Q3 2024 Westinghouse Air Brake Technologies Corp Earnings Call
Operator: Good day, and welcome to the Web Tech 3rd quarter of 2024 earnings conference call. All participants will be in the Sonoma mode. To do need assistance, please send a conference specialist by pressing the star key followed by zero.
Good day and welcome to the web Tech third quarter 'twenty 'twenty four earnings conference call.
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Kyra Yates: I now would like to comment over to Kyra Yates, Vice President, Investor Relations. Please go ahead.
Speaker Change: Now I would like to high costs over a car or Yates Vice President of Investor Relations. Please go ahead.
Kyra Yates: Thank you, operator.
Yates Vice: Thank you operator, good morning, everyone and welcome to <unk> third quarter 2024 earnings call with US today are president and CEO Rafael Santana CFO, John Olin and senior Vice President of Finance John Mass alerts.
Kyra Yates: Good morning, everyone, and welcome to Web Tech's 3rd quarter 2024 earnings call. With us today, our President and CEO, Rafael Santana, CFO, John Olin, and Senior Vice President of Finance, John Mastillers.
Kyra Yates: Today's slide presentation, along with our earnings release and financial disclosures, were posted to our website earlier today and can be accessed on the Investor Relations tab. Some statements we are making are forward-looking and based on our best view of the world in our business today. For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures and 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.
Yates Vice: A slide presentation, along with our earnings release and financial disclosures were posted to our website earlier today and can be accessed on the Investor Relations tab. Some statements. We're making are forward looking and based on our best view of the world and our business today for more detailed risks uncertainties and assumptions relating to.
Yates Vice: Our forward looking statements. Please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics I will now turn the call over to Rafael.
Rafael O. Santana: I will now turn the call over to Rafael. Thanks, Kyra, and good morning, everyone. Let's move to slide four. We'll start with an update on our business, my perspectives on the quarter and progress against our long-term value creation framework, and then John will cover the financials. We delivered another solid quarter, evidenced by sales growth, margin expansion, increased earnings, and strong cash flow. Sales were $2.7 billion, which was up nearly 4.5% versus the prior year. Revenue growth was driven by both the freight and transit segments. Adjusted EPS was opt nearly 18% from the year ago quarter, driven by increased sales and margin expansion.
Rafael: Thanks, Kara and good morning, everyone, let's move to slide four I will start with an update on our business my perspectives on the quarter and progress against our long term value creation framework and then John will cover the financials, we delivered another solid quarter despite sales growth.
Rafael: Margin expansion increased earnings and strong cash flow.
Rafael: Sales were $2 $7 billion, which was up nearly four 5% versus the prior year revenue, but also was driven by both the freight and transit segments.
Rafael: Adjusted EPS was up nearly 18% from the year ago quarter, driven by increased sales and margin expansion.
Rafael Santana: So, our cash flow from operations for the quarter was $542 million. We continued to execute against our capital allocation framework to maximize shareholder value by investing for future growth and returning cash to our shareholders. The 12 month backlog was $7.6 billion, opt 7.5%, signifying conceded momentum and visibility across the business. And the total multi-year backlog was $22 billion. Overall, the Wattac team delivered the solid third quarter behind an intense focus on execution. Looking ahead, I'm encouraged by the underlying strength and momentum across the business and believe Wattac is positioned for continued profitable growth ahead.
Rafael: Total cash flow from operations for the quarter was $542 million, we continue to execute against our capital allocation framework to maximize shareholder value by investing for future growth and returning cash to our shareholders.
Rafael: 12 month backlog was $7 $6 billion.
Rafael: Seven 5%, signifying continued momentum and visibility across the business and the total multiyear backlog was $22 billion overall.
Rafael: Overall, the Whatsapp team delivered a solid third quarter behind any gas focus on execution.
Rafael: Looking ahead, I'm encouraged by the underlying strength and momentum across the business.
Rafael: I believe <unk> is positioned for continued profitable growth.
Rafael O. Santana: Shifting our focus to Zvi5, let's talk about 2024 and market expectations in more detail. While key metrics across our freight business remain next, we are encouraged by the underlying momentum of our business. The contingent strength of our international markets and the robust pipeline of opportunities across geographies. North American carloads continued to be up in the quarter despite this carload growth. The industries and webtax active locomotive fleet was largely flat when compared to last year's third quarter. Looking at the North American rail car belt, last quarter, the industry outlook for 2024 was 38,000 cars to be delivered, which has now been raised by the industry sources to 41,000 cars, down from last year's build of 45,000 cars.
Rafael: Shifting our focus to slide five.
Rafael: Let's talk about 2024 and market expectations in more detail.
Rafael: While key metrics across our freight business remain mixed.
Rafael: We are encouraged by the underlying momentum of our business.
Rafael: That could change its strength of our international markets and the robust pipeline of opportunities across geographies.
Rafael: North American carloads continue to be up in the quarter. Despite S carload graph the.
Rafael: The industries and <unk> active locomotive fleet was largely flat when compared to last year's third quarter.
Looking at the North American railcar belt.
Rafael: Last quarter the industry outlook for 2024 was 38000 cars to be delivered which has now been raised by the industry sources to 41000 cars down from last year's build a 45000 cars.
Rafael Santana: Internationally, we're seeing significant investments to expand and upgrade infrastructure, which are supporting a robust international locomotive border pipeline. This is the strongest it has been over the last five years. In mining, commodity prices and an aging fleet continue to support activity to refresh and upgrade the truck fleet. Finally, moving to the transit sector, we continue to see underlying indicators for growth. Ridership levels are increasing in key geographies along with the fleet expansion and renewals. There also continues to be a strong push with regulation and customer initiatives on decarbonization and sustainable transportation solutions.
Rafael: Internationally, we're seeing significant investments to expand and upgrade infrastructure, which are supporting a robust international locomotive borders pipeline.
Rafael: This is the strongest it has been over the last five years.
Rafael: In mining commodity prices and an aging fleet continue to support activity to refresh and upgrade the truck fleet.
Rafael: Finally, moving to the transit sector, we continue to see underlying indicators for grow ridership levels are increasing in key geographies, along with the fleet expansion and renewals.
Rafael: There also continues to be a strong posh with regulation and customer initiatives on de carbonization and sustainable transportation solutions.
Rafael O. Santana: Next, let's turn to slide six to discuss a few business highlights. Last year in the third quarter, we announced the signing of a strategic MOU with KTZ, the National Railway Company in Kazakhstan, for over $2 billion. Since that time, we have worked to finalize orders associated with that MOU, a multi-year new locomotive order with KTZ for $405 million. These locomotives will provide the efficiency, reliability, and operational savings to effectively support the growing demand on the trans-Caspian international route that connects China to Europe. Moving to North America, we secured the long-term parts agreement with a Class I railroad for over $300 million.
Rafael: Next let's turn to slide six to discuss a few business highlights.
Rafael: Last year in the third quarter, we announced the signing of a strategic Mou with <unk> The National Railway company in Kazakhstan for over $2 billion.
Rafael: Since that time, we have worked to finalize orders associated with that Mou.
Rafael: Multiyear new locomotive order with <unk> for $405 million.
These locomotives will provide the efficiency reliability and operational savings to effectively support the growing demand on the trans Caspian International route that connects China to Europe.
Rafael: Moving to North America, we secured the long term parts agreements with a class one railroad for over $300 million.
Rafael Santana: In transit, we signed a contract for $70 million with Siemens Mobility to supply passenger information systems for 90 Munich Aspon trains. And earlier in the quarter, we expanded our service contract with Indian Railways for not at $30 million. This agreement expands WAPTX locomotive service capabilities into the southern part of the country. All of this demonstrates the underlying strength across our businesses, the team's relentless focus on execution, and the strong pipeline of opportunities which we continue to execute on.
Rafael: In transit, we signed a contract for $70 million with Siemens mobility to supply passenger information systems for 90, Munich ASP on trains.
Rafael: And earlier in the quarter, we expanded our service contract with Indian Railways for not at $30 million disagreement expand swap tax locomotive service capabilities into the southern part of the country.
Rafael: All of this demonstrates the underlying strength across our businesses the team's relentless focus on execution and a strong pipeline of opportunities, which we continue to execute on.
John A. Olin: With that, I'll turn the call over to John to reveal the quarter segment and results in our overall financial performance. John, thanks, Raphael, and hello everyone. Turning to slide 7, I will review our third quarter results in more detail. Our third quarter results played out largely as we planned, with revenue, and better than expected with our operating margins. As we discussed in the last quarter call, we expected both revenue and margin growth to be higher in the first half than in the second half, with the second half growth to be at a much more tempered pace than we experienced in the first half.
Speaker Change: With that I'll turn the call over to John to review the quarter segment results and our overall financial performance John.
John: Thanks, Raphael and Hello, everyone turning to slide seven I'll review, our third quarter results in more detail.
John: Our third quarter results played out largely as we planned with revenue.
John: And better than expected with our operating margins.
John: As we discussed in the last quarter call, we expected both revenue and margin growth to be higher in the first half than in the second half with the second half growth to be at a much more tempered pace than we experienced in the first half.
John A. Olin: We also noted during the last call that, within the second half of this year, we expected the third quarter's growth to be greater than the fourth quarter's growth. This is still the case. Sequentially, we expect margins in 2.4 to come down from Q3, driven by the reverse of what we saw in Q3 regarding business group revenue mix. In Q3, we saw robust services growth, which comes at a higher margin, while the equipment business, which comes at a lower margin, was down versus prior year. This was largely a result of the timing of our production between new locomotives, modernizations, and engine overhalls.
We also noted during the last call that within the second half of this year, we expected the third quarter's growth to be greater than the fourth quarter's growth. This is still the case.
John: Sequentially, we expect margins in Q4 to come down from Q3, driven by the reverse of what we saw in Q3 regarding business group revenue mix.
In Q3, we saw robust services growth, which comes at a higher margin, while the equipment business, which comes at a lower margin was down versus prior year.
John: This was largely a result of the timing of our production between new locomotives Modernizations and engine overhauls.
John Olin: In Q4, we expect a significant mix headwind, which will temper Q4 adjusted operating margins to be modestly higher than year-ago levels. We expect double-digit sales growth in our equipment group due to increased locomotive deliveries, while services sales are expected to be down double-digit on a year-over-year basis, basically the reverse of our production timing in Q3. Sales for the third quarter were $2.66 billion, which reflects a 4.4% increase versus the prior year. Sales growth in the quarter was driven by both the freight and transit segments. For the quarter, GAAP operating income was $433 million. The increase was driven by higher sales, improved gross margin, and an unrelenting focus on continuous improvement and productivity.
John: In Q4, we expect a significant mix headwind, which will temper Q4, adjusted operating margins to be modestly higher than year ago levels, we expect double digit sales growth in our equipment group due to increased locomotive deliveries while services sales are expected to be down double digits on a year over year basis basically the reverse.
John: Our production timing in Q3.
John: Sales for the third quarter were $2 $66 billion, which reflects a four 4% increase versus the prior year sale.
John: Sales growth in the quarter was driven by both the freight and transit segments.
John: For the quarter GAAP operating income was $433 million. The increase was driven by higher sales improved gross margin and an unrelenting focus on continuous improvement in productivity.
John Olin: Adjusted operating margin in Q3 was 19.7 percent, up 1.8 percentage points versus the prior year. This increase was driven by improved gross margin of 1.8 percentage points. The gap earnings per deluded share were $1.63, which was up 22.6% versus a year-a-go quarter. During the quarter, we had net pre-tax charges of $18 million for restructuring, which were primarily related to our Integration 2.0 and our portfolio optimization initiative to further integrate and streamline Webtex operations. As you may recall, integration 2.0 is expected to drive $75 to $90 million of run rate savings by 2025, and our portfolio optimization initiative will eliminate roughly $110 million of low-margin non-strategic revenue while reducing manufacturing complexity.
John: Adjusted operating margin in Q3 was 19, 7%.
John: Up one eight percentage points versus the prior year. This increase was driven by improved gross margin of one eight percentage points.
John: GAAP earnings per diluted share were $1, 63, which was up 22, 6% versus a year ago quarter.
John: During the quarter, we had net pre tax charges of $18 million for restructuring, which were primarily related to our integration to <unk> and our portfolio optimization initiatives to further integrate and streamline <unk> operations.
John: As you may recall integration to Plano.
John: As expected to drive $75 million to $90 million of run rate savings by 2025, and our portfolio optimization initiative will eliminate roughly a $110 million of low margin non strategic revenue, while reducing manufacturing complexity.
John Olin: In the quarter, adjusted earnings per diluted share was $2, up 17.6% versus the prior year.
John: In the quarter adjusted earnings per diluted share was $2 up 17, 6% versus the prior year.
John Olin: Overall, Webtex delivered another solid quarter demonstrating the underlying strength of the business. Turning to slide 8, let's review our product lines in more detail. Third quarter consolidated sales were up 4.4%. Our quarter results were driven by growth in our services, digital intelligence, and transit businesses, partially offset by our equipment business. Business equipment sales were down 17.3% from last year's third quarter. This decline was planned and driven by the timing of new locomotive deliveries. As mentioned earlier, we expect this to reverse in Q4 with equipment sales expected to be up double digit. The industry is forecasting the 2024 freight car build to be down 9% from last year.
John: Overall, <unk> delivered another solid quarter, demonstrating the underlying strength of the business.
John: Turning to slide eight let's review our product lines in more detail.
John: Third quarter consolidated sales were up four 4%.
John: Our quarter results were driven by growth in our services digital intelligence and transit businesses, partially offset by our equipment business equipment.
John: Equipment sales were down 17, 3% from last year's third quarter. This decline was planned and driven by the timing of new locomotive deliveries.
John: As mentioned earlier, we expect this to reverse in Q4 with equipment sales expected to be up double digit.
John: Component sales were up one 8% versus last year due to higher international freight car sales and industrial product growth, which was offset by lower North American freight car build.
John: The industry is forecasting the 2020 for freight car builds to be down 9% from last year.
John Olin: Digital intelligence sales were up 12.7% from last year. This was driven by growth in our international sales of PTC, next generation onboard products, and digital mining products. Our services sales grew 16.5%. Sales growth was driven primarily by higher year-over-year modernizations and overhauls. As mentioned earlier, we expect the timing of our mods and overhaul production and deliveries to reverse in Q4, resulting in our year-over-year service revenue to be down double digits. In our transit segment, sales were up 9.6%. During the quarter, we saw our OE revenue grow 13.3%. On a constant currency basis, sales grew 8.4%.
John: Digital intelligence sales were up 12, 7% from last year. This was driven by growth in our international sales of PTC next generation onboard products and digital mining products.
John: Our services sales grew 16, 5% sales growth was driven primarily by higher year over year Modernizations and overhauls.
John: As mentioned earlier, we expect the timing of our mods and overhaul production and deliveries to reverse in Q4, resulting in our year over year service revenue to be down double digits.
John: And our transit segment sales were up nine 6% during the quarter, we saw our OE revenue grow 13, 3% on a constant currency basis sales grew eight 4%.
John Olin: The momentum in the transit segment continues to remain positive as secular drivers such as urbanization and decarbonization accelerate the need for investments in sustainable infrastructure. Moving to slide 9, gap growth margin was 33.0%, which was up 2.0 percentage points from the third quarter last year. Adjusted growth margin was also up 1.8 percentage points during the quarter. In addition to the higher sales, growth margin benefited from favorable mix between business groups. Mixed within the freight segment was better than expected due to growth in our services business behind the timing of mods and overholes in the quarter, partially offset by a planned decline in locomotive production and deliveries.
John: The momentum in the transit segment continues to remain positive as secular drivers such as urbanization and de carbonization accelerate the need for investments in sustainable infrastructure.
John: Moving to slide nine.
GAAP gross margin was 33, 8%, which was up 2.8 percentage points from the third quarter last year.
John: Adjusted gross margin was also up one eight percentage points during the quarter.
In addition to the higher sales gross margin benefited from favorable mix between business groups mixed within the freight segment was better than expected due to growth in our services business behind the timing of mods and overhauls in the quarter, partially offset by a planned decline in locomotive production and deliveries.
John Olin: Pouring currency exchange was a slight headwind of revenue as well as gross profit in operating margin in the quarter. During the quarter, we also benefited from increased productivity and the benefits of our integration 2.0 and portfolio optimization efforts, as well as lapping last year's airy strike that ran through a portion of the third quarter of 2023. Our team continues to execute well by driving operational productivity and lean benefits.
John: Foreign currency exchange was a slight headwind to revenue as well as gross profit and operating margin in the quarter.
John: During the quarter. We also benefited from increased productivity and the benefits of our integration of <unk> and portfolio optimization efforts.
John: As well as lapping last year's Erie strike that ran through a portion of the third quarter of 2023.
John: Our team continues to execute well by driving operational productivity and lean benefits.
John Olin: Now, turning to slide 10. For the third quarter, gap operating margin was 16.3%, which was up 1.8 percentage points versus last year. Adjusted operating margin improved 1.8 percentage points to 19.7%. GAP and adjusted SG&A and engineering expenses were up versus prior year, but largely flat as a percentage of revenues. Engineering expense was $50 million, slightly lower than Q3 last year. We continue to invest engineering resources in current business opportunities. But, more importantly, we are investing in our future as an industry leader in decarbonization and digital technologies that improve our customer's productivity, capacity utilization, and safety.
Now turning to slide 10 for the third quarter GAAP operating margin was 16, 3%, which was what up one eight percentage points versus last year.
John: Adjusted operating margin improved one eight percentage points to 19, 7%.
John: GAAP and adjusted SG&A and engineering expenses were up versus prior year, but largely flat as a percentage of revenues.
John: Engineering expense was $50 million slightly lower than 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 de carbonization and digital technologies that improve our customers' productivity.
John: The utilization in safety.
John Olin: 50.
John Olin: Now let's take a look at the segment results on slide 11, starting with the Freight segment. As I already discussed, freight segment sales were up 2.6% during the quarter. Yap segment operating income was $390 million for an operating margin of 20.2%, up 2.9% in points versus last year. Yap operating income included $10 million of restructuring costs, primarily related to integration 2.2% and portfolio optimization. Adjusted operating income for the freight segment was $467 million of 17.6% versus the prior year. Adjusted operating margin in the freight segment was 24.1%, up 2.9% in points from the prior year.
John: Now, let's take a look at the segment results on slide 11, starting with the freight segment.
John: As I already discussed freight segment sales were up two 6% during the quarter.
John: GAAP segment operating income was $390 million for an operating margin of 22% up two nine percentage points versus last year.
John: Operating income included $10 million of restructuring costs, primarily related to integration to <unk> and portfolio optimization.
John: Adjusted operating income for the freight segment was $467 million up 17, 6% versus the prior year.
John: Adjusted operating margin in the freight segment was 24, 1% up two nine percentage points from the prior year.
John Olin: The increase was driven by improved gross margin, behind favorable business mix, strong operational execution, integration 2.0 savings, and as we last year's manufacturing inefficiencies caused by the strike and airy. At the same time, SG&A and engineering expense were slightly lower as a percentage of revenue. Finally, segment 12-month backlog was $5.59 billion, up 6.4% from the same period a year ago. The multi-year backlog was $17.76 billion, up 1.1% from prior year.
The increase was driven by improved gross margin behind favorable business mix strong operational execution integration to point those savings and as we lap last year's manufacturing inefficiencies caused by the strike in aerie.
John: At the same time, SG&A and engineering expense was slightly lower as a percentage of revenue.
John: Finally segment 12 month backlog was $5 five 9 billion up six 4% from the same period, a year ago, the multiyear backlog was $17 $76 billion.
Up one 1% from prior year.
John Olin: Turning to slide 12, transit segment sales were up 9.6% at $733 million. When adjusting for foreign currency, transit sales were up 8.4%. Yap operating income was $79 million. Restructuring costs related to integration 2.0 were $8 million in Q3. Adjusted segment operating income was $93 million. Adjusted operating income as a percent of revenue was 12.8%, up 0.3% in points. During the quarter, adjusted gross margin was down modestly, behind unfavorable mix, partially offset by integration 2.0 savings. Margins also benefited from SG&A and engineering expenses being lower as a percent of revenue. Finally, transit segment 12-month backlog for the quarter was $2.04 billion, up 10.8% versus a year ago.
John: Turning to slide 12 transit segment sales were up nine 6% at $733 million when adjusting for foreign currency <unk> sales were up eight 4%.
John: GAAP operating income was $79 million restructuring.
John: <unk> costs related to integration two point over $8 million in Q3.
John: Adjusted segment operating income was $93 million adjusted.
Operating income as a percent of revenue was 12, 8% up <unk> three percentage points during the quarter. Adjusted gross margin was down modestly behind unfavorable mix, partially offset by integration two point or savings.
Margins also benefited from SG&A and engineering expenses being lower as a percent of revenue.
John: Finally transit segment 12 month backlog for the quarter was $2 4 billion up 10, 8% versus a year ago.
John A. Olin: Now, let's turn to our financial position on Slide 13. Third quarter cash flow was another highlight for the quarter, with operating cash coming in at $542 million. During the quarter, cash flow benefited from higher earnings and $95 million of higher securitization modelings. We continue to expect greater than 90% cash conversion for the full year. Our balance sheet and financial position continue to be very strong as evidenced by first our liquidity position, which ended the quarter at $1.9 billion. And our net debt leverage ratio, which ended the third quarter at 1.7 times, which was lower versus the same quarter a year ago at 2.1 times debt leverage.
Now, let's turn to our financial position on slide 13.
Third quarter cash flow was another highlight for the quarter with operating cash coming in at $542 million during the quarter cash flow benefited from higher earnings and $95 million of higher securitization borrowings.
John: We continue to expect greater than 90% cash conversion for the full year.
John: Our balance sheet and financial position continue to be very strong as evidenced by first our liquidity position, which ended the quarter at $1 9 billion.
John: And our net debt leverage ratio, which ended the third quarter at one seven times, which was lower versus the same quarter a year ago at two one times debt leverage.
John Olin: We continue to allocate capital to maximize returns for our shareholders. During the quarter, we repurchased $599 million of our shares and paid $35 million in dividends.
John: We continue to allocate capital to maximize returns for our shareholders during the quarter, we repurchased $599 million of our shares and paid $35 million in dividends.
Speaker Change: With that I'd like to turn the call back over to Rafael to talk about our 2024 financial guidance.
Rafael: Thanks, Sean now, let's turn to slide 14 to discuss our 2020 for full year guidance.
Rafael: As you heard today, our team delivered a solid third quarter, which was ahead of our expectations.
Rafael: Consequently, we are increasing our previous adjusted EPS guidance, we now expect adjusted EPS to be in the range of $7 45.
Rafael: To $7 65.
Rafael: At the midpoint up 27, 5%.
Rafael: Our revenue and cash flow conversion guidance remain unchanged looking ahead, I'm confident that <unk> is well positioned to drive profitable growth into 2024 and beyond.
Rafael: Now, let's wrap up on slide 15.
Rafael: As you heard today, our team continues to deliver on our value creation framework. Thanks in large part to our resilient installed base World class team innovative technologies and our continued focus on our customers.
Rafael: With solid underlying demand for our products and technologies.
Rafael: And rigorous focus on continuous improvement and cost management consistent with our previous guidance. We continue to expect to drive mid single digit organic at all and why.
Rafael: <unk> driving double digit EPS growth through our planning horizon.
Rafael: Thereby maximizing our shareholders' returns.
Speaker Change: With that I want to thank you for your time this morning, and I'll turn the call over to <unk> to begin the Q&A portion of our discussion kaira.
Speaker Change: Thank you Raphael, 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.
Speaker Change: Yes. Thank you we will now.
Speaker Change: Now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Speaker Change: Youre using a speakerphone please pick up your handset before pressing the keys. So anytime you have questions have been addressed you would like to withdraw it. Please press star then two at.
Speaker Change: At this time, we will pause momentarily to assemble the roster.
Speaker Change: And today's first question comes from Matt How Castillo with Morgan Stanley.
Speaker Change: Good morning, Thanks for taking my question and congrats on the strong quarter.
Speaker Change: Good morning.
Speaker Change: Start on AR.
Speaker Change: Any preliminary thoughts I know you won't necessarily provide guidance for 25, but just curious as you see your backlog continuing to grow and Youre getting.
These contract wins are turning and we used to have two orders what does that tell you in terms of preliminary thoughts on 'twenty five in terms of price volume kind of margins at least directionally any sense that you could provide based on your backlog.
Speaker Change: Okay.
Speaker Change: Well first it's certainly early to be providing guidance to 25, but the fundamentals for our business are strong our finishing 24 with really every single one of our businesses are growing year to date orders are up double digit profitability is up across the board as well.
Speaker Change: And I'll finish with consistent with.
Speaker Change: What we have given on previous guidance, we continue to expect.
Speaker Change: To drive mid single digit organic growth, while delivering double digit EPS growth through our planning horizon.
Speaker Change: Understood and maybe switching over to integration to point out I just wanted to.
Speaker Change: Maybe get a little bit more color on maybe what's the run rate, thus far versus that $75 million to $90 million target.
Speaker Change: And just kind of how that shaping out.
Speaker Change: Great.
Speaker Change: Integration to <unk>.
Speaker Change: As we came out of last year's savings were at $22 million.
And we were looking to get to <unk>.
Speaker Change: Midpoint of 82 million and a half so that leaves a ramp up $60 million over 24% and 25 and what I will tell you is that we are on track and actually exceeding our expectations a.
Speaker Change: A bit not only we're getting a little bit more than we anticipated, but it's coming a little bit earlier, and we're really seeing that inflection in the third quarter and as you see we're raising our guidance part of that is driven by the <unk>.
Speaker Change: Over delivery on integration to <unk> in the third quarter, and we expect that to kind of compound into the fourth quarter. So we feel real good about where we're at today. Most of the spending is behind US. We finished the quarter program to date with $140 million of spending that's on the low end of our range, we will have a little bit more spending to go.
Speaker Change: Tracking well on the expense side and a little bit ahead on the savings side.
Speaker Change: Very helpful. Thank you.
Speaker Change: Yes.
Thank you and the next question comes <unk> <unk> with Jefferies.
Speaker Change: Good morning.
Congratulations on the quarter maybe.
Speaker Change: Maybe just kind of talking a little bit more about freight margins, obviously very strong again at 24% better than your expectation. So maybe just walk through what drove the upside surprise, how much did mix contribute to this and then maybe a little bit on the sustainability at freight margins at this level and how does that set you up for 2020.
Speaker Change: Yes.
John: Sorry, this is John.
Speaker Change: When we look at the margins up being up one eight percentage points it was higher than our expectations and it was driven in two areas <unk> number one is on mix and the other is on cost first on mix. While we knew there was going to be favorable mix because of the services production coming in at a higher margin at the expense of some of the locals.
Speaker Change: In the equipment group.
Speaker Change: We planned on but we didn't was there was additional mix favorability in our overhauls, which come at a pretty good margin as well as.
Speaker Change: In our mining business, we lean more towards the aftermarket and our sales in the third quarter than OE, and we were expecting a little bit more on the OE side. So thats on the mix side, and we don't expect that to transcend from the third quarter into the fourth quarter.
Speaker Change: The second piece of it is on the cost side and there is two elements to that one is productivity every day continuous improvement productivity was very strong during the quarter and we certainly got a.
But not to the manufacturing and the supply chain folks that are running the system extremely well and for that we're getting rewarded on additional productivity. The second area on the cost side is what I just spoke to Angel about is the integration to <unk> is coming in.
Speaker Change: Better and faster than expected.
At both of those cost items benefited the third quarter and will benefit the fourth quarter and those two combined.
Speaker Change: I'm, sorry, the mix and the cost.
Speaker Change: Combined is what got us the ex the.
Speaker Change: The increase in EPS at the midpoint of 2000.
Speaker Change: When we look now to the fourth quarter, we're going to see a reverse of what we saw in the third quarter between the production of mods logos and overhauls and.
Speaker Change: And with that we expect in the fourth quarter that equipment will be up in the double digits and services at a higher margin will be down in the double digit. So we are going to have a significant amount of mixed pressure and this is nothing new this we've talked about the second half would be unfavorable in mix and this is what's going to drive it as the fourth quarter.
Speaker Change: And with that we would expect overall margins to be higher on a year over year basis, but slightly and but down sequentially by by a fair amount as we move into the fourth quarter again. This has nothing to do with the underlying demand. It's really all about how we produce the year. So that we could more level load our factories.
Speaker Change: I appreciate the color and then just one more on the transit backlog grew in the quarter. Despite you focusing on some higher margin products projects there.
Speaker Change: Can you just update us on the margins and translate that are coming into the backlog first the current margins that are in the P&L and how that translates to transient margin expansion.
Speaker Change: I'll take this one so I'll start with we continue to be pleased with the overall progress in the business. Our teams are continuing to really drive significant simplification on the footprint.
Speaker Change: They are farther improving and sustaining margins I think youre going to see variation quarter to quarter.
Speaker Change: Some will be driven by mix and timing of projects, but I expect transit to continue to deliver on profitable, but you asked about cell activity on projects I think the best way for us to look at it. It's when we look at the profitability of the backlog and Thats up.
Speaker Change: So that business is on track to continue to expand on margins.
Speaker Change: Theyre not starry is mid teens and Thats continued to improve from there. So I feel strong about the plan they havent had.
Speaker Change: Thank you congrats anacortes.
Speaker Change: Yes.
Speaker Change: Thank you and the next question comes from kind of extra with Bank of America.
Speaker Change: Hey, great good morning.
I'll, let go of that great job building, the backlog back in and intra quarter contract announcements.
Speaker Change: Can you maybe talk about the kind of a lot of international announcements on some locomotives recently can you talk about how we should think about gross margins on international versus North American margins I know you don't break it out by contract, but maybe just in general to understand that the splits.
Speaker Change: And then just to clarify John when you mentioned service revenue down double digit.
Speaker Change: Is that balancing out the mods production is that why we're seeing that that down so much.
Speaker Change: Starting with the first question Ken is.
Speaker Change: We get the question often is international margins, whether international versus North America. It.
Speaker Change: It is really specific to the country and the contracts that we're working off of and we have some international that are higher than in North America. Some that are lower some areas that we're investing in others that were not so it's not as simple as saying that international is this when we get revenue it's going to come at that margin. It really is with regards to the various <unk>.
Speaker Change: Tracks that we have I think suffice to say that.
Speaker Change: We couldnt be more pleased with the growth that we're having from our international business from a revenue perspective as well as a margin perspective in our view across everything is is how do we continue to deliver more value to our customers and get that built into our backlog.
Speaker Change: As we go forward.
Speaker Change: The second question Ken is on.
Speaker Change: The service revenue in the fourth quarter.
Speaker Change: Let's take the third and the fourth quarter together.
Speaker Change: We as you know and you've been down to the facility down there, we do mods and local was on the same production line. So we've level loaded those but theres still because of these fall into different groups <unk> falls into the service group in new logos falls in the equipment group, we're going to have some variation as to how we run the product we typically like to run our customer order as much as we can.
Speaker Change: The other are consistently for the productivity and quality aspect of it and it just happened in the third quarter that given the orders that we had.
Speaker Change: We produced.
Speaker Change: More mods on a year over year basis, and less new logos.
And that's simply going to reverse in the fourth quarter, but with that we're going to see that shift from more favorable mix in the third of the third quarter to less favorable in the fourth quarter, but there is nothing more than just how we plan the production.
Speaker Change: There's nothing.
Speaker Change: Different with the demand for the products, just how were fulfilling that demand.
Okay.
Speaker Change: And just to understand the whats left to shut down on the portfolio optimization.
Speaker Change: So it would be.
Speaker Change: Talked about this on when in February that we were going to do a $110 million a good portion of that well, it's mostly all executed we got a little bit more to execute in the fourth quarter and we will see the lower revenues. Both this year 'twenty four and some lower revenues into 25% as a result of it but that's all tracking.
Speaker Change: Very well.
Wonderful.
Speaker Change: Thanks for the time.
Speaker Change: You can.
Speaker Change: Thank you and the next question comes from Daniel <unk> with Stephens, Inc.
Yeah, Hey, good morning, everybody. Thanks for taking my questions.
Rafael: Hi, Danielle morning Rafael.
Speaker Change: Maybe wanted to dig into international markets more specifically it does feel like these contract wins are becoming more and more frequent in the backlog you mentioned is growing.
Rafael: I'm curious how we should think about why this is accelerating.
Rafael: You guys are doing differently is it just a maturation of those markets and then understanding your answer to the last question that all countries are different but is it fair to say that as you add density in these countries incremental margins should improve as you add more scale and limit your cost there how should we think about that as you can.
Rafael: Accelerating these this international growth.
Speaker Change: So we when we think about just the dynamics of the business internationally really continues so I think we're bullish on key international markets.
Speaker Change: Got some elements of projects, taking place in Africa, and I think youre going to continue to see some wins from US there. So that's a positive we're continuing to expand on.
Speaker Change: The <unk> routes.
Speaker Change: <unk> continues there in Kazakhstan as well and.
Speaker Change: The good news on some of these projects and I speak here too.
South America, and Australia, I mean, some of the discussions here go well into 'twenty six 'twenty seven we're discussing locomotive deliveries into 28, so thats I think a positive in that regard and it comes down to the experience customers are having with our fleets driving both productivity availability and reliability.
Speaker Change: We see that.
Speaker Change: I really continuing some of the investments we've done in technology, I think youre going to continue to see a significant opportunity here for us to actually accelerate some of the modernization will talk more about this early next year, but there is certainly an element of the innovation on how we continue to drive that we mentioned <unk>.
Speaker Change: We've talked about locomotive order.
Speaker Change: What we often sometimes don't.
Speaker Change: The same emphasis is on the opportunities we have with digital here, we're expanding on not just the trip optimizer some of our kinetics.
Products are being brought as well into this mix, we often talk about PTC, yes, yes, and yes.
Speaker Change: That will continue to expand so we see it as a positive.
Speaker Change: And.
Speaker Change: But I think we'll continue to see profitable growth. They are some of those markets I mentioned our markets were more mature. So we've got a lot of products that are really best in class to compete.
Speaker Change: Helpful. And then maybe as a follow up just on the balance sheet side cash conversion. This year has driven accelerated buybacks year to date in 'twenty four but as we bounce along the bottom of the freight market at that point any more sellers to market and just curious how youre seeing the M&A markets evolve in terms of the targets that youre looking at and what you'd like to maybe spend some of that cash on the M&A side.
Speaker Change: Thanks.
Speaker Change: I think the best way to answer it is when I when we look at our capital allocation strategy that Hasnt changed right. We continue to focus to be on making sure we're driving profitable organic growth for the business.
Speaker Change: We're certainly very much focused on M&A as well when I think about inorganic. This is the strongest pipeline we've had on M&A.
Speaker Change: And we will continue to look at to US it will be opportunistic here and just a question of returns.
The returns are there regarding vast on it and if they are not we won't be shy about doing.
Speaker Change: Doing share buybacks and then Ken within the quarter.
Speaker Change: $600 million that we repurchase is really a function of that.
Speaker Change: Net cash flow you mentioned, we have had year to date cash of $1 1 billion and that's up over 100% versus a year ago. So in the absence of M&A, which we would prefer.
Speaker Change: We returned value to our shareholders in the form of share repurchases and we couldnt be more pleased to do that.
Thanks, So much guys best of luck.
Speaker Change: Thank you.
Speaker Change: Thank you. Thank you and the next question comes from <unk> majors with Susquehanna.
Speaker Change: Good morning.
Speaker Change: Yesterday, one of your class one modification customers suggested they were interested in either stretching out or reducing some of their locomotive capex near term I Wonder if you could comment maybe not specifically on.
Speaker Change: That but more broadly are we at the point in the North American locomotive replacement cycle, where that's kind of starting to plateau in the short term and international is going to drive the bulk of the growth over the next two years, just any thoughts on that market. Thank you.
Speaker Change: North America, we continue to see mixed I mean, you gotta be.
Looking at specifics on customers here.
Speaker Change: But we continue to see demand that's for both new locomotives out for March I think our cost our customers overall are continuing to invest if you think about.
Speaker Change: Customers investing it's most of the time for improved costs support reliability is for efficiency, it's not for carload growth, it's not for necessarily revenue. So that's where I think we're excited about.
Speaker Change: Coming back to some earlier comments I made is the opportunity we have here to continue to innovate and make sure that they're investing for a return at the end of the day getting more efficient product that will help improve their <unk> and improve the service levels.
Speaker Change: Alright, that's that's how we look at it at the end of the day, but you got to really look at customer specifics here.
Speaker Change: Thank you and the next question comes from Jerry Revich with Goldman Sachs.
Jerry Revich: Yes, hi, good morning, everyone.
Jerry Revich: Hi, good morning.
Jerry Revich: Hi, I'm wondering if you just talk about your receivables for a moment. So really interesting your total receivables, including Securitizations are down mid single digits year over year. Your topline on an LTM basis was up nearly 10%.
Jerry Revich: Really significant improvement in <unk>.
Jerry Revich: Can you just talk about what's driven that improvement and how much more opportunity do you folks have to.
Speaker Change: We continue to drive <unk> lower.
Speaker Change: <unk> receivables on a year to date basis are up about six 5% I don't think theyre picking up all the receivables there.
Speaker Change: But they are up six 5%, but to your point we've got.
Overall revenue on a year to date basis up nine 1% and if you adjust for some of that.
Speaker Change: Securitization you would see the receivables more nearly matching.
Speaker Change: The rate of the growth of the company.
Speaker Change: Okay, I guess, John maybe you securitize more of it more than I thought in the quarter because a year ago, you were at a $1 billion nine.
Speaker Change: In receivables, including Securitizations.
You're saying Europe over that third quarter number because obviously, there's seasonality for Q versus Q4.
Speaker Change: For the securitization we ended the quarter at $95 million securitized and the reason, we do that jewelry, it's a lower cost of funds for us and we would prefer the barrel with that but we ended the quarter at 95, we started the quarter at zero. So that was a headwind I'm sorry that was a benefit to our cash flow in the quarter.
Speaker Change: Of the 490 405 hundred $9 $42 million.
Speaker Change: On a year over year basis, the receivables of the securitization borrowings are down quite a bit they're down $140 million from where we were at the end of the third quarter.
Speaker Change: Last year.
Speaker Change: But within the quarter. It did provide some benefit to that cash flow number and the cash conversion.
Speaker Change: The securitization would have been 106%.
Okay.
Speaker Change: Follow up offline because I'm looking at it on a year over year basis.
Speaker Change: Separately as we.
Speaker Change: We look back at your long term plans Raphael you folks are.
Speaker Change: We had a plan in terms of the margin performance for the organization and then I think you had spoken about a steady $50 60 basis points per year margin improvement I'm wondering since we've already achieved.
Analyst day targets a couple of years early here.
Speaker Change: Or are you thinking about the opportunity to continue to drive margin expansion at that so you can clip off of off of these levels as we think about the next 12 to 24 months.
I think we have significant momentum here still our teams continue to simplify the business driving a continuous improvement actions across the business.
Speaker Change: And with that I think we have the opportunity here to continue to drive margin expansion so margin rates.
Speaker Change: Overall business. So I think we will continue to benefit from not just as lean efforts with productivity.
Speaker Change: <unk> shoot at all John mentioned portfolio optimization, So I think we have.
Speaker Change: Significant opportunities here to continue to drive momentum and.
Speaker Change: We are committed here to drive profitable growth as we going to 25 and beyond.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you and the next question is Rob Wertheimer with Melius research.
Rob Wertheimer: Hey, good morning, guys.
Speaker Change: Bob.
So questions on backlog and pipeline and the backlog just to clarify is the Kazakhstan order in the backlog number that you reported kind of on the slides for the quarter and I don't know if you have the ability or willingness to say, whether the big order you had.
Speaker Change: In North American rail in July as I.
Speaker Change: It came into backlog at all this quarter much I think its for 25 and 26 deliveries and Olympics in the 12 month backlog and then not to make you repeat your prepared remarks, but.
Speaker Change: Your thoughts on kind of pipeline preorders, and where you stand after having had.
Speaker Change: Bunch I mean is that is that activity still as good as ever or how would you characterize it. Thank you.
Speaker Change: Let me start with the backlog.
Question, So the $405 million, which is the first order we've received against the 200 plus billion dollar Mou that is in backlog for the third quarter. So the all the backlog numbers that we read to you.
Is that inclusive of that $405 million.
Speaker Change: We'll continue to work on the rest of those orders that will come over time.
With regards to I guess, the fundamentals of the business and we are finishing 24 with.
Speaker Change: Again every single one of our businesses are growing orders are up double digits. The pipeline is strong.
Speaker Change: Phil, especially strong about the international growth.
Speaker Change: The markets I mentioned here and that could all translate into momentum not just it goes into $25 27.
Speaker Change: That's really a positive there for us.
Speaker Change: So the pipeline is strong and even in North America as I said the demand is there but customers are investing per return and what makes me really feel positive about the momentum it's that innovation as we will talk to you in more details and started the year is the ability to drive that next level of efficiency.
Speaker Change: <unk> to add to the existing fleets and making sure that customers are accelerating and improving their operating ratios through that process, improving productivity availability and reliability of the fleet. So all in all.
Speaker Change: As I said we.
Speaker Change: We continue to expect to drive mid single digit organic growth, while delivering double digit EPS growth through the planning horizon.
Speaker Change: Thank you Michael.
Speaker Change: Thank you and the next question comes from Scott Group with Wolfe Research.
Scott Group: Hey, Thanks, Good morning, guys good morning.
Scott Group: I totally get there's quarterly volatility.
Scott Group: And mix and it has helped in Q3 and hurt in Q4, and when we think about and again I know it's early so maybe hard to answer but like do you think is there is there a reason to think 2025 in aggregate has either a mix tailwind or headwind or is it more.
Scott Group: Some quarters it helps some quarters it hurts, but net net it's.
Scott Group: Not a big swing next year, Scott It is a little bit early to talk about the components of the 2025.
We probably had more shifting I'm not probably we've had more shifting in 'twenty four we wouldn't expect as much activity from a production standpoint in 2025.
Scott Group: The way to think about though the overall margins are really where we're expecting or we're guiding to and thats, what we will take into 2025 and work to improve against.
Scott Group: Okay.
Scott Group: And then.
Speaker Change: The $400 million of <unk> 300 million parts.
Speaker Change: Any color.
Speaker Change: On duration of those two contracts and then just separately I don't know if theres any update or anything you are hearing on car BPA worth highlighting thank you Kathy.
Speaker Change: Okay.
Speaker Change: The backlog of $405 million <unk> Z order will be largely delivered over 25% in 2006 timeframe.
Speaker Change: And the service agreement is a longer term that that will be over a longer term I'm not sure exactly how many years, but.
Speaker Change: On the API, Scott, we haven't really had I'm going to call substantial change since we last stocks, but I.
I guess, what we're saying is if you look at the heavy truck fleet, which is now really expect it to help to drive 25% reduction of greenhouse gas emissions.
Speaker Change: The EPA is.
Also the fine liquid hydrogen for internal combustion engines would be classified as at year zero zero emissions and we see that as a validation of the strategy. We have pursued with really making sure. Our engines are ultimately agnostic and we're able to run alternative gases like hydrogen, but biofuels renewable.
Fields, and we see that as a validation for really making sure. We're the best in class product to help our customers achieve their goals on de carbonization and various parts of the world.
Speaker Change: So that feels that might be available in Brazil might be different than in California, and auto parts of North America. So we see that as really a validation and we feel very strong about having the best in class products here to play.
Speaker Change: Given any regulation changes and things like that so that's a positive for us.
Helpful guys. Thank you. Thank you.
Speaker Change: Thank you and the next question comes from Steve Barger with Keybanc capital markets.
Steve Barger: Hey, good morning. Thanks.
Steve Barger: John You said M&A was the preferred use of capital as you look at the portfolio. Today are you primarily focused on freight additions or do you want to build out the transit portfolio.
Steve Barger: Or is the overall strategy more opportunistic and return space can you just talk about how you're approaching it.
Steve Barger: I think theres a couple of areas, Steve that we're focused on.
Speaker Change: One is the digital area.
Steve Barger: Others are near in Adjacencies.
Speaker Change: Of course, we're always interested in bolt ons to our existing business.
Speaker Change: But other than that it would be near and Adjacencies and when I say near Adjacencies to think about things such as mining right. We've got a good foothold in that market <unk> was a great example of a near an adjacency that we did a year ago and we had four key elements are vital Oregon's do a mining truck and now we added.
Speaker Change: Fifth with.
<unk> acquisition.
Speaker Change: And then again on digital we've done a couple of digital <unk>.
Speaker Change: <unk> over the last couple of years, we would expect to see more our focus here ultimately maximizing returns and we will be opportunistic, but just to add additional color here right recurring high recurring revenue streams are bolt ons.
Speaker Change: Dave <unk>.
Speaker Change: Service related those are certainly I'm going to call the bulk of the preference.
Speaker Change: We have worked out I think we have a strong pipeline, it's making sure that ultimately the best returns are reside on the house and if not making sure we're not ultimately shy about returning to your share buybacks.
Speaker Change: Yes.
Speaker Change: I think everyone would like to see more digital in the portfolio.
Speaker Change: You had said that that was stronger in international this quarter was that a one off or do you see the beginnings of a more consistent trend in digital internationally particular shot two elements. There I think we continue to see a softer north American markets.
Speaker Change: Internationally, we continue to see gaining momentum there PTC is certainly one of those products and the kinetics so portfolio.
Speaker Change: Very strong there, but there's also an element within digital making sure we move from what I'll call onetime sales to more recurring revenues. So that's the element of transformation in that business I think we're happy to see the business has moved into good offsets.
Speaker Change: Second quarter, but it's an element of transforming that business and we're committed to it we see it as a big element of driving efficiency productivity.
Speaker Change: And we're seeing that to some extent in North America.
Speaker Change: International markets as.
Speaker Change: As you think about the opportunity to ultimate and drive that potentially gaining momentum ahead of North America, given our regulation and given some other things. So it's all it's all in all a positive and we're highly committed to continuing to grow that business.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Thank you and this concludes our question and answer session.
Just turn the floor back to carry H for any closing comments.
Speaker Change: Thank you Keith and thank you everyone for your participation today, we look forward to speaking with you again next quarter.
Speaker Change: Thank you Brian.
Speaker Change: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].