Q2 2023 Westinghouse Air Brake Technologies Corp Earnings Call
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Good morning, and welcome webcast second quarter 2020 earnings conference call, all participants will be in listen only mode.
Assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.
The turn the call over unless Kristine Kubacki, Vice President of Investor Relations. Please go ahead ma'am. Thank you operator, good morning, everyone and welcome to <unk> second quarter 2023 earnings call with US today are president and CEO Rafael Santana CFO , John Olin and senior Vice President of Finance John <unk>.
<unk>.
Today's slide presentation, along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on 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 related 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 I'll start with an update on our business my perspectives on the quarter progress against our long term value creation framework and then John will cover the financials.
We delivered another strong quarter GAAP densify robust sales and earnings per share growth, we achieved despite continued volatility and economic challenges.
Sales were $2 four $1 billion, which was up 17, 5% versus prior year.
Revenues was driven by strong performance from both the freight and transit segments.
Total cash flow from operations was $115 million.
Overall, our financial position remains strong.
We continue to execute against our capital allocation framework to maximize shareholder value by investing for the future growth.
Executing on the strategic M&A like our recent acquisition of Alan M and returning cash to shareholders.
The 12 month backlog was $7 2 billion up 10%, signifying growing momentum and visibility across the business.
Total multiyear backlog was $22 4 billion.
Overall, the <unk> team delivered a strong second quarter, marking a good first half of 2023.
Looking forward I mean.
<unk> by the underlying strength and robust momentum across the business.
<unk> is well positioned to continue driving profitable growth, even amidst a challenging economy.
Shifting our focus to slide five let's talk about our 2023 and market expectations for more details.
As we look at key metrics across our freight business, we remain encouraged by the underlying business momentum and our robust pipeline of opportunities across geographies.
North America carloads continue to be down in the quarter and locomotive parking smoothed up slightly as we exited the second quarter, but better than we had anticipated as customers prioritize service and fluidity.
We continue to see significant opportunities across the globe in demand for new locomotives Modernizations and digital solutions.
Customers invest in solutions that.
Continued to drive reliability productivity and fuel efficiency.
Looking at the North American railcar builds demand for our railcar continues to show growth the industry outlook for 2023 is for about 45000 cars to be delivered.
Overall, we believe we have an opportunity to continue building significant long term momentum with growth in modernization Neo locomotive sales railcar belts and digital solutions.
Internationally activity is strong in core markets, such as Brazil, Australia, and <unk> in the CIS region significant investments to expand and upgrade infrastructure are supporting a very strong international order pipeline.
Finally, moving to the transit sector, the Mega trends remain in place driving the need for clean safe and efficient transportation solutions around the globe.
Next let's turn to slide six to discuss a few recent business highlights.
In North America, we secured several key wins, including orders for 30 new locomotives.
Order for 69 locomotives under our certified pre owned program.
And in order for 60, Modernizations from Canadian National that closed after the end of the quarter.
In Australia, we recently won a strategic quarter for 17 locomotives from CBA itch, which will support the continued growth of agricultural commodities in the region.
And with regards to our zero emissions portfolio.
We also recently signed a strategic quarter with Vale for three Flex drive locomotives. These locomotives will pull the world's largest iron ore train.
And is expected to remove 63000 tons of carbon.
Wavelength or 14000 passenger cars per year.
In transit, we won a major order to supply passenger information systems and path of rats for up to 504 established cars for Germany and Austria.
And finally during June we completed the bolt on acquisition of LNR. This strategic acquisition will enhance swap tax existing heat transfer portfolio and we will extend our installed base in mining, providing a solid platform for domestic and international profitable growth.
All of this demonstrates the growing momentum across the business the team's relentless focus on delivering for our customers.
And a strong pipeline of opportunities we continue to execute on <unk>.
<unk> is 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 would like to highlight how <unk> will provide efficient solutions for our customers by driving their productivity, reducing fuel consumption and improving safety.
While leading the de carbonization of rail across the industry.
<unk> is uniquely positioned to shape, a more sustainable future for rail by inventing in developing technologies that provide customers with adaptable and efficient solutions to meet their carbon reduction goals.
While providing strong investment returns to our customers given improved reliability haulage ability and fuel efficiency.
Ultimately, we will help lead the industry towards a zero emissions rail network and we have already started laying that path to get there through new locomotive modernizations with adverse events and utilizing renewable and biofuels, leading in battery electric applications in <unk>.
Staying in hydrogen technology, and providing a wide range of digital solutions.
With that I'll turn the call over to John to review the quarter segment results and our overall financial performance John Thanks.
Thanks, Raphael and Hello, everyone turning to slide eight I will review, our second quarter results in more detail, we delivered another strong quarter of operational and financial performance with underlying business momentum strengthening through the first half of the year.
Sales for the second quarter were $2 41 billion, which reflects a 17, 5% increase versus the prior year sales were driven by strong growth across all major product lines.
For the quarter GAAP operating income was up $48 million driven by higher sales adjusted operating margin in Q2 was 16, 4% down <unk> three percentage points versus the prior year.
The benefits of higher sales were offset by a less rich mix of sales between and within the segments.
GAAP earnings per diluted share were $1 six.
Which was up 16, 5% versus the second quarter a year ago during.
During the quarter, we had pre tax charges of $10 million for restructuring, which was primarily related to our integration to <unk> initiatives to further integrate <unk> operations into drive $75 million to $90 million of run rate savings by 2025.
In the quarter adjusted earnings per diluted share were $1 41 up 14, 6% versus the prior year.
Overall web tech executed a good quarter and a strong first half of 2023, we outperformed our expectations demonstrating the underlying strength and momentum of the business and as a result, we are raising our full year outlook for sales and adjusted earnings.
Now turning to slide nine let's review our product lines in more detail second quarter consolidated sales were very strong up 17, 5% equipment sales were up eight 9% due to higher locomotive sales this quarter versus last year's second quarter.
<unk> sales were up 23, 1% versus last year, largely driven by the higher OE railcar build and an increase in our market share due to product availability along with increased demand for industrial products. We also closed the strategic acquisition of <unk> late in the quarter, which did not have an impact on component sales.
During the quarter.
Digital intelligence sales were up 18, 9%, which was driven by robust demand for onboard locomotive products and international PTC, along with revenue contribution from the acquisitions in Q2 of last year.
Our services sales grew 13, 9% sales growth was driven by higher sales from increased modernization deliveries and increased parts sales our customers continue to recognize the superior performance reliability efficiency and availability across their web tech locomotive fleets.
Across our transit segment, OE and aftermarket sales significantly increase versus last year.
Segment sales were up 25, 3% to $699 million.
The momentum in this segment is strong across our core markets as secular drivers such as urbanization and de carbonization accelerate the need for investments in sustainable infrastructure.
Moving to slide 10, as forecasted gross profit margin was slightly lower driven by a less rich mix and higher manufacturing costs.
Mix was unfavorable driven by strong sales from the transit segment and higher sales of new locomotives and Modernizations within the freight segment.
Raw material costs, while still elevated were largely flat on a year over year basis.
Foreign currency exchange was unfavorable to sales by $7 million or three tenths of a percentage point and it reduced our second quarter gross profit by $2 million.
Finally manufacturing costs were positively impacted by favorable fixed cost absorption.
More than offset by manufacturing inefficiencies at our <unk> facility in June .
Our team continues to execute well to mitigate the impact of continued cost pressures by driving operational productivity and lean initiatives.
Turning to slide 11 for the second quarter GAAP operating margin was 12, 9%, which was flat versus last year, while adjusted operating margin declined <unk> three percentage points to 16, 4%.
GAAP SG&A was $285 million and adjusted SG&A was 283 million Boe.
Both of which were up versus the prior year, but down significantly as a percent of sales.
Engineering expense increased from last year. According to plan, yet was down 0.2 percentage points as a percentage of sales at two 2%.
We continue to invest engineering resources and current business opportunities, but more importantly, we are investing in our future as the leader in de Carbonization and digital technologies that improve our customers' productivity capacity utilization and safety.
Now, let's take a look at the segment results on slide 12, starting with the freight segment.
As I already discussed freight segment sales were strong for the quarter up 14, 6%.
Segment operating income was $271 million for an operating margin of 15, 9% of 0.2 percentage points versus last year.
Adjusted operating income for the freight segment was $346 million up 15% versus the prior year.
Adjusted operating margin in the freight segment was flat with prior year at 23% the.
The benefits of increased sales, including fixed cost absorption and lower SG&A as a percentage of revenue were offset by unfavorable mix from higher sales of international logos at Modernizations as well as nonrecurring expenses from our labor negotiations in Erie.
Finally segment multiyear backlog was $18 3 billion down six 8% from the end of Q2 last year, while the 12 month backlog was $5 3 billion up 10, 3% over the same period.
The 12 month backlog continues to show momentum beyond 2023.
Conversely, the year over year reduction in the backlog was driven by lapping last year's significant multiyear order from Union Pacific for over $1 billion of Modernizations.
Now turning to slide 13 Transit segment sales were up 25, 3% driven by strong OE and aftermarket sales.
GAAP operating income was $66 million up 32%.
GAAP operating income increased as a result of higher sales and benefits from our integration to point or activities, partially offset by higher restructuring costs.
Adjusted segment operating income was $76 million, which was up 31%.
This resulted in adjusted operating margin of 11, 1% up eight tenths of a percentage point from last year.
Finally.
Transit segment multiyear backlog for the quarter was $4 1 billion.
Up 15, 4% versus a year ago.
Now, let's turn to our financial position on slide 14.
Q2 cash from operations was $115 million, while cash flow benefited from higher earnings we are continuing to invest in the businesses growth, which is driving working capital higher in particular receivables and inventory. Despite that we continue to drive toward a greater than 90% cash conversion for the full year.
Our debt leverage ratio was two four times at the end of the second quarter, which was flat versus prior year, primarily due to the acquisition of <unk>.
As we look forward, we have a $250 million senior note at 438% coming due in August we intend to roll that debt into our delayed draw term facility.
I'd like to spend just a moment on providing some additional color on O&M as Raphael mentioned during the quarter, we completed the bolt on acquisition of <unk>.
This strategic acquisition will extend and complement our portfolio of premium heat transfer solutions in mining.
We purchased <unk> for $223 million in cash and the business is expected to have calendar year 2023 sales of about $130 million.
And finally.
We returned $105 million of capital back to shareholders in the quarter 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 Raphael.
Thanks, John let's flip to slide 15 to discuss our updated 2023 financial guidance.
We believe that the underlying customer demand for our products and solutions is growing across our business.
Our order pipeline in 12 month backlog continues to strengthen.
Providing solid visibility for profitable growth for the rest of 2023 and beyond.
The team is committed to driving strong top line growth while managing costs.
We are also committed to driving adjusted margin expansion in 2023, despite a still challenging macro environment.
With these factors in mind, we are increasing our previous guidance. We now expect 2023 sales of nine and a quarter billion to $9 5 billion.
12% from last year at the midpoint.
And adjusted EPS to be between $5 50.
And $5 80 per share up 16% at the midpoint.
We also expect cash flow conversion to be greater than 90%.
Now, let's wrap up on slide 16.
As you heard today, our team delivered another strong quarter to the year, despite an uncertain and volatile environment. Thanks.
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 strengthening order pipeline and a rigorous focus on execution <unk> is well positioned to drive profitable long term growth and maximize shareholder returns.
With that I want to thank you for your time this morning, and I'll now turn the call over to <unk> to begin the Q&A portion of our discussion Christine.
Thank you Rafael we will now move onto your questions before we view and out of consideration for others on the call I ask you that you limit yourself to one question and one follow up question.
If you have additional questions. Please rejoin the queue.
Operator, we are now ready for our first question.
Thank you well now begin the question and answer session to ask a question you May Press Star then one on just touched on something.
Using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press two at this time, we will pause momentarily to assemble the roster.
Yeah.
First question will be from Justin long of Stephens. Please go ahead.
Thanks, and good morning.
Good morning, Justin.
Based on the updated full year guidance I was wondering if you could share how youre expecting third quarter and fourth quarter to.
Look on a relative basis do you think they'll look similar from a revenue and earnings perspective, I just wanted to better understand the cadence that you're anticipating when you think about the timing of deliveries mix or anything else, we should be mindful of in the back half.
Great just and this is John Justin when we look at the back half cadence.
Starting with revenue, we would expect the majority of our revenue growth to come in the third quarter versus the fourth quarter and again. This is due to the way the orders have come in in production as scheduled as well as we've got a slight little a little on lapping benefit over a slightly easier comp from a revenue standpoint, when we look at the earnings.
Side or margin side of the equation, we would see the opposite we expect the opposite Justin We would expect the majority of our earnings growth our emerging growth to come in the fourth quarter versus the third quarter and that is simply because we're lapping a much easier comp in the fourth quarter of last year then.
And then we have in the third quarter.
Okay. That's very helpful. Second question I had was on the freight services segment. We saw some notable strength there in the second quarter is there a way you can help us think about the growth in that segment, if you exclude mines.
And then going forward I was just wondering if you could share what you're assuming for locomotive utilization it sounds like parking's, where maybe a little bit better than you thought, but we're hearing from some of the rails that locomotives are getting put into storage. So I just wanted to kind of marry those two trends.
So Justin Youre right. So I think we will see a special as we go into the second half of the year and it's beyond the second half I think you will see acceleration of growth in services.
Some of that demand you see it with some of the recent order that we announced here. So March is a golf case continuing to us moving forward. So that continues to be a positive.
When it comes down to Parking's, we're seeing really.
Active fleet staying steady.
Side any elements of really fluctuation within the year, but.
The focus on services continues.
And we feel very good about our fleet status out there, providing really I'll call significant benefits to the customer when compared to.
Our competitor fleets and Thats, both in terms of reliability availability of fuel efficiency, which is seeking.
A significant element here, we stand with <unk>.
Feel about are down and averaged more than 5% on every single one of our platforms. So.
We don't expect.
No signs of any significant changes on that active fleet theater.
Okay. Thanks for the time and congrats on the quarter.
Thank you.
Thank you. Our next question will be from Chris Weatherby of Citi. Please go ahead.
Hey, good morning, guys, it's Rob on for Chris Good morning could.
Could you give us a sense in terms of fee.
The backlog.
Obviously, an increase over the 12 months sequentially, how should we think about.
That conversion.
In 'twenty three versus 24.
Okay.
Ill start just with <unk> feel very good about our overall backlog I feel strong about the pipeline of opportunities that the team is working on I think the overall underlying growth fundamentals of the business is also strong as you said that 12 months is off 10%, it's accelerating a less last quarter was up four.
Our four 4%.
The current total backlog is also healthy so while while it's down three 5%.
Look at it in conjunction with the multiyear billing dollars order that we got from Union Pacific and the auto multi billion dollar order opportunities were being worked right now and with the team. So we see good momentum internationally.
We see it in North America, it's positive we're progressing.
We're continuing to grow and Dr pipeline supports it in terms of the convertible with you. The 12 month already provides you a view into 'twenty four.
We continue to see strength in the pipeline.
That's helpful and just to piggyback on Justin's question. Your response, you had said I thought I heard you, saying that you are expecting acceleration of services growth. So should I think about that stepping up from the roughly 14% you guys did in <unk> in the back half of the year and maybe if you can comment a little bit more second half of the year.
That's where I made the comment.
Okay. That's helpful and how are you thinking about services growth.
<unk> term.
Continuous and as you saw I think the demand for a lot of the solutions we have there.
Continues to be robust and we have an opportunity to modernize <unk>.
<unk> part of the fleet out there I think customers are really looking into it you see based on the announcement, we just made yesterday when youre looking at 18% fuel savings, 40% improvement on reliability, 55% on pulling power. Those are significant numbers that are really compelling in terms of driving or not.
Just the quality of the service youre, providing for your customers, but reducing your costs and I think that these are some of the fundamentals will continue to build on graph for the modernization of the fleet and demand for new units as well.
I appreciate the time.
Thanks, Rob.
Thank you next question will be from well one timer and latest research. Please go ahead.
Thank you.
So just just to clarify on gross margin. Obviously, you mentioned that you had mixed headwind between segments and within is mix. The entire driver of the down gross margin or is there any price cost or anything else to catch up still and then it wasn't a mixed drag within transit.
Okay. Rob This is John looking at the quarter, we came in <unk>.
Margin came in at 16, 4% down three tenths of a percentage point as we've talked about in the earlier quarter. We expected the first half to be flat on margin. So margins were down a little bit more than we expected. The key driver of that Rob was the inefficiencies we're experiencing at our facility in Erie behind the strength.
So that is the biggest driver.
The mix, we anticipated the mix within the groups, we anticipated that locomotives and mods in the original guidance, but the difference really is the.
Inefficiencies at our facility at York.
Erie.
Sure.
Perfect. Okay got it and then if I can ask a different one.
On hybrid electric.
Yes.
The win in mining the biggest.
Iron ore trade in the world.
No what the size of that market is and what your expectation for the pace of testing validation.
And potential future orders, maybe I wonder if you have any comments you can make.
Baidu, we're continuing to look for us to make progress on battery electric I think that orders are great example of that we're developing a supply chain around it to make sure that we make are really the overall product reliable first deliveries are happening next year.
We're continuing to work actively with customers both in North America and internationally. There is demand out there up to foreign expand their use of the technology, we're working with customers to really make sure that we pace.
As we step into its fuel continues to of course be a significant element of cost for our customers.
I think there is sure a really significant opportunity for us to continue to grow that.
We're going to pace it.
We grow into different geographies, that's I think the exciting piece, it's not a demand around one specific customer or one specific segments I think we have an opportunity.
To apply fabric concept also in conjunction with what I'll call not just the hybrid product, but hybrid systems as well recently came back from Europe , and there is significant opportunity for us there as well.
Perfect. Thank you.
Thank you. Our next question will be from sorry, <unk> Jefferies. Please go ahead.
Good morning. This is James on for Sarah Thanks for taking the questions today.
So I wanted to touch on integration to Plano. So can you provide an update on how integration to point out how it's progressing and how should we think about cost savings into 2024.
Great James So as we've talked about when we announced integration to point, a little bit over a year ago that we would invest $135 million to $165 million and expect ongoing savings of $75 million to $90 million, we're off to a great start as we talked about at the end of the 22.
<unk> was a little bit ahead of schedule, which is a good thing.
And as we ended last year, we were at a run rate savings of $5 million.
Six months that we've had this year, we've over doubled that and the trajectory will continue through the remainder of 2023.
To add to a fair amount of our incremental margin in 'twenty in the back half as well as through 2024 as.
As we head up to that $75 million to $90 million run rate in 2025.
Great. That's helpful and just following up on the <unk> plan strikes. So can you provide like a little bit more detail on the strike and how that is affecting the production schedule like revenue mix given that the facility was more focused on the right components like customized locomotive for international and electric locomotives.
I'll start with fall over the last few years, we have successfully reached an agreement with all of our Union and non Union side. So we are working on collaboration we remain committed to the workforce.
With that we remain optimistic that we can reach an agreement here in a timely manner from a financial perspective, I'd say with planned through really sort of variety of outcomes in contingents. This year and we do not anticipate any impact for the full year revenue.
Great. Thank you.
Okay.
Thank you our next question will be from Allison.
Wells Fargo. Please go ahead.
Hi, Good morning, Good morning, a quick question on that.
Your 5% revenue growth at 5% earnings.
The impact sort of lack of in that range on that revenue is that just simply a mix situation.
Hey, Matt just any thinking buckets through that thing so listen you're talking about within the quarter.
For the full year, the guidance range and nice revenue guidance range that EPS really just in line with that revenue guide and <unk>.
The lower Incrementals just wanted to understand if that's just purely mix or something else within that that's driving sort of that lack of incrementals. There sure Alison absolutely, yes, we are.
To be able to raise our revenue guidance went from a midpoint of up 6% to up 12% and.
Driven by the underlying momentum that we've experienced rate and Thats continued from the back half of this year last year into the through the first half of this year. When we look at the earnings guide it was up from a midpoint of $5 65 or up 10% to up 16%.
So what we're seeing is a couple of things youre not seeing the full <unk>.
Increase in revenue coming through in earnings and Allison that's for three reasons.
One is in the first quarter, we had some additional.
Investment in our next generation technology for our Pds software, that's the dispatch software and so thats a one time.
<unk> that kind of will bring earnings down on a full year basis.
The second driver of that is the strike at Erie rate that does have costs. Raphael had mentioned, we don't expect any impact on revenue for the year, but it does have a cost and we had cost in that in the first and the second quarter, but will also have some costs in the third quarter. So that's included in that as well again more on the one time side.
The third area is higher interest cost as you can see in the quarter interest was up about 25% to $11 million and we would expect interest to be higher in the back half as well.
Partly behind the <unk> acquisition, but also the refinancing of some debt that we've got coming due so I'll assume when you take those three things that's the difference between the growth rate of revenue and the growth rate.
Earnings.
Great. That's very helpful. And then on the digital side, if I recall at the only thing I would say cyclically sensitive and it doesn't seem to be exhibiting that same trend is it sort of a change in how your customers are approaching that product.
That's meant that you've done that thinking game, maybe even more efficiencies made that empire cycle theyre pushing through that investment just trying to understand how buy it broke that sort of cyclical China eastern exhibit. So a couple of points here first as you saw and we have significant order growth in the last two years have positioned the business.
Really well from a backlog perspective.
A good chunk of that was really international water somewhere multiyear agreements as we go more international it's a bit more lumpy. So we would expect that to play out over the different quarters.
But.
And the order comment I would make no different than the previous years, we need to really drive convertibility into the year. So shorter term orders that continue to.
Deliver on the year results, but backlog coverage.
<unk> daughter done now we've had before so we like the fundamentals of the business, but you would expect to be lumpy.
Perfect. Thank you.
Thank you. Our next question will be from Scott Group of Wolfe Research. Please go ahead.
Yes, good morning, it's <unk> on for Scott.
First of all your revenue guidance updated to $91 4 billion at the midpoint implies a 12% increase in total sales this year, how much of that 12% increases volume versus how much of that is price. Thank you.
We would look at the price on a full year basis to be in the 1% to 2% range.
Perfect. Thank you and secondly can you provide some background on the pace of absolute locomotive modernizations, meaning how many months' did you do in 'twenty. Two what are you expecting in 'twenty three and can you talk about 24, and then lastly, what is the timing of the 60 months for CN.
You very much.
So I think without getting into any specifics of 24 of course, it's kind of early for that we expect growing momentum on modernization portfolio yeah.
What are you just.
You asked about the CN.
It's part of that and then we see that growth momentum not just going to 'twenty three we see that momentum.
Going into rail.
<unk> 20.
<unk> 24, and beyond so just good backlog.
Thank you very much.
Thank you. Our next question will be from Jeremy Rabbit Oh.
Goldman Sachs. Please go ahead.
Yes, hi, good morning, everyone.
Good morning, Jerry.
Brookdale John I'm wondering if you could just talk about in transit you've had really strong bookings for three quarters now the topline inflection this quarter.
At a point, where this business has earned the right to grow and we could see more substantial pick up in top line now that the margins are where you need to be.
In other words is there more runway.
Based on the bookings.
Performance this quarter for the momentum to continue in transit.
Thanks, Gerry first the fundamentals for the business remains strong.
Despite of a more competitive environment I look at our book to Bill ratio over one.
While mark backlogs up 9% the multiyear is up double digits.
But I will tell you while we are pleased with the progress. There is significant work ahead of us to simplify the footprints.
To further improve and sustained margins.
We're going to have variation quarter to quarter, but the mandates there and the team is executing on expanding margins.
And with fuel.
Building competitiveness in the business. So we ultimately drive profitable growth so it fuels.
Good from that perspective.
<unk>.
Unchanged to dropped out there we continue to have opportunities.
So this.
A point, where we're putting up north of 20% topline growth and it sounds like.
Based on the backlog that should continue into the back half.
Okay.
In freight really impressive performance.
In service.
In an environment, where volumes have obviously not been very good can you just talk about for your service business ex mods what are some factors that are contributing.
The performance because all.
All of the year over year sales growth was driven by months that would be a pretty dramatic ramp. So it feels like the core business is doing pretty well.
Ex mods.
Given the gap versus freight volumes I Wonder if you could just comment on that if you if you don't mind.
<unk> had its running hard right, where if I look at it.
The different markets, we serve Charlotte Kazakhstan, where.
<unk>.
I think there's just.
A strong demand out there when you look at the pipeline of opportunity. So I think those things are ultimately connected in North America, where.
You could have expected that a.
Change in the active fleet I think it's holding holding strong it's again back to the focus on both services and I think we stand with a significant advantage in our fleets in terms of fuel savings in terms of haulage capability and reliability and that's real.
Critical to our customers right now.
Thanks.
Thank you.
Thank you. Our next question will be from Steve Unger Keybanc capital markets. Please go ahead.
Good morning.
And can you talk about the margin profile for new business, you are booking relative to the margin profile in the next 12 months backlog and then just generally is new business looking higher margins and then old business.
Yes, Steve This is John absolutely, we've watched our margins come up over the last couple of years and that is a function of bringing in better orders at higher profit and so as we look forward to the backlog we've talked about we feel great about it overall not only from.
The standpoint of the revenue will drive in the future, but also from a profitability standpoint, and it is booked at a higher margin than we've seen in the past.
Got it thanks, and total backlog has contracted I know its not much but it's been a couple of quarters now when you think about the size of the new deals you are signing in the pipeline versus what's scheduled to come out of backlog in the back half would you expect it to continue contracting this year.
Steve What I'll tell you is the following yes. The total backlog is down it's going to be lumpy as we have those I'll call multi billion dollar deals.
We've got.
More than a couple of dose being worked right now so that could drive some lumpiness I think our focus here is making sure that we've got the converted <unk> moving forward and of course as you look into the convertibility 12 months 18 months 24 months. So we track that and we feel very strong about that.
It's really in the pipeline of the deals that we're working on and we.
We're continuing to grow that.
It's really supported by our pipeline.
Got it thank you.
Thank you. Our next question will be from Adam Roslyn Koski of Bank of America. Please go ahead.
Hey, Thanks for taking my question, Adam restaurants for Ken Hector Luisa.
So we've covered a lot maybe just to touch on the M&A pipeline is there anything you can share broadly about verticals or geographies of interest in this space.
Of course, I mean, we're not going to go into any of the specifics here, we are continuing to explore bolt on acquisitions.
We're going to be very opportunistic here.
There'll be a strategic that will drive a higher ROIC.
Ultimately accelerate profitable growth for <unk> and increase shareholder value I think Alan M is really a great example of that so we're active.
Really trying to make sure that we find those opportunities.
Thank you and then maybe just going over to transit.
Mentioned, a mid teens margin target in the past just maybe give us a sense of.
You know how we are.
Trending there versus initial expectations.
Any view over the next coming years, maybe if you could that could be achieved earlier than initially thought.
I'll, maybe start and I'll pass it onto Jon I think we're continuing to mandate, we feel strong about it.
Paul and the team are working on drilling.
Continuing that trajectory.
Never study ended up precise through shortly.
Some bumps along the way, but we.
We feel strong about continuing to drive.
Simplification on DAP business, improving the competitiveness.
A lot of opportunities here as.
As I mentioned earlier on the question on integration to point, all right, we're going to see that continue to ramp.
The majority of the benefit will accrue to our transit group. So we feel great about the consolidation the integration that's happening there and the results that it's I'm starting to spin and part of the benefit we saw in margin growth in transit in the quarter was due to integration 2.0 and the other one is the other question with regards to the backlog as we can.
We need to bring in volume in the background backlog, we're very focused on making sure that it is coming in at a higher margin and we are focused on bringing in good profitable business versus revenue in the transit group.
Thank you.
Okay.
Thank you. Our next question will be from Matt Alcott with Cowen. Please go ahead.
Okay.
Good morning.
69 certified pre owned locomotives do you guys foresee any similar opportunities going forward and if you can provide some insight maybe on the revenue and margin profiles of those locomotives if not on an absolute basis at least relative to mods.
I'm not going to get into the specifics of that program, but what I will tell you.
That program provides a significant opportunity for us to number one as we think about our products. It's how we cascade those products down so theyre not just on core mainline we often.
Focus is a lot of the dialogue here around the 16th.
Locomotives that we got running out there there's a number of order locomotives, Ronnie and short lines in our yards.
We see an opportunity to Cascade that fleet down and Cascade. It with a fleet that's more efficient it causes less emissions is able to pull more so a lot of the same fundamentals and I think thats, yes, we are.
Look at building and it provides again a significant strength for our services business outs.
<unk>.
There will be a pull there in terms of providing I'll spare parts and things like that so.
Really excited about gaining momentum on that front yet.
And also it sounds like this is not something that you guys have done.
Actively.
No to any meaningful extent in the past.
Kind of a fairly new area for you. These certified pre owned units.
I'd say, we've done some of that stuff for the class ones, especially bringing waterfall.
Older Dash nines, and modernizing goes into AC technology I think it's the first time, we do at size with like a fort lines and I think there is a significant opportunity there so you're right about that.
Okay and then are these.
The guidance raise partly in part because of this order that you got I think you got it last months.
Yeah.
I would say that I would say not.
There'll be a little bit in there, but not to the extent to drive the overall guidance, Matt it's the underlying.
Momentum, we've talked about for the last year.
Just to come at us in the backlog continues to fill it'll be more of an impact on the future growth.
As we look to 'twenty four and beyond exactly.
Got it and then just one question on the 30th New local orders in North America, you call them strategic.
Can you tell us what that means and.
Given the fact that it's good to see new orders starting to come back in North America over the past year or so.
What does that mean to the new build versus Mod mix for next year.
I think it just validates what we've been saying and in some cases.
<unk>, we will look at modernization is a better solution for some of the fleet dynamics they've got in some other cases glaucoma really new locomotives.
So we see both active and I think the fact that we continue to see that I think that's.
Really a positive in terms of the dynamics that we're looking into the North America.
Our market. So there is really a commitment to continue to drive service to invest in the fleets that are really at this stage at the oldest <unk> Zen.
And at least a couple of decades, so good opportunity here.
From a financial standpoint, we're pretty indifferent.
Whether it's a modernization of renewable right. We've talked about new comes with a higher revenue and modernizations with a higher margin.
So overall, we're pretty indifferent as long as their web tech locomotives.
We're good.
And if I if I missed it did you guys say what the purpose of those it's just these are just diesel locomotives.
Replacement or is there a technology angle.
I think there as well.
Certainly a technology element here and youre going to be used to really cool freight more efficiently.
Yeah.
Great. Thank you so much Raphael Thank you John .
You bet.
Thank you.
Next question.
It will be from Steve Barker.
Keybanc capital markets. Please go ahead.
Just a quick clarification I think you said the Erie situation could be a swing factor in the back half, but I also thought I heard you say that it would be one time. So can you clarify if expected costs from that are included or excluded in the back half EPS range.
Absolutely included in our revised guidance Steve.
Included got it okay. Thank you.
Thank you that concludes our question and answer session I would like to turn the call back over to MS. Christine go back to you for closing remarks. Please go ahead.
And thank you everyone for your time today, we appreciate it and we look forward to talking with you next quarter Goodbye.
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