Q3 2023 Westinghouse Air Brake Technologies Corp Earnings Call

Good morning, and welcome to the Wabco Corporation third quarter 2023 earnings Conference call all participants.

Excuse me all participants will be in listen only mode should you need 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 to ask a question. You May Press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note this.

France is being recorded I would now like to turn the conference over to Christine Coupe Balky Vice President of Investor Relations. Please go ahead.

Thank you operator, good morning, everyone and welcome to <unk> third quarter 2023 earnings call with US today are president and CEO Rafael Santana CFO, John Olin and senior Vice President of Finance John <unk>.

Today's slide presentation, along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on our investor Relations tab on Y Tec 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 our 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 the progress against our long term value creation framework and then John will cover the financials.

We delivered another strong quarter.

Densify robust sales growth margin expansion and <unk>.

Kris for earnings and cash flow.

We achieved despite increased volatility and uncertainty in the economy.

Sales were two and a half billion.

Which was up 22, 5% for sprayer year revenue was driven by strong performance from both the freight and transit segments.

Total cash flow from operations was $425 million.

Generation was driven by higher earnings and improved inventory management.

Overall, our financial position remains strong.

We continue to execute against our capital allocation framework to maximize shareholder value by investing for future growth and returning cash to shareholders.

The 12 month backlog was over 7 billion.

13%.

<unk> continued momentum and visibility across the business into 2024.

Our multiyear backlog was 21 and a half billion.

Overall, the Wap Tech team delivered a strong quarter behind solid execution.

Looking ahead I am encouraged by both the underlying momentum across the business and the team's unrelenting focus on delivering for our customers.

And even against a more uncertain and volatile macro environment. We believe <unk> is well positioned to drive profitable growth ahead.

Shifting our focus to slide five.

Let's talk about our 2023 and market expectations in more detail.

While key metrics across our freight business remain mixed we continue to be encouraged by our business momentum activity in international markets, and our robust pipeline of opportunities across geographies.

North America car loans continue to be down in the quarter, which resulted in locomotive parking is up slightly from last quarter's levels.

Operator: Good morning, and welcome to the web tech corporation, third quarter, 2023, Earnings Conference Call. Our participants, excuse me, our participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Yes, we continue to see significant opportunities across the globe in demand for new locomotives modernization and digital solutions as our customers invest in solutions that continue to drive reliability productivity safety and fuel efficiency.

Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star 1-1 on your touch-tone phone. To withdraw from the question queue, please press star 1-2. Please note this event is being recorded.

Looking at the North American railcar built demand for railcars continue to show good al.

Kristine Kubacki: I would now like to turn the conference over to Kristine Kubacki, vice president of investor relations. Please go ahead. Thank you operator.

The industry outlook for 2023 is for about 45000 cars to be delivered.

Internationally activity is strong across core markets, such as Latin America, Australia, South Africa, and Kazakhstan significant investments to expand and upgrade infrastructure are supporting a substantial international order pipeline.

Kristine Kubacki: Good morning everyone, and welcome to web tech's third quarter, 2023, Earnings Call. With us today, our president and CEO, Rafael Santana, CFO John Olin, and senior vice president of finance, John Mastellers. 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 web tech corp.com. Some statements were making our forward looking and based on our best view of the world and our business today.

In mining commodity prices are supporting activity to refresh and upgrade the truck fleet.

Finally, moving to the transit sector, the Mega trends of organization and de Carbonization remain in place driving the need for clean safe and efficient transportation solutions around the globe.

Kristine Kubacki: For more detailed risks, uncertainties, and assumptions related to our forward looking statements, please see our disclosures in our Earnings release and presentation. We will also discuss non-gap financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics.

Next let's turn to slide six to discuss a few recent business highlights.

During the quarter, we signed a strategic Mou with <unk>, the National Railway company in Kazakhstan for over $2 billion.

Rafael Santana: I will now turn the call over to Rafael. Thanks Kristine and good morning everyone. Let's move to life 4.

This agreement will support significant trade growth through the state of the art equipment and technologies driving productivity and lowering operating costs.

Rafael Santana: I'll start with an update on our business, my perspectives on the quarter, the progress against our long term value creation framework, and then John will cover the financials. We delivered another strong quarter, sentenced by robust sales growth, margin expansion, and increased earnings and cashflow. We achieved these despite increased volatility and uncertainty in the economy. Sales were $2.5 billion, which was up 22.5% for a spry year. Revenue was driven by strong performance from both the freight and transit segments.

Framework includes locomotives to be delivered in 2024.

Long term supply agreement and our collaboration on a number of digital technologies.

All of which we expect to drive strong orders and sales growth in 2024.

Speaking of our business in Kazakhstan. The team just achieved a significant milestone by delivering its 500 locomotives.

Looking at our mining business.

<unk> signed orders totaling over $150 million, which is up double digits versus last year.

Rafael Santana: Total cashflow from operations was $425 million. Cash generation was driven by higher earnings and improved inventory management. Overall, our financial position remains strong. We continue to execute against our capital allocation framework to maximize shareholder value by investing for future growth and returning cash to shareholders. The 12-month backlog was over $7 billion, up 13%, signifying continued momentum and visibility across the business into 2024. Total multi-year backlog was $21.5 billion.

Yes early in the fourth quarter our team in Latin America won an order for 22 additional locomotives to be delivered in 2024.

In North America, we won an order in New York City Transit to supply components for an additional 640 subway cars.

Also late last quarter, we closed the <unk> acquisition that expanded our heat transfer portfolio in mining.

This is off to a great start.

Integration is on track third quarter revenue is ahead of plan, taking advantage of our strong mining market globally.

I'd also highlight in North Dakota, which we acquired back in 2021, our maintenance of way business continues to be ahead of plan and is experiencing double digit growth in 2023.

Rafael Santana: Overall, the WattTech team delivered a strong quarter behind solid execution. Looking ahead, I'm encouraged by both the underlying momentum across the business and the team's unrelenting focus on delivering for our customers, and even against a more uncertain and volatile macro-environment, we believe WAPDAQ is well-positioned to drive Propho-Groph ahead.

All of this demonstrates the continued momentum across the business the team's relentless focus on driving for our customers and a strong pipeline of opportunities we're executing on.

<unk> is well positioned to capture profitable growth with innovative and scalable technologies that address our customers' most pressing needs.

Rafael Santana: Shifting our focus to slide five, let's talk about our 2023 and market expectations in more detail. While key metrics across our trade business remain next, we continue to be encouraged by our business momentum, activity and international markets, and our robust pipeline of opportunities across geographies. North America carloads continue to be down in the quarter, which resulted in locomotive parking up slightly from last quarter's levels. Yet, we continue to see significant opportunities across the globe in demand for new locomotives, modernizations, and digital solutions.

Turning to slide seven.

To discuss in more detail our international markets.

While North America provides us a solid foundation to refresh and renew the installed base. We also have a significant opportunity for growth across international fleets by leveraging our broad portfolio and superior technologies.

We have been successful in expanding our international installed base over time, which has grown at roughly four 5% annually for the last six years.

Rafael Santana: As our customers invest in solutions that continue to drive reliability, productivity, safety, and fuel efficiency. Looking at the North American rail car builds, demand for rail cars continue to show growth. The industry outlook for 2023 is for about 45,000 cars to be delivered. Internationally, activities strong across core markets, such as Latin America, Australia, South Africa, and Kazakhstan. Significant investments to expand and upgrade infrastructure are supporting a substantial international orders pipeline. In mining, commodity prices are supporting activity to refresh and upgrade the truck fleet. Finally, moving through the transit sector, the mega-trans of urbanization and decarbonization remaining place, driving the need for clean, safe, and efficient transportation solutions around the globe.

Looking at half the pipeline of opportunities in our international markets continue to strengthen and as a result, we expect continued expansion in our installed base.

Increasing freight volumes from mining agriculture, and intermodal continue to drive the need for increased investment in clean efficient and safe modes of transportation.

We expect growth in 2024 from key regions like Latin America, Cif's, Australia, and South Africa, driven by our regional footprint and local partnerships.

Our technologies are delivering more fuel efficient reliable solutions, which will reduce operational cost for our customers around the world.

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 third quarter results in more detail.

Rafael Santana: Next, let's turn to his light six to discuss a few recent business highlights.

We delivered another good quarter of operational and financial performance from strong underlying momentum across the business coupled with great execution from the team.

Rafael Santana: During the quarter, we signed a strategic MOU with KTZ, the National Railway Company in Kazakhstan, for over $2 billion. His agreement will support significant trade growth through the state of the art equipment and technologies, driving productivity and lowering operating costs. This framework includes local motives to be delivered in 2024, a long-term supply agreement, and a collaboration on a number of digital technologies, all of which we expect to drive strong orders and sales growth in 2024.

Sales for the third quarter were $2 55 billion, which reflects a 22, 5% increase from the prior year sales were driven by strong growth across both the freight and transit segments.

For the quarter GAAP operating income was $370 million driven by higher sales and focused cost management.

Adjusted operating margin in Q3 was 17, 9% up one five percentage points versus the prior year the.

The increase during the quarter was driven by significantly higher sales improved productivity and cost management, partially offset by manufacturing inefficiencies driven by the strike at our <unk> facility.

Rafael Santana: Speaking of our business, in Kazakhstan, the team just achieved a significant milestone by delivering its 500 locomotive. Looking at our mining business, the team signed orders totally over $150 million, which is up double digits versus last year. And early in the fourth quarter, our team in Latin America won an order for 22 additional locomotives to be delivered in 2024. In North America, we want an order in New York City Transit to supply components for an additional 640 subway car.

GAAP earnings per diluted share were $1 33, which was up 51, 1% versus the third quarter a year ago.

During the quarter, we had pre tax charges of $13 million for restructuring, which was primarily related to our integration to <unk> initiatives to further integrate web Tex operations and to drive $75 million to $90 million of run rate savings by 2025.

In the quarter adjusted earnings per diluted share were $1 70 up 39, 3% versus prior year.

Rafael Santana: Also, late last quarter, we closed the LNM acquisition that expanded our heat transfer portfolio in mining. This is off to a great start. The integration is on track, third quarter revenue is a hat-of-plan, thinking advantage of a strong mining market globally. I'd also highlight Nordco, which we have acquired back in 2021, our maintenance of way business continues to be a hat-of-plan in his experiencing double-digit growth in 2023.

Overall web tech delivered another strong quarter, we outperformed our expectations demonstrating the underlying strength and momentum of the business and as a result, we are fine tuning our full year outlook by increasing our sales and adjusted earnings guidance.

Now turning to slide nine let's review our product line in more detail.

Third quarter consolidated sales were very strong up 22, 5% equipment.

Equipment sales were up 38, 8% from last year due to higher locomotive sales, which as planned we're significantly skewed to Q3 versus Q4, along with increased demand for mining products this quarter.

Rafael Santana: All of this demonstrates the continual amount of across the business, the team's relentless focus on driving for our customers and the strong pipeline of opportunities we're executing on. WAPTEX, well-positioned to capture profitable growth with innovative and scalable technologies that addresses our customers most pressing needs.

Component sales were up 32, 3% versus last year, largely driven by higher North American OE railcar build and market share gains and freight car product sales.

Rafael Santana: Turning to slide seven, I'd like to discuss in more detail our international markets. While North America provides us a solid foundation to refresh and renew the install base, we also have a significant opportunity for growth across international fleets by leveraging our broad portfolio and superior technologies. We have been successful in expanding our international install base over time, which has grown at roughly four and a half percent annually for the last six years.

Along with increased demand for industrial products sales also benefited from the strategic acquisition of <unk> late in the second quarter by $42 million.

Digital intelligence sales were down three 2% from last year, which was driven by a softness in our north American sibling business, partially offset by higher demand for international PTC Nextgen onboard locomotive products and digital mining.

Our services sales grew 17, 6% sales growth was driven by higher modernization deliveries and increased parts sales our customers continue to recognize the superior performance reliability efficiency and availability across their web tech locomotive fleets.

Rafael Santana: Looking ahead, the pipeline of opportunities in our international markets could change the strengthen, and as a result, we expect continued expansion in our install days. Increasing trade volumes from mining, agriculture, and intermodal continue to drive the needs for increased investment in clean, efficient, and safe modes of transportation. We expect growth in 2024 from key regions like Latin America, CIS, Australia, and South Africa, driven by our regional footprints and local partnerships. Our technologies are delivering more fuel-efficient, reliable solutions, which will reduce operational costs for our customers around the world.

Across our transit segment, OE and aftermarket sales significantly increase versus last year segment sales were up 28% to $660 million behind execution of our growing backlog easing of supply chain disruptions and comparing against the sabre impact in Q3 2022.

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, GAAP gross margin was 31, 8%, which was down <unk> one percentage points from Q3 last year, while adjusted gross profit margin was up 0.1 percentage points driven by higher sales and improved productivity, partially offset by inefficiencies related to the strike in Erie.

John Olin: With that, I'll turn the call over to John to review the quarter segment results in our overall financial performance. John, thanks Raphael and hello everyone. Turning to slide eight, I will view our third quarter results in more detail. We delivered another good quarter of operational and financial performance from strong underlying momentum across the business, coupled with great execution from the team. Sales for the third quarter were $2.55 billion, which reflects a 22 and a half percent increase from the prior year.

Mix was favorable driven by a richer mix between and within segments.

Raw material costs, while still elevated were largely flat on a year over year basis.

Foreign currency exchange was favorable to sales by $32 million or one five percentage points and it improved our third quarter gross profits by $7 million.

John Olin: Sales were driven by strong growth across both the freight and transit segments. For the quarter, gap operating income was $370 million, driven by higher sales and focused cost management. Adjusted operating margin in Q3 was 17.9 percent, up 1.5 percentage points versus the prior year. The increase during the quarter was driven by significantly higher sales, improved productivity and cost management, partially offset by manufacturing inefficiencies driven by the strike at our area facility.

Finally manufacturing costs were positively impacted by favorable fixed cost absorption and benefits of integration to <unk> more than offset by manufacturing inefficiencies primarily at our <unk> facility.

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 third quarter GAAP operating margin was 14, 5%, which was up 2.8 percentage points versus last year, while adjusted operating margin improved one five percentage points to 17, 9% yes.

John Olin: Eiff earnings per diluted share were $1.33, which was up 51.1% versus the third quarter a year ago. During the quarter we had pre-tax charges of $13 million for restructuring, which was primarily related to our integration 2.0 initiative to further integrate WebTech's operations and to drive 75 to $90 million of run rate savings by 2025. In the quarter adjusted earnings per diluted share were $1.70, up 39.3% versus prior a year. Overall, WebTech delivered another strong quarter.

GAAP and adjusted SG&A were $295 million.

SG&A as a percentage of sales was 11, 6% down <unk> seven percentage points versus the prior year as we leveraged higher sales and strong focus on managing costs.

Engineering expense was $53 million about flat with Q3 last year, we continued to invest engineering resources and current business opportunities, but more importantly, we are investing in our future as an industry leader in de carbonization and digital technologies that improve our customers' productivity.

John Olin: We outperformed our expectations, demonstrating the underlying strength and momentum of the business, and as a result, we are fine tuning our full year outlook by increasing our sales and adjusted earnings guidance.

John Olin: Turning to slide 9, let's review our product line in more detail. Third quarter consolidated sales were very strong, up 22.5%. Equipment sales were up 38.8% from last year due to higher locomotive sales, which, as planned, were significantly skewed to Q3 versus Q4, along with increased demand for mining products this quarter. Component sales were up 32.3% versus last year, largely driven by higher North American OE rail car build and market share gains in freight car product sales, along with increased demand for industrial products.

<unk> utilization and safety.

Now, let's take a look at segment results on slide 12, starting with the freight segment.

As I already discussed freight segment sales were very strong for the quarter up 23, 4%.

GAAP segment operating income was $327 million for an operating margin of 17, 3%.

Two one percentage points versus last year.

Adjusted operating income for the freight segment was $399 million.

Up 38% versus prior year.

Adjusted operating margin in the freight segment was up one three percentage points from prior year at 21, 2%.

John Olin: Sales also benefited from the strategic acquisition of L&M, late in the second quarter, by $42 million. Digital intelligence sales were down 3.2% from last year, which was driven by a softness in our North American Siggling business, personally offset by higher demand for international PTC, next gen onboard locomotive products, and digital mining. Our services sales grew 17.6%. Sales growth was driven by higher modernization deliveries and increased part sales. Our customers continue to recognize the superior performance, reliability, efficiency, and availability across their web tech locomotive fleets.

The increase was driven by significantly higher sales, including fixed cost absorption and lower SG&A as a percentage of revenue and improved mix somewhat offset by manufacturing inefficiencies driven by the strike at Aerie.

Finally segment multiyear backlog was $17 six 1 billion.

Down eight 1% from the end of Q3 last year, we continued to compare against the multiyear modernization and locomotive orders totaling over $1 5 billion that we received in 2020 to the 12 month backlog was $5 billion to $8 billion.

John Olin: Across our transit segment, OE and after market sales significantly increased versus last year. Segment sales were up 20.0% to $660 million, behind execution of our growing backlog, easing of supply chain disruptions, and comparing against the cyber impact in Q3 2022. The momentum in this segment is strong across our core markets as secular drivers, such as urbanization and decarbonization, accelerate the need for investments in sustainable infrastructure. Moving to slide 10, gap gross margin was 31.0%, which was down 0.1 percentage points from Q3 last year, while adjusted gross profit margin was up 0.1 percentage points driven by higher sales and improved productivity.

Up 15, 7% for the same period and shows good momentum well into 2024.

Turning to slide 13 transit segment sales were up 28% to $660 million.

When adjusting for foreign currency transit sales were up 14, 5%.

GAAP operating income was $68 million.

Up 28, 3% restructuring costs related to integration to <unk> activities were $10 million in Q3.

Adjusted segment operating income was $83 million, which was up 38, 3%.

Adjusted operating income increased as a result of higher sales favorable mix benefits from our integration to <unk> activities and the sabre impact in Q3 2022.

John Olin: Personally offset by inefficiencies related to the strike and airy. Mix was favorable driven by a richer mix between and within segments. Raw material costs, while still elevated, were largely flat on a year-over-year basis. Core Incurrency Exchange was favorable to sales by $32 million or one and a half percentage points, and it improved our third quarter gross profits by $7 million. Finally, manufacturing costs were positively impacted by favorable fixed cost absorption and benefits of integration 2.0, more than offset by manufacturing inefficiencies, primarily at our airy facility.

This.

Resulted in adjusted operating margin of 12, 5% up one five percentage points from last year.

Lee Transit segment multiyear backlog for the quarter was $3 $87 billion.

Up 12, 6% versus a year ago.

Now, let's turn to our financial position on Slide 14, Q3 cash from operations was $425 million versus $204 million in the prior year.

Cash flow benefited from higher earnings and improved inventory management.

Our debt leverage ratio was two one times at the end of the third quarter, which was favorable versus prior year.

John Olin: 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 third quarter gap operating margin was 14.5%, which was up 2.0 percentage points versus last year, while adjusted operating margin improved 1.5 percentage points to 17.9%. The app and adjusted SG&A were $295 million. Adjusted SG&A as a percentage of sales was 11.6%, down 0.7 percentage points versus the prior year as we leverage higher sales and strong focus on managing costs.

And finally, we have returned $344 million of capital back to shareholders year to date through share repurchase and dividends.

During the third quarter, we utilized free cash flow to pay down debt and reduce leverage after the $229 million acquisition of <unk> in the second quarter of 2023.

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, 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 continues our orders pipeline in 12 month backlog continues to be strong providing solid visibility for profitable growth ahead.

John Olin: Engineering expense was $53 million, about flat with Q3 last year. We continue to invest engineering resources and current business opportunities, but more importantly, we are investing in our future as an industry leader in decarbonization and digital technologies that improve our customers productivity, capacity utilization, and safety.

The team is committed to driving top line growth and adjusted margin expansion in 2023, despite a challenging macro environment.

John Olin: Now let's take a look at segment results on slide 12, starting with the freight segment. As I already discussed, freight segment sales were very strong for the quarter of 23.4%. Gap segment operating income was $327 million for an operating margin of 17.3%, up 2.1 percentage points versus last year. Adjusted operating income for the freight segment was $399 million, up 30.0% versus prior year. Adjusted operating margin in the freight segment was up 1.3 percentage points from prior year at 21.2%. The increase was driven by significantly higher sales, including fixed cost absorption, and lower SG&A as a percentage of revenue, and improved mixed, somewhat offset by manufacturing inefficiencies driven by the strike at Erie.

With this factors in mind, we are increasing our previous guidance. We now expect 2023 sales of $9 5 billion to.

To $9 7 billion.

Up nearly 15% from last year at the midpoint and.

And adjusted EPS to be between $5 80.

$6 per share up about 21, 5% at the midpoint.

We continue to expect cash flow conversion to be greater than 90%.

Looking ahead, while the macro environment has become more uncertain over the last quarter I am confident that <unk> is well positioned to drive profitable growth in 2024, which is aligned to our long term financial framework.

Now, let's wrap up on slide 16, as you heard today, our team delivered another strong quarter.

Even in a dynamic environment, we are committed to delivering on our value creation framework.

John Olin: Finally, segment multi-year backlog was $17.61 billion, down 8.1% from the end of Q3 last year. We continue to compare against the multi-year modernization and locomotive orders, totally over 1.5 billion that we received in 2022. The 12-month backlog was $5.28 billion, up 15.7% for the same period, and shows good momentum well into 2024. Turning to slide 13, transit segment sales were up 20.0% to $660 million, when adjusting for foreign currency transit sales were up 14.5%. The app operating income was $68 million, up 28.3%. Restructuring costs related to integration 2.0 activities were $10 million in Q3.

Through the strength of our portfolio resilient installed base innovative solutions 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 Christine to begin the Q&A portion of our discussion.

Christine.

Thank you Rafael we will now move onto questions, but before we do and out of consideration for others on the call I ask that you limit yourself to one question and one follow up question. If you have additional questions. Please rejoin the queue.

Operator, we are now ready for our first question.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

John Olin: Committee. Adjusted segment operating income was $83 million, which was up 38.3%. Adjusted operating income increased as a result of higher sales, favorable mix, benefits from our integration 2.0 activities, and the cyber impact in Q3 2022. This resulted in adjusted operating margin of 12.5%, up 1.5%age points from last year. Finally, transit segment multi-year backlog for the quarter was $3.87 billion, up 12.6% versus a year ago.

We are using a speakerphone please pick up your handset before pressing the keys to withdraw from the question queue. Please press star one to.

My first question is from Justin long of Stephens. Please go ahead.

Thanks, Good morning, and congrats on the quarter good morning, Justin.

So maybe to start I was wondering if you could quantify the strike impact at Erie in the quarter and thinking about the guidance the.

Our full year outlook was raised but it implies a sequential step down in earnings as we move into the fourth quarter. So John can you give a little bit more color on some of the key drivers to that sequential pressure.

John Olin: Now let's turn to our financial position on slide 14. Q3 cash from operations was $425 million versus $204 million in the prior year. Cash flow benefited from higher earnings and improved inventory management.

Sure.

So number one on the Aerie, we couldnt be more pleased that we came to a successful agreement with the union during the quarter.

Well, Justin we don't provide on line item details of our cost of goods sold it is important to understand that our cost of the strike to understand the cost of the strike. It's important to note that the plant never closed during the strike and hence some of our strong volume performance in the quarter, but it did operate at less than normal efficiency given the.

John Olin: Our debt leverage ratio was 2.1 times at the end of the third quarter, which was favorable versus prior year. And finally, we've returned $344 million of capital back to shareholders year-to-date through sharey purchase and dividends.

Our reduced workforce that it was operating under.

John Olin: During the third quarter, we utilized free cash flow to pay down debt and reduce leverage after the $229 million acquisition of LNM in the second quarter of 2023. As you can see in these results, our financial position is strong, and we continue to allocate capital and a balance strategy to maximize shareholder returns.

So overall it was a little bit of a drag on the quarter in terms of <unk>.

Earnings, but certainly.

We took it in stride and delivered a great quarter despite that.

The second question you have Justin with regards to I know.

The implied fourth quarter growth I guess is first I'd start by saying that we're very pleased with how the back half is unfolding certainly favorable direct spectation that we had shared with the with the group in Q2 earnings call.

Rafael Santana: With that, I'd like to turn the call back over to Raphael. Thanks, John.

Rafael Santana: 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 continues. Our orders pipeline and 12-month backlog continue to be strong, providing solid visibility for profitable growth ahead. The team is committed to driving top-line growth and adjusted margin expansion in 2023, despite the challenging macro environment. With dispatchers in mind, we are increasing our previous guidance. We now expect 2023 sales of $9.5 billion to $9.7 billion, up nearly 15% from last year at the midpoint, and adjusted EPS to be between $5.80 and $6.00 per share, up about 21.5% at the midpoint. We continue to expect cash flow conversion to be greater than 90%.

Overall, we've increased the revenue guidance by two 5% at the midpoint of four 5% for EPS and with that it kind of pushes out an implied.

Fourth quarter guidance and that is that we expect revenue to grow roughly at 6% mid point and again. This is despite last year's on tough comps of over 11% growth and likewise expect very strong margin increase in Q4, driven by EPS up roughly 17% at the midpoint.

So when we look at the second half and how it's unfolding. It's just as we discussed last quarter Justin.

With the third quarter revenue growing considerably faster than the fourth quarter and Thats driven by the fact that the production plan for the second half is significantly skewed to the third quarter.

In fact, just when you look at it roughly 70% of our second half locomotive deliveries will be delivered in the third quarter and that's strictly to meet the customer expectations and it was scheduled scheduled will built over a year ago.

Rafael Santana: Looking ahead, while the macro environment has become more uncertain over the last quarter, I'm confident that WAPTEX well-positioned to drive profitable growth in 2024, which is aligned to our long-term financial framework.

So consequently, our Q4 underlying growth remains very strong and as evidenced by our strengthening which is evidenced by the strengthening 12 months backlog, which was up 13% versus prior year.

Rafael Santana: Now, let's wrap up on slide 16. As we heard today, our team delivered on not a strong quarter. Even in a dynamic environment, we are committed to delivering on our value creation framework. Through the strength of our portfolio, resilient install bays, innovative solutions, and a rigorous focus on execution. WAPTEX is well-positioned to drive profitable long-term growth and maximize shareholder returns.

Like Raphael said in the prepared comments, we expect to see profitable growth as we transition into 2024.

Okay. That's helpful and secondly, I wanted to ask about the backlog. So we did see.

Sequential moderation I know timing, particularly with some of the multi year orders can move things around so I'm curious if you've seen any slowdown in inquiry levels or the pipeline or if you would just chalk this up to timing and on the Kazakhstan $2 billion Mou.

Kristine Kubacki: With that, I want to thank you for your time this morning, and I'll now turn the call over to Christine to begin the Q&A portion of our discussion. Christine? Thank you, Rafael. We will now move on to questions. But before we do and out of consideration for others on the call, I ask that you limit yourself to one question and one follow-up question. If you have additional questions, please rejoin the queue. Operator, we are now ready for our first question.

Could you just confirm that's not included in the backlog.

I'll take that one Justin so first no it's not.

Backlog of orders.

But talking about backlog the backlog is healthy.

It will be down year over year, but you got to look at it in conjunction with a multi billion in orders that we signed last year, which don't repeat every year.

Operator: We will now begin the question and answer session. To ask a question, you may press star one one on your touch tone phone. If you are using a speaker phone, please pick up your hands up before pressing the keys. To withdraw from the question queue, please press star one two.

<unk> side of it we have a number of multi billion dollar opportunity to start being more.

And we just signed a large one which is in the pipeline and will convert into orders. So we see good momentum here, we don't see.

Justin Long: The first question is from Justin Long of Stevens. Please go ahead. Thanks.

Slow down we are progressing well.

John Olin: Good morning and congrats on the quarter. Good morning, Joseph. So maybe to start, I was wondering if you could quantify the strike impact at Yuri in the quarter and thinking about the guidance, you know, the full year outlook was raised, but it implies a sequential step down in earnest. So, John, can you give a little bit more color on some of the key drivers to that sequential pressure? Sure. So number one on the, on the area, we couldn't be more pleased that we came to the successful agreement with the union during the quarter.

We continue to grow and our pipeline supports it.

Last quarter as John said 12 months.

Last quarter was opt in for shots. This quarter third quarter was up 13 sort of continue to drive momentum here with key deals being signed.

If you think especially about the long lead items in our portfolio like mods and Youll locomotives, you need that backlog to be there and yet as we look into 'twenty four and beyond.

Okay. Thanks for the time thank you.

The next question is from Jerry Revich of Goldman Sachs. Please go ahead.

John Olin: Well, Justin, you know, we don't provide online item details of our cost of goods sold. It is important to understand that our cost of the strike, to understand the cost of the strike, it's important to know that the plant never closed during the strike and hence some of our strong volume performance in the quarter, but it did operate at less than normal efficiency given the reduced workforce that it was operating under.

Yes, hi, good morning, everyone, Hey, Jerry good morning, roughly.

Hi.

John I'm wondering if we just piece together.

The comments you made it sounds like a pretty healthy order opportunity backdrop.

S railcar orders are.

Instructive as well so as we think about your five year outlook. It sounds like 2024 might be.

John Olin: So overall, it was a little bit of a drag on the quarter in terms of earnings, but certainly we took it in stride and delivered a great quarter despite that. The second question you have, Justin, with regards to, I know the implied fourth quarter growth, I guess, is first that start by saying that we're very pleased with how the back half is unfolding. Certainly favorable to our expectations that we had shared with the group and the Q2 earnings call and overall we've increased the revenue guidance by 2.5% at the midpoint and 4.5% for EPS.

Better organic growth revenue opportunity that five year outlook that you provided just putting the pieces together and I'm wondering if.

You can confirm that that's how it's tracking and if you could touch on the level of margin improvement.

You can deliver your if it does indeed play out that way relative to the margin.

Margin improvement CAGR that you've laid out on a five year basis. Thank you.

So Jerry I mean as you see.

Finished a strong quarter strong pipeline of opportunities, which I'll say have just strength and really the visibility that we have to continue to drive revenue and margin expansion.

John Olin: And with that, it kind of pushes out an implied fourth quarter guidance, and that is that we expect revenue to grow roughly at 6% midpoint. And again, this is despite last year's on tough comps of over 11% growth, and likewise expect very strong margin increase in Q4 driven by EPS, roughly 17% at the midpoint. So when we look at the second half and how it's unfolding, it's just as we discussed last quarter, Justin, with the third quarter revenue growing considerably faster than the fourth quarter, and that's driven by the fact that the production plan for the second half is significantly skewed to the third quarter.

It's for sure a bit early to get into the specifics of 24 guidance.

The momentum will continue to see.

My mind with results being driven by first I'll start with the strength of the short and mid term backlog since the 12 month backlog that we spoke about at $7 $1 billion up double digits second piece, we continue to see momentum on both new locomotives in March our customers are continuing to invest for improved cost.

So this is bringing a modernization and so they can park water units, they're investing for reliability, we're still coming out of the trough. There. If you think about the lead times as I mentioned here before we need a strong backlog here as some of the lead times here with mods in new units.

John Olin: In fact, Justin, when you look at it, roughly 70% of our second half locomotive deliveries will be delivered in the third quarter, and that's strictly to meet the customer expectations, and those scudges scheduled to go built over a year ago. So consequently, our Q4 underlying growth remains very strong, and is evidenced by our strengthening, which is evidenced by the strengthening 12 month backlog, which was up 13% versus prior year, and like Rafael said in the prepared comments, we expect to see profitable growth as we transition into 2024. Okay, that's helpful.

Longer and you need the backlog and we have it for the next 12 and 24 months. The Rfps for me is international.

We're very bullish on key international markets, we have the momentum there you saw in Kazakhstan, but what if I think about Brazil, South Africa, and Australia, they're all driving significant momentum going into 2004.

On the margin side, the business will benefit in Florida benefit from integration should at all so we will continue to drive expansion here as well so all in all the pipeline of opportunities. We continue to get better visibility. In fact this is the best I'll call we've had.

Rafael Santana: And secondly, I wanted to ask about the backlog. So we did see a sequential moderation. I know timing particularly with some of the multi-year orders can move things around. So I'm curious if you've seen any slowdown in inquiry levels or the pipeline or if you would just chop this up to timing. And on the Kazakhstan $2 billion MOU, could you just confirm that's not included in the backlog? I'll take that one, Justin.

Stepping into a year, which strengthens our position here to deliver on profitable growth.

Super really appreciate the comprehensive discussion and then can I ask on transit.

Got a couple of <unk>.

Orders.

Really good margin performance there has that business in your mind earn the right to grow off of these levels I know you're waiting until you felt really good about the sustainable margin performance are we at a point where we.

Rafael Santana: So first, no, it's not in the backlog of orders, but talking about backlog, the backlog is healthy. It will be down year over year, but you got to look at it in conjunction with the multi-billion orders that we signed last year, which don't repeat every year. The other side of it, we have a number of multi-billion dollar opportunities that are being worked. And we just signed a large one, which is in the pipeline and will convert into orders.

We can think about that part of the platform.

Topline accelerating given.

Proved execution over the past year plus.

Jerry.

Pleased with the progress that we've seen there our continuing significant work to simplify the footprint and far to improve the business saw competitiveness.

Rafael Santana: So we see good momentum here. We don't see slowdown. We are progressing. We continue to grow in our pipeline supports it. Last quarter, as John said, 12 months. Last quarter was up 10 percent. This quarter, third quarter was up 13. So we're continuing to drive momentum here with key deals being signed. And if you think especially about the long lead items in our portfolio like mods and you'll look more as you need that backlog to be there. And it as we're looking to 24 and beyond.

I think what youre going to continue to see some variation quarter to quarter, but that team is committed to continuing to expand margins and take action here for profitable growth.

Despite of the more I'll call competitive environment.

The fundamentals are good in the business.

If you think about our book to Bill ratio will close above one for the year 12 month backlog is up multiyear backlog is up.

The 106% dollar one.

<unk> 12 over 12%.

Justin Long: Okay, thanks for the time. Thank you.

And the team is continuing to progress to really drive a mid teen margins. So yes, we expect the business to be more competitive.

Gary Reback: The next question is from Gary Reverage of Goldman Sachs. Please go ahead. Yes, hi. Good morning, everyone. Good morning. Hi, Rafael. Hi. Rafael, John, I want to just piece together a few of the comments that you made sounds like a pretty healthy order opportunity backdrop. U.S, rail car orders are constructive as well. So as we think about your five year outlook, it sounds like 2024 might be a better organic growth revenue opportunity than the five year outlook that you provided just putting the pieces together.

The marketplace, there and we're saying no no slow down in fact, we see the opportunity here to continue to grow with the business. If you think about the record backlog some of our customers had where we're continued to see momentum there.

I appreciate the discussion thanks.

The next question.

<unk> is from Ken <unk> Bank of America. Please go ahead.

Hello, Ken Your line is open.

Hi.

Gary Reback: And, you know, I'm wondering if you can confirm that that's how it's tracking. And if you could touch on the level of margin improvement, you can deliver it if it does indeed play out that way relative to the margin improvement cater that you laid out on a five year basis. Thank you. So, Jerry, I mean, as you see, finish the strong quarter, strong pipeline of opportunities, which I'll say have just strength and really divisibility that we have to contribute to drive revenue and margin expansion.

Sorry, this is Nathan <unk> dialing in for Ken Hester.

Gratulation stood the team on the solid results.

John I think you commented earlier that mix was favorable to gross margins.

I'm just looking through some of the segments. It looks like equipment is up 40% components of <unk>.

Services and digital are.

A little bit.

Surface up 18, and digital is down three I understand the team doesn't usually comment on segment level margins, but could you maybe just talk a little bit more about the commentary and maybe some of the pricing and mix dynamics that play.

Gary Reback: It's for sure a bit early to get into the specifics of 24 guidance, but the momentum will continue to see in my mind with results being driven by first start with the strength of the short and meet turn backlog. 2nd piece, we continue to see momentum on both new locomotives and mods. Our customers are continuing to invest for improved costs, so this is bringing modernization in so they can park to other units.

Yeah, Nathan So number one would you pointed out.

What we said may be a little bit counterintuitive rate.

But if you take it back to the discussion that we've been having for the last four quarters.

When we really started to step up a lot of locomotive deliveries internationally.

That put a fair amount of overall.

Mixed pressure on US again, starting in the third quarter of 2022, and really going through the last four quarters. So as we move out of the fourth quarter of 2023, we are stepping in from a freight perspective.

Gary Reback: They're investing for reliability. We're still coming out of the trap there. If you think about the lead times, as I mentioned here before, we need a strong backlog here as some of the lead times here with mods and new units is longer and you need the backlog and we have it for the next 12 and 24 months. The other piece for me is international. We're very bullish on key international markets. We have the momentum there.

<unk> into higher margin.

Deliveries and Shai.

Signing through even though given the fact that overall equipment at a lower margin than digital we are still seeing in aggregate a fair amount of mix favorability. The other piece of it is not only mix within the various groups, but also the mix between groups right. When you look at the freight growing at 22% 23.

Gary Reback: You saw on Kazakhstan, but what if I think about Brazil, South Africa, and Australia, they're all driving significant momentum going to 24. On the margin side, the business will benefit and farther benefit from integration 2.0, so we'll continue to drive expansion here as well. All in all, the pipeline of opportunities we could continue to get better visibility. In fact, this is the best call we've had. It's stopping to a year which strengthens our position here to deliver on profitable.

4%.

Currency adjusted Transit at 14, 5% that provides a fair amount of mixed.

Mixed tailwind as well.

Perfect. Thank you and as my follow up I just wanted to maybe continue on.

The prior train of thought on the backlog I noticed just on the freight side. It seems like this is the fifth quarter of sequential declines I think just comping. The multiyear backlog this quarter versus <unk> were down $722 million how should we read. This is this a is this any commentary on unit volumes.

Rafael Santana: Super, we really appreciate the conference of discussion. Can I ask on transit, we've got a couple of orders of really good margin performance there. Has that business in your mind earned the right to grow off of these levels? I know you're waiting until you felt really good about the sustainable margin performance or we had a point where we can think about that part of the platform, top line, accelerating given the improved execution over the past year plus.

Or.

Maybe something regarding pricing or mix.

Any thoughts there would be helpful.

I think you got to keep in mind first the lumpiness of the multiyear orders that we get and Youre going to see that lumpiness on not just playing out through the quarters.

That's lumpiness will play out a year or so as well as we mentioned, we expect backlog to be down this year year over year.

But the other side of it is the multi billion dollars orders that were working on which are not in our backlog and we expect that to convert so I really look at us in terms of.

Rafael Santana: Jerry, we're pleased with the progress that was seen there. We're continuing significant work to simplify the footprint and farther improve the business competitiveness. I think you're going to continue to see some variation quarter to quarter, but that team is committed to continuing to expand margins and take action here for profitable growth. Despite of the more, I'll call competitive environment. The fundamentals are good in the business. If you think about our book to build ratio, we'll close above one for the year, 12-month backlog is up, multi-year backlog is up, 1.6% out of one, I think 12, over 12% and the team is continuing to progress to really drive a meeting margin.

The lumpiness of the orders the auto piece, you've got to be very focused on is when you think about the lead times on certain of your products, making sure that you have the coverage toward threat and that's why I highlighted both modernizations and new locomotives. So if you think about the lead times on the house you need a strong coverage and we have it.

We have it if we think about a 24, we have it beyond 'twenty four.

Perfect I appreciate your thoughts thank you.

The next question is from Scott Group of Wolfe Research. Please go ahead.

Good morning. This is <unk> on for Scott Group My first question.

Rafael Santana: So yes, we expect a business to be more competitive in the marketplace there and we're saying no slowdown. In fact, we see the options here to continue to grow with the business. If you think about the record backlog, some of our customers had where we're continuing to see momentum there. I appreciate the discussion. Thanks. Thank you.

You are showing very strong EPS growth this year, but what are the puts and takes to another year of double digit EPS growth next year can you kind of walk through the moving parts there. Thank you.

I think.

Ivan it's very much similar to what we experienced this year is one volume growth does wonders for expanding margins right and driving incremental growth we've talked about our incremental growth is about 25% to 30% so with that incremental volume, which we would expect revenue growth in 2024.

Ken Hawker: The next question is from Ken Hawker of Bank of America. Please go ahead. Hello. Ken, your line is open. Hi. Hi, sorry.

We will build on EPS growth and.

Maiden Ho-Dionling: This is Maiden Ho-Dionling in for Ken Hector. Congratulations to the team on the solid results. John, I think you commented earlier that mix was favorable to freight growth margins. I'm just looking through some of the segments. Looks like equipment's up 40%, components up 30, yet services and digital are a little bit I mean, services up 18 and digital's down three. I understand the team doesn't usually comment on segment level margins, but could you maybe just talk a little bit more about the comment there and maybe some of the pricing and mix dynamics I play?

In addition to that the other.

There is Raphael had mentioned you know integration to point out so that was a three year investment and we're just starting to get to the kind of the ramp on the savings plan and we're seeing that ramp up in the first three quarters of this year, but expect the largest growth in terms of savings due to that program in 2024, so that again.

We'll drive margins, a little bit faster than revenue, but overall as we sit today and look forward to 2024, we expect that profitable growth that Raphael spoke to and with that.

Maiden Ho-Dionling: Nathan, so number one would you point it out what we said may be a little bit counterintuitive, right? But if you take it back to the discussion that we've been having for the last four quarters, when we really started to step up a lot of locomotive deliveries internationally that put a fair amount of overall mixed pressure on us again starting in the third quarter of 2022 and really going through the last four quarters.

We expect to be.

Overall in line with our.

Long term objectives, and a long term guidance I would reinforce a few other points, which is just element of international markets I spoke here, specifically about Brazil, South Africa, Kazakhstan, Australia, which are very significant and we have.

<unk> significant momentum Walgreens to 'twenty four with this market. So we do expect significant growth there from a sales perspective and the other pieces.

Maiden Ho-Dionling: So as we move out of the fourth quarter of 2023, we are stepping in from a free perspective into higher margin deliveries and that's shining through even though given the fact that overall equipment's at a lower margin than digital, we are still seeing an aggregate a fair amount of mixed availability. The other piece of it is not only mixed within the various groups, but also the mix between groups, right? When you look at the freight growing at 23.4% and currency adjusted, transit at 14.5%, that provides a fair amount of from Mixtail Winds as well.

Again, the coverage as we looking to stepping into 2024, which is certainly one of the strongest coverages, we've had stepping into any given year.

Thank you and then just a follow on again on the backlog. The one your backlog is up nicely year over year, but the multiyear backlog of course is down can you just kind of go through that divergence why is that happening and which one of those metrics is the better one to focus on the one year or multiyear.

Thank you.

Got it.

I go back to the things I've highlighted here you got to make sure you have the coverage, especially on the long lead items Rois, if youre getting an order here for a new locomotive at this point and you don't have the coverage for 'twenty four I, there's not much you can do there so having the coverage for that long leads.

John Olin: Perfect, thank you. And as my follow-up, I just wanted to maybe continue on the prior turn of thought on the back lock. I noticed just on the freight side, it seems like this is the fifth quarter of sequential declines, I think, just comping the multi-year back lock, this quarter versus 2Q, we're down 722 million. How should we read this? Is this any commentary on unit volumes, or maybe something regarding pricing or mix, and any thoughts there will be helpful?

Items is important and we have at the.

The second piece I talked about is the fact, our fleets internationally continued to grow out. So we're seeing good momentum there not just from a capex, but from also an opex perspective, so that's very positive and in North America kind of discussions continues despite of I'd say continue to grow parking levels.

John Olin: I think you've got to keep in mind, first, the lumpiness of the multi-year orders that we get. And you're going to see that lumpiness not just playing out through the quarters. That lumpiness will play out on the years as well. As we mentioned, we expect the back lock to be down this year, year over year. But the other side of it is the multi-billion dollar orders that we're working on, which are not in our back lock, and we expect that to convert.

Our customers are investing for really lower costs for improved efficiency for improved reliability. So all in all when we think about the momentum here looking at North America, and internationally Capex and Opex.

Changes to looking to profitable growth going to 24 very much aligned to the long term guidance we've provided.

John Olin: So, I really look at that in terms of the lumpiness of the orders. The other piece you've got to be very focused on is when you think about the lead times on certain of your products, making sure that you have the coverage to work through it, and that's why I highlighted both modernizations and new locomotives. So, if you think about the lead times on those, you need a strong coverage. And we have it. We have it. We think about 24. We have it beyond 24.

John Olin: Perfect. I appreciate your thoughts.

Thank you.

The next question is from Matt Alcott of TD Cowen. Please go ahead.

Good morning. Thank you if we take the guidance raise and the sequential moderation in the 12 month backlog together.

Scott Group: Thank you.

Is it because you had some deliveries that were scheduled for next year and were pulled forward to this year.

Ivan Leon: The next question is from Scott Group of Wolf Research. Please go ahead.

No no not at all Matt when we look at it we've been talking about the year a lot in the first half second half and at the beginning of the year, We said that first half would grow a little bit faster than the second half.

John Olin: Good morning. This is Ivan Leon for Scott Group. My first question. You're showing very strong EPS growth this year. Well, what are the puts and takes to another year of double digit EPS growth next year? Can you kind of walk through the moving parts there? Thank you. I think Ivan, it's very much similar to what we experienced this year, is one volume growth does wonders for expanding margins, right, and driving incremental growth.

And I think the way to look at between our third and fourth quarter is to look at them together and we're seeing what you would see on the implied growth is 14% growth in the back half versus 16% growth in the first half and again, that's what we've expected.

But it's really a function of the way the production plan was set up over a year ago in terms of the deliveries that we expected to make in the third quarter versus the fourth quarter and some of our larger equipment in particular on locomotives and as I had mentioned that about 70% of the second half.

John Olin: We've talked about our incremental growth is about 25 to 30%. So, with that incremental volume, which we would expect revenue growth in 2024, we will build EPS growth in addition to that. The other is Raphael had mentioned, you know, integration 2.0. So, that was a three-year investment, and we're just starting to get to kind of the ramp on the savings plan. And we're seeing that ramp up in the first three quarters of this year, but expect the largest growth in terms of savings through that program in 2024.

John Olin: So, that again will drive margins a little bit faster than revenue. But overall, as we sit today and look forward to 2024, we expect that profitable growth that Raphael spoke to, and with that, you know, we expect to be overall in line with our long-term objectives and our long-term guidance. I would reinforce two auto points, which is just element of international markets. I spoke here specifically about Brazil, South Africa, Kazakhstan, and Australia, which are very significant.

Our production plan for locomotives is delivered in the third quarter versus the fourth quarter. So overall when you even those out.

Had a year very much in terms of overall cadence expectations.

At a higher level of revenue growth.

Which.

Explains the raise in the second and the third quarter.

But the fourth quarter underlying momentum is just as strong as the third quarter and we feel good as going into the 2024 with a backlog growing as Raphael had mentioned, it's actually sequentially grown for the last couple of quarters and.

As we exited the third quarter is up 13%.

Hum.

That's very helpful to know just on my follow up question John.

Can you talk a bit about the <unk>.

More about the $2 billion to understand how much of it do you think could materialize into orders in 'twenty, four and how much could materialize in deliveries in 'twenty four we're.

John Olin: And we have significant momentum walking to 24 with this market. So, we do expect significant growth there from a sales perspective. And the other piece is, again, the coverage, as we look into stopping into 2024, which is certainly one of the strongest coverages we've had stopping Thank you. And then just to follow on again on the backlog, the one-year backlog is up nicely over here, but the multi-year backlog, of course, is down.

We're not going to break out the timing of it but we would expect all $2 billion of it to turn into orders.

We've got a great customer in Kazakhstan, and they've got a tremendous growth opportunity given some of the dynamics of the flow of products from China to Europe, and we're certainly working with them.

Upgrade their fleet and they expand their fleet.

They can manage their future.

John Olin: Can you just kind of go through that divergence? Why is that happening? And which one of those metrics is the better one to focus on the one year or the multi-year? Thank you. I got first I go back to the things I've highlighted here. You've got to make sure you have the coverage, especially on the long-lead items. Otherwise, if you're getting an order here for a new locomotive at this point and you don't have the coverage for 24, there's not much you can do there.

To add the following we expect a large part of that to converge.

As I said about some international markets.

We're increasing deliveries in Kazakhstan, and jobs strong, but ill go into 'twenty four.

Perfect. Thanks, Raphael Thanks, John I appreciate it thank you Matt.

The next question is from saree.

<unk> of Jefferies. Please go ahead.

Thanks, Good morning, so kind of building on your comments I think you mentioned the largest savings from integration.

John Olin: So, having the coverage for that long-leads items is important and we have it. The second piece I talked about is the fact our fleets, the international are continuing to grow out. So, we're saying, good momentum there, not just from a cat-packs, but from also an op-packs perspective. So, that's very positive. And I'm in North America, discussions continues. Despite of, I would say, continue to grow parking levels. Customers are investing for really lower costs, for improved efficiency, for improved reliability.

Now into next year could you just got an update on the progress you've seen there how is it going versus expectations and any way to quantify that margin benefited in 2024.

John Olin: So, all in all, when we think about the momentum here, looking at North America and internationally cat-packs and op-packs, I'd continue to look into profitable growth, going to 24, very much aligned to the long-term guidance. We've provided. Thank you.

Thanks, Yeah, sorry, so if you recall that the integration to point out was a three year program that started in the beginning of 2022 and on any of these type of restructuring programs or opportunities to integrate and we will see a higher investment profile in the beginning and a higher savings profile in the back as we get the.

The projects often executed.

So to date, we've invested about $100 million out of an expected $1 35 to $1 65.

Over the next three or over that three year period of time and Siri. What we're seeing now is just as those projects start and either.

The facilities are being consolidated or products being moved or however, we're looking at optimization those savings are starting to build and at the end of 2022, we had about ongoing savings of about $5 million.

Matt Alcott: The next question is from Matt Alcott of TD Cohen. Please go ahead.

John Olin: Good morning. Thank you. If we take the guidance raise and the sequential moderation in the 12 month backlog together, is it because you have some deliveries that were scheduled for next year and we're pulled forward? To this year? No, not at all, Matt. You know, when we look at it, we've been talking about the year a lot in first half, second half. And at the beginning of the year, we said that first half would grow a little bit faster than the second half.

And that continues to escalate and we look for that to build up to $75 to $95 million. So we won't quantify it but you can start to start to see the momentum that we need to have.

To be at a run rate of $75 to $95 million in 2025.

Yeah.

Okay, and then maybe maybe this is kind of partially related to the trends and margins came in pretty shy.

John Olin: And I think the way to look at between our third and fourth quarter is to look at them together. And we're seeing what you would see on the implied growth is 14% growth in the back half versus 16% growth in the first half. And again, that's what we've expected. But it's really a function of the way the production plan was set up over a year ago in terms of the deliveries that we expected to make in the third quarter versus the fourth quarter on some of our larger equipment, in particular on locomotives.

Stay with typically would be a weaker seasonal quarter. So what kind of drove that margin improvement there and how does this set you up as we look into 'twenty 'twenty four yes.

Yes, we're very pleased with the transit margin is up one five percentage points driven by a couple of things series number one it's certainly fixed costs absorption was favorable given the volume growth ex currency of 14, 5%.

Other area is product mix product mix was favorable in transit and if you look at the aftermarket grew on a fair amount faster than.

John Olin: And as I had mentioned that about 70% of the second half's production plan for locomotives is delivered in the third quarter versus the fourth quarter. So overall, when you even those out, we've had a year very much in terms of overall cadence expectations, of course, at a higher level of revenue growth, which explains the raise in the second and the third quarter. But the fourth quarter underlying momentum is just as strong as the third quarter. And we feel good as going into the 2024 with the backlog growing as Raphael had mentioned. It's actually sequentially grown for the last couple quarters. And as we exit the third quarter is up 13%. 10%.

And also when we talk about integration to point, a fair amount of that hits, our transit business right. So that's helping driving it and also we're lapping some of the inefficiencies that we had in cyber in the year ago quarter.

So.

Feel very good about the transit business is Raphael had mentioned and certainly a bright future as we continue to move that business forward.

Okay. Thanks for taking the questions.

Thank you.

The next question is from Chris Wetherbee of Citigroup. Please go ahead.

Hey, good morning, guys, it's Rob on for Chris This morning.

Could you give us an update in terms of your delivery timing expectations for next year like.

John Olin: Now, that's very helpful to know. I just want my follow-up question, John. Can you talk a bit about the, a bit more about that $2 billion Kazakhstan? How much of it do you think could materialize in orders and $24, and how much could materialize in deliveries and $24? We're not going to break out the timing of it, but we would expect all $2 billion of it to turn into orders. We've got a great customer in Kazakhstan, and they've got a tremendous growth opportunity, given some of the dynamics of the flow of products from China to Europe.

As of right now the orders more kind of first half or second half loaded or do not yet have line of sight on that one.

Yes, Rob it's a little bit early for us.

We started talking about gating.

It's early for us to talk about.

Guidance as well so our typical cadence would be to provide guidance in the call in February after the year is done and again just broadly.

We're looking at certainly profitable growth in 2024, but in another quarter's time, we'll have certainly more detail with regards to what that is and what's driving it.

John Olin: And we're certainly working with them to, you know, to upgrade their fleet, and expand their fleet so that they can manage their future. Out of the following, we expect a large part of that to converge. And as I said about some international markets, we're increasing deliveries in Kazakhstan, and it's a strong growth going to $24.

That's helpful and this might be a little bit too early as well if we're looking at eight to 12 months backlog, how does that mix compared Q.

Next today do you have a sense of is it better is it worse.

Thinking about some of the puts and takes for next year.

Matt Alcott: Perfect. Thanks, Raphael. Thanks, John. Appreciate it. Thank you.

I think more in terms of the coverage looking ahead right.

Sherry Boroditsky: Thank you, Matt. The next question is from Therese, or Ditsky of Jeffries. Please go ahead. Thanks. Good morning. So kind of building on your comments. I think you mentioned the largest savings from integration 2.0 into next year, because you just got an update on the progress you're seeing there. How is it going worth expectations? And any way to quantify the margin benefit into 2024? Thanks.

My comments on the strong coverage that it provides piece.

Piece of it has to be connected with long lead parts of our portfolio and Thats, where I think about new locomotives and I think about mods and I think that in conjunction of both international markets and in North America.

Probably the strongest certainly the strongest we've had to walk into any year.

Hello.

John Olin: Yes, Sherry. So if you recall, that integration 2.0 was a three-year program that started at the beginning of 2022. And on any of these type of restructuring programs or opportunities to integrate, we'll see a higher investment profile in the beginning and a higher savings profile in the back as we get the projects off and executed. So to date, we're invested about 100 million out of an expected 135 to 165 million over the next three, or over that three-year period of time.

Thanks, Rob Thank you.

The next question is from.

Rob Wertheimer of Melius research. Please go ahead.

Thank you I just had two quick follow ups, John I think you've been pretty clear on the gross margin and some of the puts and takes I wonder, though I mean can you give any comment on just what normal gross margin leverage should be apps.

Absent the strike or whatever and whether next year has any incremental labor pressure that would keep gross margin from rising great fixed cost leverage across the enterprise don't get me wrong, but more on the SG&A line. So just any comment on that would be helpful. Thank you.

John Olin: And Sherry, what we're seeing now is just as those projects start, and either the facilities are being consolidated, or products being moved, or however we're looking at optimization, those savings are starting to build. And at the end of 2022, we had about, I'm going savings of about five million dollars. And that continues to escalate, and we look for that to build up to 75 to 95 million. So we won't quantify it, but you can start to see the momentum that we need to have to be at a run rate of 75 to 95 million in 2025.

I think from a gross margin standpoint, what youre seeing on a year to date basis is certainly a drag from the strike in Erie.

But also that mix that we talked about right we had mix headwinds in the first half and that had.

That impact on gross margin.

So this quarter gross margin was flat again affected by the strike at Erie.

But.

And a lot of benefits as we move forward and.

When we look at integration to point, all that directly fits into the gross margin and we would expect a tailwind on margins because of that and then also the biggest driver of margin as volume rate and leveraging the fixed cost structure of the business and that's not only fixed fixed manufacturing costs, but also the fixed portion of SG&A.

John Olin: Great, and then maybe this is kind of partially related, but transit margins came in pretty strong, despite what typically would be a weaker seasonal quarter. So what kind of drove that margin improvement there and how does this set you up as we look into 2024? Yeah, we're very pleased with transit margin. It's up one and a half percentage points driven by a couple things, Sherry. Number one, it's certainly fixed cost absorption was favorable given the volume growth ex-currency of 14 and a half percent.

Hey.

So as we grow we expect to continue to aggressively manage our cost structure and making sure that we do deliver those incremental volumes, which again, we would expect to be in the 25% to 30% range.

John Olin: The other area is product mix. Product mix was favorable in transit, and if you look at the aftermarket grew, I'm a fair amount faster than OE. And also when we talk about integration two point, all a fair amount of that, it's our transit business, right, so that's helping driving it. And also we're laughing on some of the inefficiencies that we had in Cyber and the Corp. So, I'm very good about the transit business, as Rafael had mentioned, and certainly a bright future as we continue to move that business forward.

Perfect. Thank you and then one last one the closeout.

Most of them are really strong I think particularly for some of your customers.

Any sign that that has peaked out or are we still early in that cycle, just any commentary there and won't stop.

So I don't think we caught the first part of the question exactly.

Thank you pardon mining quite strong, especially I think for some of your customers I'm just curious if that.

Sherry Boroditsky: Okay, thanks for taking the questions. Thank you. In terms of your delivery timing expectations for next year, like as of right now, the orders are more kind of first half, or second half loaded, or do you not yet have line of sight on that one? Yeah, Robert's a little bit early for us to start talking about dating, early for us to talk about guidance as well. So, typical cadence would be to provide guidance in the call in February after the year is done.

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Can you or whether youre seeing any signs that that could plateau continuous mining is very strong right now and so all the indications. We've got is that momentum continuing into next year as well so that's a.

Certainly not in one of the positive momentum that we see on business.

Thank you.

Thank you.

The next question is from Steve Barger of Keybanc capital markets. Please go ahead.

Hey, Thanks, good morning.

Rafael.

Yes backlog has been stable at around 22 billion for the five years post the GE deal do you think of that as a natural run rate, meaning if things go to plan and it'll be around the same five years from now or the way, it's structured as monetization speed up at some point, meaning revenue accelerates, but backlog contracts.

Sherry Boroditsky: And again, just broadly, we're looking at certainly profitable growth in 2024. But another quarter's time will have certainly more detail with regards to what that is and what's driving it. That's helpful, and this might be a little bit too early as well. If we're looking at the 12-month backlog, how does that mix compare to the next today? Do you have a sense, is it better? Is it worse? Is there just kind of thinking about some of the puts and takes for next year?

You think about that long term.

Rob I E.

Not going to give you like specific numbers here thinking five years from now just thinking I'll tell you how we're running the business right. There is really a strong focus on making sure that we've got the coverage as we look ahead to <unk> coverage sports what I'll call <unk>.

<unk> growth for the business, that's where a big piece of the focus has been in the past. If you go back there was maybe a lot of focus, especially on multi service agreements that covered fleets for long period of time.

Sherry Boroditsky: I think it more in terms of the coverage looking ahead, right? And my comments on the strong coverage that it provides, piece of that has really to be connected with long lead parts of our portfolio. And that's where I think about new locomotives, and I think about mods, and I think it in conjunction of both international markets and North American. That's probably the strongest, certainly the strongest we've had walking to any year. A particular.

We've managed that in mix with long term parts agreements in some cases, we might take a different approach depending on what the fleets are with the customer. So all in all I think those are levers that we gotta be managing and really thinking more about the value.

Rob Werffiner: Thanks, Rob. Thank you.

We are delivering especially as we introduce more opportunities to improve fleet.

John Olin: The next question is from Rob Werffiner of Melius Research. Please go ahead. Thank you. I just had two quick follow-ups. John, I think you've been pretty clear on the gross margin and some of the puts and takes. I wonder, though, I mean, can you give any comment on just what normal gross margin leverage should be, you know, absent the strike or whatever? And whether next year has any incremental labor pressure that would keep gross margin from rising. I mean, a great fixed cost leverage across the enterprise. Don't get me wrong, but more on the SGNA line. So just any comment on that would be helpful.

A lot of the upgrades that we talk about in terms of fuel efficiency and things like that and we want to make sure we're where we're driving value for both our customers and ourselves through that process, but all in all I mean, we expect to.

Continue to drive that momentum forward with profitable graph does that help.

Yes, I think so if I can just boil that down it sounds like you do expect when you look at your pipeline and how you try to manage the business that you'll have.

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Forward years revenue in backlog for the foreseeable future is that fair.

John Olin: Thank you. Yeah, I think from my gross margin standpoint, what you're seeing on a year to date basis is I'm certainly a drag from the strike in eerie. But also that mix that we talked about, right? We had mixed headwinds in the first half and that had an impact on gross margin. So this quarter gross margin was flat again affected by the strike at eerie, but you know, a lot of benefits as we move forward.

I don't think we can we would put an index on it just looking at the backlog of over the last five years, we've seen it oscillate between 'twenty, one and a half in 'twenty, two and a half I think parts of it are the economy that goes into that.

And when we have periods of big orders, we see it rise and then that kind of burns off and Thats exactly what were seeing in 'twenty two to 'twenty three rate we saw it rise about $1 billion in 'twenty, two and as we work that off we're lapping those numbers and backlogs down.

John Olin: And when we look at integration 2.0, you know, that directly fits into the gross margin and we would expect a tailwind on margins because of that. And then also the biggest driver of margin is its volume, right? And leveraging the fixed cost structure of the business. Business, and that's not only fixed manufacturing costs, but also the fixed portion of SG&A. So, as we grow, we expect to continue to aggressively manage our cost structure and making sure that we do deliver those incremental volumes, which again, we would expect to be in the 25 to 30% range.

45%.

So I think all.

Rob Werffiner: Perfect. Thank you.

Over a long period of time, we would expect it to rise, but I don't think there is a formula you can put on it we keep coming back to this word lumpy.

Is that.

It is very lumpy, depending on what multi years I think the best way to remove the Lumpiness is to look at the 12 months right. So we don't we kind of neutralize for that and the 12 months has been very steady and growing.

Up on the three quarters. This year and has been gaining momentum. This is a business that go before the transaction was done through a lot of I'll call ups and downs through the cycle I think one of the things that the team has been very purposeful on is making sure. We are working with customers to drive what I'll call sustainable.

Steve Larger: And then one last one to close out. Much more really strong, I think particularly for some of your customers. Any sign that that has, you know, peaked out. Are we still early in that cycle, just any commentary there and I will stop. So we didn't, I don't think we cut the first part of the question. Exactly. Thank pardon. Mining him quite strong, especially I think for some of your customers. I'm just curious if that that strength can continue or whether you're seeing any signs that, you know, for that record plateau. Thank you.

The investments moving forward, which place well for the entire ecosystem, it's an element of making sure that we ultimately.

Getting to the right quality the right value for the product ultra.

Ultimately to battery costs as we run some of these programs and Thats been a huge part of the focus if you think about the focus on a 12 month backlog 18, 24, that's a significant part of that and the longer term agreements will play them to make sure that we've got the continuation of a.

Rafael Santana: You continue. Mining is very strong right now and all the indications we've got is of that momentum continuing to next year as well. So that's certainly not one of the positive momentum that we see on the business.

John Olin: Thank you.

Steve Larger: The next question is from Steve larger of key bank capital markets.

A lot of the infrastructure that we've got out there that supports that.

The delivery of some of these assets for customers around the world.

Rafael Santana: Please go ahead. Hey, thanks. Good morning.

Yeah, that's that's good color.

John Olin: Rafael. Yeah. Backlog has been stable at around 22 billion for the five years post the GED deal. Do you think of that as a natural run rate, meaning if things go to plan, it'll be around the same five years from now? Or the way it's structured is monetization speed up at some point, meaning revenue accelerates, but backlog contracts. How do you think about that long term? I'm not going to give you like specific numbers.

Only comment I'll make is mid single digit percentage variance around a $21 billion five year averages is not that lumpy I think a lot of companies would love to have that.

As my follow up John I know you don't want to get into specific line items around the strike, but this was a record quarter for freight revenue in the best segment margins. Since 2019 can you tell us what revenue and margin could have been and is it fair to say this quarter.

John Olin: You're thinking five years from now. I'll just think I'll tell you how we're running the business, right? There's really a strong focus on making sure that we've got the coverage as we look ahead and that coverage supports what I'll call a profitable growth for the business. That's where a big piece of the focus has been. In the past, if you go back, there was maybe a lot of focus especially on multi service agreements that covered fleets for long period of time.

We will not be a high watermark as we think about freight in 2024.

Well, we expect to continue to grow this company in $2024 25 and 26.

Steven and well beyond that.

No I can't pull out what it would look like without all that I can say is it was a tremendous effort on the part of the overall company to be able to deliver.

Deliver that revenue growth and again I talked about the locomotive piece right in that shift.

John Olin: We've managed that in mix with long term parts agreements. In some cases, we might take a different approach depending on what the fleets are with the customer. All in all, I think those are lovers that we've got to be managing and really thinking more about the value that we're delivering, especially as we introduce more opportunities to improve fleets. A lot of the upgrades that we talk about in terms of fuel efficiency and things like that.

We delivered all the locomotives.

In the second quarter that we were intending to deliver with the 10 week strike at our largest plant that makes locomotives. So it's a tremendous tribute to the team and how the whole company pulled together to continue to work through the Strait.

Got it thank you.

Thank you.

This concludes our question and answer session I would like to turn the conference back over to Kristine Kubacki for closing remarks. Thank you Kate and thank you everyone for your participation today, we look forward to speaking with you again next quarter.

John Olin: We want to make sure we're driving value for both our customers and ourselves through that process. But all in all, I mean, we expect to continue to drive that momentum forward with profitable growth. Does that help? Yeah, I think so. If I can just boil that down, it sounds like you do expect when you look at your pipeline and how you try to manage the business that you'll have, you know, 2X, the forward years revenue in backlog for the foreseeable future.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.

[music].

John Olin: Is that fair? I don't think we can, we would put an index on it, you know, just looking at the backlog over the last five years, we've seen it oscillate between 21 and a half and 22 and a half. I think parts of it are, you know, the economy that goes into that. And when we have periods of big orders, we see it rise and then that kind of burns off. And that's exactly what we're seeing in 22 to 23, right?

John Olin: We saw it rise about a billion dollars in 22. And as we worked that off, we're lapping those numbers and backlogs down, you know, four or five percent. So I think over a long period of time, we would expect it to rise, but I don't think there's a formula you can put on it. You know, we keep coming back to this word lump, is that it's very lumpy depending on what multi-years.

Yes.

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John Olin: I think the best way to remove the lumpiness is to look at the 12-month, right? So we don't, we kind of neutralize for that and the 12-month has been very steady and growing, you know, up on the three-quarters this year and has been gaining momentum. This is a business they go before the transactional was done. There's a lot of I'll call ups and downs through the cycle. I think one of the things that the team has been very purposeful on is making sure we're working with customers to drive what I'll call sustainable investments moving forward, which plays a well for the entire ecosystem.

John Olin: It's an element of making sure that we ultimately getting to the right quality, the right value for the product, ultimately to about a cost as we run some of these programs. And that's being a huge part of the focus if you think about the focus on 12-month backlog, 18, 24. That's a significant part of that and the longer-term agreements will play them to make sure that we've got the continuation of a lot of the infrastructure that we've got out there, that supports delivery of some of these assets for customers around the world.

John Olin: Yeah, that's that's good. And all the only comment I'll make is, you know, mid-single-digit percentage variance around a $21 billion or five-year average is not that lumpy. I think a lot of companies would love to have that.

John Olin: As my follow-up, John, I know you don't want to get into specific line items around the strike, but this was a record quarter for free revenue and the best segment margin since 2019. Can you tell us what revenue margin could have been and is it fair to say this quarter will not be a high watermark as we think about freight in 2024? Well, we expect to continue to grow this company in 2024, 25 and 26, Stephen, and well beyond that.

John Olin: You know, I can't pull out what it would look like without. All I can say is it was a tremendous effort on the part of the overall company to be able to deliver that revenue growth. And again, I talked about the locomotive piece, right, in that shift. We delivered all the locomotives, you know, in the second quarter that we were intending to deliver with the 10-week strike at our largest plant that makes locomotives. So it's a tremendous tribute to the team and how the whole company pulled together to continue to work through the strike. Got it. Thank you.

Kristine Kubacki: This concludes our question and answer session. I would like to turn the conference back over to Christine Kubaki for closing remarks. Thank you, Kate. And thank you everyone for your participation today. We look forward to speaking with you again next quarter.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you. John Olin, John Olin, John Olin, John Olin