuring costs.
Adjusted segment operating income was $83 million, which was up 12, 2%. This resulted in an adjusted operating margin of 13, 1% up 0.8 percentage points from last year.
Finally transit segment backlog for the quarter was $4 8 billion.
Up six 3% versus a year ago on.
On a constant currency basis backlog would have been up nine 3%.
Now, let's turn to our financial position on slide 13.
Q1 cash used for operations was $25 million, while cash flow benefited from higher earnings we are continuing to invest in the business. This growth, which is driving working capital higher in particular receivables and inventory.
Bite that we continue to expect greater than 90% cash conversion for the full year.
Our debt leverage ratio at the end of the first quarter declined to two three times versus the prior year and our liquidity was robust at $2 billion as.
As Raphael mentioned during the quarter Moody's upgraded our credit rating, which reflects the strength of the balance sheet and the outlook for continued strong cash flow.
With the Moody's upgrade web Tech is rated investment grade across all three rating agencies.
And finally, we returned a significant amount of capital to our shareholders in the quarter with.
With $209 million returned through share repurchases and dividends.
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 with that I'd like to turn the call back over to Rafael.
Thanks, Sean let's flip to slide 14 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 good visibility into 2023 and beyond.
The team is committed to driving strong top line growth, while managing costs were.
We're also committed to driving adjusted margin expansion in 2023, despite FX volatility.
The old challenging cost environment and continued supply chain disruptions.
With these factors in mind, we are reiterating our previous guidance. We continue to expect 2023 sales of $8 $7 billion to $9 billion and adjusted EPS to be between $5 15, and $5 55 per share. We also expect cash flow conversion to be greater.
90%.
Now, let's wrap up on slide 15.
As you heard today, our team delivered a strong start to the year, despite a challenging and volatile environment.
Thanks in large part to our resilient installed base World class team innovative solutions and our relentless focus on our customers.
Our results remain on track for us to deliver on our five year outlook that we provided at our Investor day last year.
With strong momentum across the portfolio increased visibility through our multiyear backlog and rigorous focus on execution <unk> well positioned to drive profitable long term growth and maximize shareholder returns with that I want to thank you for your time this morning, our churn to call.
Over to Christine to begin the Q&A portion of our discussion Christine.
Thank you Raphael, we will now move onto 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.
We will now begin the question and answer session.
I'll ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And our first question will come from Justin long of Stephens. Please go ahead.
Thanks, and good morning.
Justin.
I was wondering if you could help us think through the assumption in your guidance for North American locomotive utilization over the rest of the year.
What percentage of the locomotive fleet are you assuming gets parked by the end of 2023 and as we think about your sensitivity to that is there any way you could speak to the percentage of your freight services revenue that's transaction base that would be impacted by that trend.
So just and I'll start with.
Strong quarter, we finished with a strong pipeline of opportunities.
And so I think we continue to add on some really important options here for multiyear orders as.
As we look into the quarter specifically.
I would say revenues were a bit higher.
Piece of that was the alleviation of the supply chain, but <unk> was really a piece of.
I will call a locomotive parking's being.
Actually a positive so there were lower parking's than we had for last year, that's not what we have planned for the year.
For the year was two locomotive parking's to be up.
So with that we do expect that to be more amplified in the second half of the year for the first half I think we will continue to be a positive.
I think ultimately a lot of that's going to depend on the improvement of both velocity and dwell times.
So I think ultimately going to be determinant. So I wouldn't speculate I think we feel very strong about the dynamics of the year based on the backlog.
We have the convertibility.
Really its high for the year at this point, we moved into a new high from the 12 month backlog cell.
We feel confident about our ability to deliver on the guidance that we provided at this point.
Okay, great and on that percentage of your freight services business Thats tied it's more transaction based John is there any color on that you could provide.
Well out of the $2 5 billion.
Good 2 billion of it is tied to the service contracts right and that the locomotives are running we're earning and if their part.
We don't so we don't provide just the amount in our forecast, but as Raphael had mentioned on a full year basis, we expected the parking.
Grow be up.
Which would be a headwind to revenue what we saw in the first quarter was a slight reduction so again, a little bit of a benefit that drove a little bit more revenue than what we expected in the quarter, but on a full year basis.
And we would expect to get to that target or even a little bit higher and the reason I say a little bit higher is that if you remember last quarter, we talked about our assumption on car loads and that was for flat and coming out of the first quarter flat.
It doesn't feel as is likely now given the fact that carloads were down three 6% so that could amplify a little bit of the parking's, but Justin to answer your question, specifically, we don't provide that number.
But we've got 16000 of them running.
With America and fewer that run.
But less that we get in revenue.
Understood and as a follow up John you were helpful last quarter in helping us think through that quarterly cadence that's baked into the guidance in terms of both revenue and operating margin. Just curious if you have any updated thoughts as we look out the rest of the year based on what.
Coming in the backlog mix et cetera.
Great question, Justin So we talked about last time was around margin as well as revenue and starting with margin.
<unk> said that we expect the merchant to grow on a full year basis in line with our long term plans.
But that growth would all come in the back half. So we expected the first half on margin to be flat and that's really where we're at on a year over year basis actually we're down about a 10th of a percent so kind of check on that one we feel good about where we're at versus our plan.
And that leaves us the revenue and the last time, we talked about revenue.
<unk> faster than the first half than the second half.
Again, we had strong revenue growth in the first quarter.
Raphael had mentioned that revenue growth it did exceed our expectations.
And when we looked at putting the plan together Justin.
We look for launching from the fourth quarter rate and when you take out currency. The fourth quarter was up 15, 7% and we expected a little bit of.
A tempering.
From the fourth quarter and what we got is a little bit of an acceleration and we ended up ex currency at 16 eight.
So.
And that difference of revenue some of that is being pulled from the back half. So that was driven by three things one is our assumption on supply disruption.
It was a little bit more frontloaded than we had planned.
That drove a little bit more on the second area, we talked about parking. So we had forecasted it to be up it was down and that added a little bit to that.
Revenue over our expectations and then the third one is in our components group.
Components was able to take market share, we still feel very very good about our our carload build of 40 to 45.
Because of the availability and the investment that we've made in working capital and inventory in particular, we were able to take a little bit of share due to availability.
So most of those will reverse themselves out in the back half.
And so largely from a revenue standpoint, we're on track with where we expect it to be again, a little bit more in the first quarter and that will it will come out, but most of that will come out a little bit in the next three quarters.
Okay got it thanks for the time and congrats on the corner.
Thank you Bill.
The next question comes from Allison <unk> of Wells Fargo. Please go ahead.
Hi, Good morning, Good morning, when you go back to the services piece, John I think you made a comment that there was some impact timing of deliveries. This quarter could you give a little color there and how we should think about through the balance of the year.
Yes, so when we look at the full year and we talked about.
I believe last couple of quarters, as we expect demand to be up double digit on the year.
But when we look at the quarter Allison makes the miles were down a fair amount in the first quarter and that's nothing to get excited about that as the way it was planned and.
We will have still that double digit growth by the end of the year. So that's the cadence that we're referring to I think where it comes in there'll be important Alex is when you look at the fourth quarter mix was a big driver of that Unfeasibility and at that time, we had talked about both locomotives and labs being up quite significantly driving that.
In the first quarter mix is unfavorable but not to the same extent that we saw in the fourth quarter, because we had a little bit of offset on the <unk>.
<unk> being.
Being down in the quarter.
And we also saw.
Very strong growth as you saw in our equipment group with regards to the locomotives.
Perfect and then just on the digital side, you know really strong growth there is there.
10%.
Our organic basis is part of that growth sort of a catch up now that some of the supply chain is starting to ease I think on the electronic component side.
Or is this sort of you know kind of I'm trying to where you thought and this should be the number that we should be thinking through the balance of the year.
Yeah.
There was a little bit of catch up.
In the computer chips, I wouldn't say a lot and again the first time, we started to see the computer chip market is was in the fourth quarter and so we saw a little bit more easing.
But not a not a huge portion of it allison, but a bit of it.
Also I'll just add that I mean.
The graph you saw in the last few years I think has positioned the business well from a backlog perspective perspective, some of us were multiyear agreements. So.
The backlog coverage is actually better.
It was a year ago so.
The team without continues to be a really very much focused on making sure that we drive convert ability to 2023 still got to work through that.
Great. Thanks for the color.
The next question comes from Scott Group Wolfe Research. Please go ahead.
Yes. Good morning. This is <unk> on for Scott Group.
Good morning.
Good morning up first following the Norfolk derailment in East Palestine, what potential regulatory initiatives could well benefit from and I know Bob does not manufacture the hot bearing detectors, but are you seeing any uptick in orders for other detection systems can you get into the Hotbox market. Thank you.
A couple of comments there first I mean, we're not going to comment on the accident per se, but.
If you think about rail safety I think this is a top priority for both positive for our customers I think similarly to what we do in efficiency or carbon emissions. I mean, we continue to partner with customers here to further improve rail safety rail productivity emissions.
We are working with a number of customers are on technologist.
Help really harder.
Attacked and anticipate any failures of systems or subsystems and deaths continue to be a part of opportunities we have to continue to.
I will always drive continuous improvement in the space.
Thank you and just a follow up can you discuss the M&A market and what areas or regions, where you most actively looking right now for any potential acquisitions. Thank you.
Well when we think of inorganic we're continuing to explore bolt on acquisitions.
To some extent, we will continue to be opportunistic here.
Yes.
Need to really ultimately drive higher ROIC and faster profitable growth for the business with that being said I think our focus continues to be very much on driving organic growth for a lot of the investments that we're doing on technology. We believe that we will continue to drive momentum in terms of the opportunities that we have here in the combination of Modernizations and.
Youll locomotive sales.
And with that we continue to see opportunities to return value to shareholders.
Our board recently renewed the authorization for $750 million.
<unk>.
With that.
You need to be committed to pay down debt.
Thank you.
Our next question comes from Ross, whether Iraq of Melius Research. Please go ahead.
Thank you and good morning, everybody.
Had two questions on international freight and one is just on locomotives is there any shift in trend there or its strength just normal variability in the production and delivery and then second I Wonder if you kind of a bigger picture question. If you could just give us a state of the market PTC and digital in general across.
International freight and what the runway looks like there.
Yeah.
So first of all because you would see a strong pipeline of deals here we.
We see good momentum both internationally and in North America. Our team continues to be a really focused on order conversion.
If you think about internationally, what fits Brazil, Kazakhstan Africa, Australia, we've had really a number of projects that are being discussed at this point.
And in North America, as well I think there continues to be an opportunity here.
<unk>.
Drive productivity and efficiency.
Renewing our fleet that is quite aged and there are significant opportunities there.
So.
With that in mind I think.
This is probably the best visibility we've had over the last year.
The next three years.
And we see the opportunity here to continue.
Continue to drive really momentum towards delivering the five year guidance. We provided last year are you asking specifically some elements of PTC.
Internationally, we're continuing to expand.
And.
We will be deploying <unk> on auto market internationally. So I think that's a big part of the opportunity and we're having the opportunity here to upgrade those systems. So the momentum there continues on driving innovation driving really the next gen of products that will drive both efficiency and productivity for customers. So.
A positive from that perspective.
Tal in transit I mean, I think the trends continue to be a positive there as well and we see the fundamentals of the business quite good.
Thank you.
One follow up if I may I mean, that's a fairly bullish statement the north American locomotive kind of pipeline of potential orders et cetera. Do you have any characterization of what's driving that you mentioned the old fleet will definitely know there you guys have done a ton with efficiency and I think youre tier four is more efficient so maybe that maybe that makes the economics easier just any color commentary from the.
The conversations Youre, having and I'll stop there. Thank you.
I think a lot of add here, it's again back to driving efficiency I mean, if you think about it trains that are being pulled down by three locomotives are for locomotives. How do you replace those with less locomotives. So instead of three you have two or four you have three low commodity pulling a train and with that I mean just locomotives.
We are delivering now they are burning less fuel. So there is the benefits that come from that are there.
They're more reliable in that context, so that helps drive efficiency to the next level and with that that's where I think momentum comes in in terms of the opportunities to continue to drive that.
Efficiency across their operations.
We are continuing to invest in technologies that will help.
Further accelerate that and that's.
This is something that we continue to see opportunities on <unk>.
We typically see our customers typically see a mid double digit return or IRR on the purchase of <unk>.
Either a new or a modernized unit typically a little bit higher on a new.
But both in the mid double digit returns so they've got a very good strong economic.
Incentive.
Perfect. Thank you guys.
The next question comes from Sarah <unk> of Jefferies. Please go ahead.
Thanks for taking my question just first a follow up on the derailment question.
Theres been some talk about shorter train lanes in response to this have you heard anything from a legislative perspective, and how you think about that impacting your business.
And we're continuing to work with our customers and our stakeholders sharing the industry to continue to I'll call support.
Improvement, there's always a sense of continues improvement despite rail being the most sustainable way of moving things over land I mentioned here some moderate technologies that we've been working with customers that could anticipate once again.
Earlier at various equipment, including not just terminal, but also vibration and all other technologies that allow us to be more predictive on rail. So we see an opportunity here to <unk>.
To drive.
I'll call innovation in the space and with that I think we have a set of solutions that can continue to help customers drive efficiency productivity emissions in rail safety.
And then maybe just a follow up maybe you could provide an update on how integrate integration to Plano is progressing and maybe any segment level benefits for this year.
Sure sorry.
Integrating two point.
As we exited 2022.
Spending was a little bit higher than what we had anticipated. So that is very good that means we'll get to the savings quicker.
But looking at that launching spot.
Here after one year, we spent $46 million.
A lot of that noncash, but I took a $46 million charge and with that we'd be returned $5 million of savings.
And as we move into the next couple of years, we would expect that $5 million of savings to grow to $75 million to $90 million on a run.
Run rate basis in 2025, so we expect a.
Fair ramp.
As we go forward with that and we saw some of that certainly in the first quarter. When we look about the segments.
Most of the spending.
And.
She said that a majority of the spending as well as the savings are going to accrue to the transit group. There is a fair amount in the freight side, but a little bit over shared in terms of our investment and opportunity for consolidation in transit and again when you look at the margins in the first quarter, we were up eight tenths of a point.
Year over year some of that was certainly driven by those savings on the investments that we made in 2021, beginning to turn and pay off.
I appreciate the color would it be possible to provide any.
Numbers around what you would expect for savings for this year and maybe for 2024.
No.
Terms of the spending and we would expect it to be a little bit north of what we spent last year of $46 million.
In terms of savings again, so we've got three years to ramp up from.
$5 million to call it $80 million to $85 million at the midpoint.
Pretty significant and.
It will continue to build over that period of time so.
A little bit more in 'twenty 'twenty four 'twenty three.
Okay. Appreciate the color thanks for taking my questions.
Yes.
The next question comes from Jerry Revich of Goldman Sachs. Please go ahead.
Yes, hi, good morning, everyone.
Jerry.
I'm wondering if you could just talk about the web tech products.
<unk>.
Could potentially improve the safety around.
Not only the incident that we spoke about on this call, but in a range of other less severe accidents.
But the addressable market look like Raphael, if we were to say.
Let's leverage webex products to improve safety and outcomes across the industry, obviously different paths to get there but.
What is that addressable market, if we were to move in a direction that's payable to webex product portfolio.
I think it's number one it's a significant opportunity that we have a lot of it resides into all of the elements that we described as automation, which comes down to really driving in what I'll call a.
More seamless operation that will improve both the elements of efficiency, but that will also drive.
Our opportunity here is to continue to.
Capitalize on safety on audio elements of that.
Some of it comes down to potentially introduction of new projects and new products and technologies, such as sub products that allowed the detection and anticipation of failure, while if that's up to locomotive level, whether that's at the trade level. That's a piece of it the auto ones. The integration of some of these systems.
We are well aware of our trip optimizer, which is a product that we have largely deployed.
Not just in North America, but internationally as well the combination of that with PTC and some other elements really allow you to fundamentally operate a trained largely with <unk>.
What we will call on autopilot. So those are some of the tanks that we have an opportunity here too.
Continued to drive filed with customers and we're at different stages on that depending on the complexity of networks.
Around various.
<unk> of the World and we're seeing really an opportunity here to drive larger adoption I mentioned here PTC internationally, we've gone with PTC now not just into Brazil.
We did it in Africa, we're expanding into Asia, and that's another area, where we expect that to go into we've got opportunity to share with wayside monitoring.
As well and those are some of the things that we're currently either in the process of installing or discussing it with customer side in North America.
It's a significant opportunity.
Okay.
Really interesting comment around the combination of locomotive and broader system technologies, maybe just to put a finer point on that the 16000 locomotive installed base what proportion would you estimate of that installed base that you folks have has that combination.
Trip Optimizer plus is on network with a.
PTC did to drive that level of automation and how significant a good chunk is that out of the existing installed base.
Jerry it's very high right the way I should think about BTC, it's really deployed across the entire installed base, where outfits wiped out locomotives or any order of comparator locomotive that's running out there when this when it comes to trip Optimizer, that's more I'll call really it's been largely deployed.
Whatsapp locomotives, so that's an area or an opportunity that we.
<unk> continued to expand on that and with that and I mean, there is evolution of some of the products that we've talked to you guys before such as zero to zero, which really amplifies a lot of the element of automating the entire trip and with that.
Continue automation of some of these systems.
Modern systems that really operate at a network level, so helping the railroads both dispatch trains, but really ultimately manage that network things like movement planner, which allow you to really.
Really in a very fast mode be able to redefine the operations.
Dispatches youre going to be doing it once a day.
Super and John can add can I, just ask really interesting material cost performance for you folks.
In the quarter can you expand on what drove your ability to drive flat material costs.
Essentially as we think about the comps over the balance of the year considering cost moved up over the course of 'twenty two for most industrial companies is it fair to say that we could actually be looking at year over year cost tailwind for you folks in coming quarters, Yes sure Jerry.
Yes. This is the first quarter after six very rapidly raising quarters of our cost of goods sold that we saw even with year ago.
So costs were flat on a year ago basis.
Don't want anyone to walk away that think that costs are fine. They are very elevated they are very high but this is the first quarter and six that we didn't see them.
Rise right and.
So with regards to that Jerry it is it's tough to.
To say what next quarter will be we've certainly got our forecast, but there's four elements of the cost that are all moving some in different directions.
And you got metal costs, and they are falling right. They skyrocketed from the second quarter.
'twenty one through the invasion into the second quarter of <unk>.
2022, since then they've been coming down and so we feel very good about that.
And then also the transportation cost very similar both from a fuel standpoint in the container cost although as on the positive side and remember that takes time for that to flow through.
Our inventory the other pieces of it are not so good right labor is more of a latent cost that certainly continues to rise and then we can't forget about general inflation rate.
Everything else is inflating.
Certainly CPI was up 5% in March.
So all of those things are acting within our cost structure and then Jerry as you know we've got about 60% of our.
Revenue under long term contracts and a lot of those have.
Cost escalators in them and if things start to go down or be a cost escalator.
So we.
We monitor it all very closely I think the important piece of the most important pieces. It has been our Ames. Since this all started the seven quarters ago is to make sure that we're driving a price cost equilibrium, which.
Which we started or hit in the second quarter of last year and have maintained for the last.
Four quarters, and we expect to continue to maintain that throughout 2023.
Okay Super I appreciate it thank you.
Thank you Jerry.
Yeah.
Our next question comes from Ken <unk> of Bank of.
America. Please go ahead.
Thanks, Operator, this is nathan dialing in for Ken Congratulations on the solid quarter.
Just wanted to quickly follow up first on Justin's first question on the quarterly cadence.
I see that there was a pretty positive impact from international orders in the first quarter and per your guidance from last from.
<unk> I think that was supposed to be a little bit more first half weighted would you mind, just giving the split between <unk> and <unk> on the magnitude of impact to.
So equipment and just secondly on on the backlog.
I noticed that.
The 12 month backlog being up this.
Roughly the third quarter of sequential decreases in the total backlog.
Is that is that just a function of the commodity escalators being assumed well whats maybe talk a little bit about your outlook on on demand and selling into the pipeline. Thank you so much.
Let me start with the second half of the question and then I'll pass it on to John to address the first one on the second one if you look at it in the first half of last year, we had some very significant multiyear orders so orders that.
Really supported not just 'twenty three 'twenty four and 'twenty five.
And those were Modernizations that we signed with class ones and you asked you don't have the repeat of that this year, but this is as I said before the best visibility with ads when I look at the last several years in terms of really our ability to.
Drive momentum towards 'twenty, three 'twenty four 'twenty five and I think the 12 month backlog is just realization of that.
The solid backlog here, we have to drive 23 announced stepping into 'twenty four.
As well as part of that.
With regards to the first part John in terms of quarterly cadence Nathan.
Obviously, all of our equipments under longer term contracts and we had a contract that that came through that was going to be heavy in the back half of 2022 and heavy in the first half of this year and with that is tied to the mix. We saw unfavorable mix in the back half of last year, and we're seeing unfavorable mix in the first quarter and we would expect.
The mix in that level of elevated growth out of the equipment group to move into the second quarter. We don't specifically provide with that growth would be from equipment, but suffice to say that.
That level of delivery.
For four quarters, and we would start to see.
From a revenue standpoint, it to step down in the back half just as we saw it step up in the first or second half of last year.
And again.
Mix will also mitigate and drive some of that improved margin in the back half of next year.
I am sorry back half of this year.
Got it great that's very clear thank you so much.
Yes.
The next question comes from Matt Elliot.
With Cowen. Please go ahead.
Good morning.
The increase in the 12 months backlog how much of it is due to delivery dates for some existing orders may be being moved up it may because manufacturing disruptions are easing.
If that's a factor at all.
This is actual new order additions.
Yes, Matt when we look at it.
There can be orders that move.
This quarter to that quarter, just like our overall volumes.
Over time, it's nothing significant in the numbers, we saw a four 4% increase in the 12 months and ex currency was a five 5% up but any any driver of the supply disruptions lot of that would have been baked in over the last seven quarters, right and we're seeing a little bit of release of that.
But nothing of great significance on a number of that magnitude.
Okay. Good thats good to know and then John you talked quite a bit about the margin dynamics for freight.
Yes.
It's nice to see that freight margin held up very well against huge equipment growth basically if we if.
If we assume the mix comparable to last year, the first quarter of last year.
And we didn't have the technology cost that you mentioned.
What would the margin have been.
19%.
Well, let me start here because I think the first thing is we will have significant variation as John mentioned here in terms of quarter to quarter and some of it is mix I mean, John just.
Could you hear how we saw very significant growth on delivery of new locomotives, but mods was significantly down in the quarter. We've got project specifics, we've got investments when it comes down to especially our R&D, which shall we continue to drive and those will have variation quarter to quarter and we've got still some of the elements of <unk>.
Cost dynamics, playing and so I'd just be careful with some of those assumptions on how they play out quarter to quarter as it will be bumpy from that perspective, but we feel very well about making sure that we deliver on the guidance we've provided.
And although I would add Matt is that that's why we're providing it by half if things move around a little bit.
Clean quarters.
And.
It's in line with what we guided is in line with what we expected.
And so there's always puts and takes in any given quarter, but it's right in line with where we thought and we feel kind of again going back to my first comment is that a check in terms of margin out of the gate here in the first quarter.
Got it and John You mentioned, you haven't taken the market share and components is there any way you can update us on your average content now in railcars, both freight and transit and locomotives and.
I guess have you guys been realizing the revenue synergies as one would expect now that you've worked through the locomotive backlog you inherited from GE and are now taking orders as both the equipment manufacturer and a component supplier.
Yes, we don't we don't provide that number actually Matt I don't know the number.
But we don't provide as well.
So the other one is yes, we are seeing the opportunities and as time goes on in terms of the group's working better and as equipment is selling products, we're pulling as many things that we make across the board.
Under these things so yes, we're seeing.
Strong revenue synergies in terms of again all of our products working in unison with one another to deliver the best.
Locomotive, we tend to our customers.
Matt If you go back to some of the comments, we made earlier on dose were around I'll call. It <unk> translate to today about $7000 of content in our freight car that we would see an average.
We have had the opportunity here to as John described win share and that was largely due to some of the investments with debt and inventory and the ability to ultimately be able to serve customers.
Context, we do see an opportunity here and we're continuing to drive.
Ill call, a really entitlement and share into the products that we sell especially as we go here into this battery electric locomotives the opportunity to have a lot more content as we drive the integration of the system and that speaks not just to the brakes that speaks to various auto parts, including heat exchangers.
And things like that into the system. So I think that we're going to continue to see us driving share off to slow play game is you got to really work with customers that have fleets.
With water systems deployed and we got to make sure that we're.
Putting up also the services to be able to support them through that process, but it's another opportunity for growth for us.
<unk> been executing on it.
And that's a helpful number Raphael the 7000 average debt that maximum opportunity my understanding is it closer to like 25 or 30000 is that is that true.
It will depend again by freight car types.
So thats why we give that average number.
Number but.
That's related to freight car that's.
Current number if you think about locomotives.
Alright, and transit is way way higher right.
Yes.
Higher again, it speaks to the various I'll call critical systems that we have that spell out to doors HVAC systems cop letters brake systems and so forth.
Okay, and then just one final thing Raphael I think that I think maybe I'm reading too much into this but you said underlying business fundamentals strengthened in the quarter that was just in reference to the strong results you had in the Q or something else.
When I talk about our thoughts in the context of transit and specifically.
When I made those comments, but overall, we see that across the business I think in transit.
If you think about the underlying fundamentals the book to Bill over one the 12 month backlog being really up over 5% and even the multiyear backlog on a constant current basis up over 9% and we're continuing to see I mean really.
A lot of strength in the pipeline of opportunities there, but we as I sat on the freight segment see it very much the same so.
Order question that we got before.
Largely an element of I'll call multibillion dollar orders that we signed in the first half of the year the combination of the modernization with both.
Union Pacific.
Yes.
Perfect. Thank you very much.
The next question comes from Steve Barger of Keybanc capital markets. Please go ahead.
Thanks, Raphael I'm going to follow up on that that order comment you just made I know they can be lumpy and we got very tough comps from last year, but with freight orders, having been down three quarters in a row is this kind of low $1 billion range for orders, what we should expect in periods when youre not booking new equipment or mods are multiyear.
Service contracts.
Here's how I look at it it.
It comes down to the pipeline of opportunities that we're driving and the convertibility of who is going to be lumpy I mean as I sign a three year agreement and that's over $1 billion, that's not going to repeat again every year. So that's a little bit of that Lumpiness that we're talking about are we are working with our customers on making sure.
We're driving.
To really have those multiyear orders. So I think it's in the best interest in terms of.
Both the quality of the product, but the cost of the product that we get and the visibility is good in terms of those pipeline of opportunities and the opportunity to continue to drive I'll call bulk revenue graph here.
The combination of both Modernizations and new equipment. So.
Good visibility out there and good visibility with the 12 month backlog, which provides us the confidence on the convertibility into 'twenty three and now starting to look into the first part of 'twenty four as well.
Yeah.
And backlog has been pretty stable at $22 billion over the past four years do you have periods coming up beyond 12 months, where you have significantly higher or lower delivery scheduled from backlog and just given macro concerns have you given more thought to expanding backlog visibility for investors. So they can better think about.
The stability that provides beyond four quarters.
A key area of focus for US is really looking at the convertibility of the backlog.
And that's why I've highlighted the elements of this about our visibility that we have right now than we've ever really had in the business, which comes down to visibility on 'twenty three 'twenty four 'twenty five and that's what those multiyear order sure ultimately provide us we.
We have had discussions it's something that we'll we'll continue to evaluate here in terms of making sure that there is.
That visibility in terms of how the business will behave but I go back to very much. The guidance. We provided last year in terms of the five year outlook, which provides both I'll call.
Revenue expansion and margin expansion for the business, we're committed to deliver on that.
Steve the backlog has grown in the last three years ever since the merger each and every year of the multiyear backlog has grown.
Understood.
When I go back to look at <unk> 19, It was $23 billion, that's $22 billion right now I look at it as fairly stable over that period, which is a great outcome.
But I would say just anything you can do to improve the visibility of that in terms of deliverability beyond four quarters would be really helpful. For investors just given the increasing macro concerns that are out there in people's concerns about order growth rates and things like that.
We'll consider that.
Thanks very much thank you.
The next question comes from Chris Wetherbee of Citi. Please go ahead.
Hey, good morning, guys, it's Rob on for Chris I guess falling on the backlog could you give us a sense of are you seeing any of the orders being pushed out a little bit.
Within the multiyear period, obviously, the 12 month kind of stepped up here.
Curious, what if any impact kind of week carloads that we're seeing in North America as well as just softer macro if that's having any sort of impact in terms of the timing and cadence of the backlog, but we're not seeing push outs number one and again back to the comments I made earlier on a lot of what's driving that.
<unk> is associated with really gains in productivity and efficiency tied to a fleet that <unk> quite a bit.
That's some of the elements of North America, but do we see.
Also some positive signs here in terms of the pipeline of opportunities internationally.
<unk> of that is tied to new projects like in countries like Brazil, as we described and some other ones <unk> got an element of combination of bulk drug replacement of older units driving efficiency and productivity with also good off by in terms of.
Volume in that context, and so in that framework no. We have not seen any delays or push push outs in terms of orders.
Helpful Color and then just in terms of the 2023 outlook.
It sounds like the material cost absorption that benefit just given comps should increase as the year progresses. How are you thinking about the productivity impact.
To the business.
Over the next couple of quarters should that be.
Also kind of improving or we see that kind of work is a little bit of an offset to the absorption.
Well that was all part of the initial guidance that we put in there.
Rob is we are looking for.
The year overall to be up in terms of margin and that's driven by productivity absorption.
Partially offset by unfavorable mix on a full year basis.
And then we would also expect SG&A to be positive as a percent of revenue throughout the year in our R&D spending to be in line with that.
So.
Again, when we look at the first quarter, we're right on track in terms of margin.
We don't see any any change in the margin as the guidance that we gave that.
Margin will grow largely in the back half of the year, Rob costs remain high and I think as an organization, we really remain very diligent on both cost management and pricing through that process.
Despite the fact, you see some cost coming down into spot market like transportation auto is still very volatile, but if you think about copper or energy so that.
<unk> continues to be very diligent on the us.
Got it that's helpful. I was just trying to get a sense.
The benefits should step up as the year progresses, which kind of feels like what what's baked into guidance, but I just wanted.
A little bit of additional clarification there.
Thank you.
Thanks.
The next question comes from Dillon Cumming of Morgan Stanley . Please go ahead.
Great. Good morning. Thanks for the question Rafael wanted to go back to your kind of comments on the transit segment, you mentioned kind of feeling better incrementally exiting the quarter.
Been a bit of a market its been more opaque in the near term, but just kind of want to get a sense of what actually is driving the more positive backdrop nearer term is that governments, just investing more or is it better utilization on the actual metro cars I'm just be curious is driving some of the more near term optimism there.
Well, so a little bit of welcoming with just the first quarter results, which are organic growth over 9% I think to some extent with benefited from catch up in the quarter due to supply chain disruptions. So I think that's a piece I did mentioned about the fundamentals of the business being strong whether it's when you look to the book to bill above 1%.
Montand multiyear backlog I think we're up.
Pleased to see the progress, but we still have significant work ahead here to simplify the footprint.
Further improve and sustain margins.
Youre going to see some variation quarter to quarter, but we're working to drive margin expansion in the ear bulk buffered transit and for our freight business as well I think the fundamentals so on transit.
We continue to see really.
All parties are committed to continue to invest some infrastructure spending continues to be a positive there with government spending in rail and our customer Oems also have very strong backlogs in that context, which continue to drive opportunities for us.
Okay. That's clear. Thank you and then if I can just go back to the Brazil order for a second obviously nice to see that materialize, but you also made a comment is talking about how there might be a bit more of a structural opportunity there with regards to the infrastructure build out our rail volumes over time, I think GE used to kind of quantify that market is about a 50 to 100 unit market per year any change that thinking longer term.
What you've been seeing recently that could actually drive a higher market opportunity longer term we.
We see a growing opportunity there and you are right. We see this as a very strategic order. This.
Customer that ultimately.
Ill call.
Adopted what tax largely in terms of the solutions and we see that as a very a significant step in that direction. There's a number of new concessions taking place I think we have really built a very solid starting on partnering with customers over time to drive efficiencies to drive productivity.
We've been I think really benefiting from that starting with customers.
We've got good opportunity here ahead of us in terms of the numbers for the market.
I would say think about 50 plus unit market for us in that context.
Great very clear thanks Rafael.
Thank you.
Okay.
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 Andrea and thank you everyone for your participation today, we look forward to speaking with you again next quarter.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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Yeah.