The Wabtec Corporation held its Third Quarter 2023 Earnings Conference Call, where they reported strong sales growth, margin expansion, and increased earnings and cash flow. Despite economic uncertainty, they achieved $2.5 billion in sales, driven by both the Freight and Transit segments. Cash flow from operations was $425 million, thanks to higher earnings and improved inventory management.

The company's financial position remained strong, with a 13% increase in backlog and $21.5 billion in multiyear backlog. The team's focus on delivering for customers and navigating a volatile macro environment has positioned the company for profitable growth. The Freight business has mixed metrics, but there are opportunities for growth in international markets and demand for new locomotives, railcars, and mining equipment.

In the transit sector, the need for clean, safe, and efficient transportation solutions is driven by the mega trends of modernization and decarbonization. Recent business highlights include a strategic MOU with KTZ in Kazakhstan, delivery of the 500th locomotive in Kazakhstan, and orders for locomotives in mining and subway cars in North America. The L&M acquisition has also been successful, with strong revenue and integration on track, and the Nordco acquisition has resulted in double-digit growth in the maintenance of way business. This all demonstrates the company's momentum and focus on customer satisfaction.

Wabtec is well-positioned for profitable growth in international markets with their innovative and scalable technologies. They have seen a 4.5% annual growth in their international install base and expect this to continue as the demand for clean, efficient, and safe transportation increases. In the third quarter, Wabtec saw a 22.5% increase in sales and strong operational and financial performance due to momentum and excellent execution from the team. GAAP operating income was $370 million, driven by higher sales and cost management.

In the third quarter, Wabtec saw a significant increase in adjusted operating margin, driven by higher sales, improved productivity, and cost management. GAAP earnings per diluted share also increased by 51.1%. The company had pre-tax charges for restructuring and integration initiatives, but still delivered a strong quarter. Sales were up 22.5%, with equipment sales and component sales experiencing significant growth. Digital intelligence sales were down, but services sales saw a 17.6% increase. As a result, Wabtec is adjusting its full year outlook and increasing its sales and earnings guidance.

In the third quarter, Wabtec experienced sales growth due to higher modernization deliveries and increased parts sales. This was driven by the superior performance, reliability, efficiency, and availability of their locomotive fleets. Sales in the transit segment also significantly increased due to the execution of their backlog and easing of supply chain disruptions. Gross margin was slightly down, but adjusted gross profit margin increased, driven by higher sales and improved productivity. The strike in Erie caused some inefficiencies, but overall the company continues to mitigate cost pressures through operational productivity and lean initiatives. Operating margin also improved, with both GAAP and adjusted operating margin increasing. SG&A expenses were $295 million.

In the third quarter, adjusted SG&A as a percentage of sales decreased by 0.7 percentage points due to higher sales and cost management efforts. Engineering expenses remained flat as the company invested in future decarbonization and digital technologies. In the freight segment, sales and operating income saw significant increases, driven by higher sales, improved mix, and lower SG&A as a percentage of revenue. However, multiyear backlog decreased due to comparison with large orders received in 2022. In the transit segment, sales and operating income also saw strong growth, with adjusted operating income up 38.3%.

In the third quarter, adjusted operating income and margin increased due to higher sales, favorable mix, integration activities, and a cyber impact. The transit segment backlog also increased. Cash flow was strong, and the debt leverage ratio improved. The company has returned capital to shareholders and is focused on maximizing shareholder returns. The company is confident in its financial position and has updated its 2023 guidance, expecting sales and adjusted EPS to increase significantly. Cash flow conversion is expected to be over 90%.

The speaker is confident in Wabtec's ability to drive profitable growth in 2024 despite a more uncertain macro environment. The team delivered a strong quarter and is committed to creating value through their portfolio, installed base, innovative solutions, and execution. They are well-positioned for long-term growth and maximizing shareholder returns. The Q&A portion of the call will begin and the first question is about the strike impact at Erie and the sequential pressure on earnings for the fourth quarter. The speaker does not provide specific details on cost of goods sold.

The cost of the strike had a slight impact on the quarter's earnings, but the company still had a strong performance. The company is pleased with how the second half of the year is unfolding and has increased revenue guidance. The fourth quarter is expected to show strong growth in both revenue and margins, despite tough comparisons from the previous year. The third quarter is expected to have faster revenue growth due to a higher production plan, with 70% of second half locomotive deliveries scheduled for that quarter. The 12-month backlog has also strengthened by 13% compared to the previous year.

Rafael and John discussed the company's expectations for profitable growth in 2024. They also addressed the backlog, which is down year-over-year but still healthy. The $2 billion MOU with Kazakhstan is not included in the backlog. They confirmed that there has been no slowdown in inquiries or pipeline, and they are seeing good momentum with key deals being signed. They also mentioned that long lead items like mods and locomotives are important for the backlog, and they are optimistic about the order opportunities in the U.S. railcar market.

The speaker confirms that there is a strong pipeline of opportunities for revenue and margin expansion in the next 5 years. They mention the strength of the short and mid-term backlog, momentum in new locomotives and mods, and investments for improved costs and reliability. They also express optimism for international markets and mention the benefits of Integration 2.0 for margin improvement. Overall, they have better visibility for 2024 but it is still too early for specific guidance.

The speaker discusses the company's recent success and growth, particularly in the Transit business. They mention the team's efforts to simplify operations and improve competitiveness, resulting in higher margins and increased backlog. They also express confidence in the business's ability to continue growing despite a competitive market.

John Olin and Nathan Ho discuss the favorable mix in Freight gross margins, with Equipment and Components up 40% and 30% respectively, while Services and Digital are up 18% and down 30%. Olin attributes this to the team's focus on higher-margin deliveries and mix between groups. Ho asks about the decline in backlog for Freight, wondering if it reflects unit volumes or pricing/mix.

Rafael Santana, CEO of the company, mentions the lumpiness of multiyear orders and how it affects the backlog and future years. He also highlights the importance of having coverage for lead times on certain products. The next question is about the potential for double-digit EPS growth next year, which is expected due to volume growth and the implementation of Integration 2.0.

The company expects to see significant growth in savings due to a program in 2024, which will drive margins faster than revenue. They also anticipate profitable growth in line with their long-term objectives and guidance. The CEO mentions significant momentum in international markets and strong coverage for 2024. The one-year backlog is up, but the multiyear backlog is down due to the need for coverage and the growth of fleets internationally. Despite challenges in North America, discussions for growth continue.

The company is experiencing strong growth in both North America and internationally due to increased demand for more efficient and reliable products at lower costs. This growth is expected to continue through 2024 and aligns with the company's long-term guidance. The increase in guidance and moderation in backlog is not due to deliveries being pulled forward, but rather reflects the expected cadence of production for the year.

The company is optimistic about their backlog and expects it to continue growing into 2024. They also mentioned a $2 billion MOU with Kazakhstan and expect all of it to turn into orders. The company is working with Kazakhstan to upgrade and expand their fleet. The largest savings from Integration 2.0 are expected in 2024, and the company is seeing progress in this program.

The company has invested $100 million out of an expected $135-165 million over a 3-year period. This has led to savings of $5 million in 2022, with a goal of $75-95 million by 2025. Transit margins were strong due to volume growth, favorable product mix, and improvements in Integration 2.0. The company is optimistic about the future of the transit business.

The company is unable to provide specific guidance for next year's delivery timing or backlog mix, but they expect profitable growth in 2024. They also mention strong coverage for long lead parts of their portfolio and potential labor pressures that could affect gross margin.

The speaker discusses the company's gross margin and how it was affected by a strike in Erie and mix headwinds in the first half. They expect a tailwind on margins due to Integration 2.0 and anticipate a 25-30% increase in volumes. They also mention the strong performance in the mining sector and expect it to continue into next year.

Steve Barger asks Rafael Santana about the backlog of $22 billion for the past 5 years and whether it will continue to be stable or if there will be a change in monetization speed. Santana responds by saying that they are focusing on ensuring coverage for profitable growth and managing the mix of long-term agreements and upgrades for customers. He also mentions that they cannot put an index on the backlog for the future.

The backlog of the company has fluctuated between 21.5 and 22.5 over the past 5 years due to economic factors and large orders. The backlog is expected to rise over time, but it is difficult to predict due to its lumpiness. The company has been working with customers to drive sustainable investments and focus on longer-term agreements to support the delivery of assets. The average 5-year backlog is around $21 billion with a mid-single-digit percentage variance, which is not considered very lumpy.

The speaker, John Olin, cannot provide specific details on the record quarter for Freight revenue and segment margin due to a strike. However, he emphasizes the company's growth in the future and credits the team for their efforts during the strike. The conference call has now ended.

This summary was generated with AI and may contain some inaccuracies.