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Text: We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics.
John is a well-respected leader with broad operational and financial experience.
He is already bringing a great perspective to our business and long-term strategy with a clear focus on growing shareholder value.
We are thrilled to have him on the team.
I also want to take a moment to tank Pat Dugan for his nearly 20 years of service to Wabtec.
We're grateful for all that he has contributed to the company.
I will start with an update on our business, my perspective on the quarter and our long-term value framework and then John will cover the financials.
Overall, we made significant progress against our strategy and delivered a strong third quarter as noted by our sales growth, adjusted margin and adjusted earnings per share each of which were up year-over-year.
Total sales for the quarter were $1.9 billion driven by growing demand in freight services and components but offset by continued weakness in the North America OE end market.
Adjusted operating margin was 17% driven by strong mix and productivity, ongoing lean initiatives and cost actions.
Total cash flow from operations was $244 million this takes year-to-date cash from operations to $759 million versus $458 million a year ago.
This is a solid illustration of how the team is driving good operational performance.
Cash conversion for the year is at 103%.
Finally, we ended third quarter with adjusted earnings per share of $1.14 up 20% year-over-year.
Today, we're also pleased to share that we have achieved our $250 million synergy run rate, a full-year earlier than expected at the time of the GE Transportation acquisition.
We have consolidated and optimized our operations reduced costs to drive stronger profitability, accelerated lean across the enterprise and created additional capabilities in best cost countries.
We're already feeling the benefit of these efforts which will continue to improve our competitiveness.
So overall, really strong execution by the team as we continue to deliver on our long-term strategy.
Shifting our focus to Slide 5 let's talk about our end market conditions in more detail.
Internationally, freight activity continued to improve in the third quarter, across our major markets and our order pipeline remains strong.
We expect long-term revenue growth in Russia/CIS Brazil, Africa, Asia and Australia.
Rate trends in North America weakened slightly year-over-year in the third quarter, not driven by lack of demand but by global supply chain disruption that has impacted intermodal volumes and auto production.
Consumer and industrial activity continue to spur volume growth in chemicals, metals and materials.
Locomotive parkings continue to decline despite weaker freight traffic in the quarter.
We expect demand for reliability, productivity and fuel efficiency to continue to increase placing our services business in a position of strength.
When it comes to the North America railcar build, demand for railcars is improving.
About 21% of the North American railcar fleet remains in storage a slight improvement from the previous quarter and in line with pre-COVID levels.
As a result, industry orders for new railcars are starting to improve.
We forecast the railcar built this year will be in the neighborhood of 30,000 cars.
Transitioning to the transit sector, ridership remains a bit uneven in some markets, however infrastructure spending for green initiatives continues to be a bright spot, especially as governments globally turn to rail for clean, safe and efficient transportation.
Overall, the long-term market drivers for passenger transport remain strong.
Shifting to Slide 6, we are developing innovative solutions that address the main cost drivers for our customers, including fuel efficiency and increased velocity in the transportation sector.
Our commitment to succeed in these efforts is underscored by our focused on continuing to position rail transportation as the safest and most sustainable way to move freight and people overland.
Today, we have the capability and expertise to transition diesel-powered locomotives to battery power and drastically reduce emissions as we're doing with our FLXdrive locomotive.
We expect to extend this technology further to hydrogen fuel cells and help lead the industry to a zero emission rail networks of the future.
And we're not stopping there; we have extended battery technology to other areas of our business as well and we are driving several technology breakthroughs to boost transit efficiency and reduce emissions and pollutants.
An example of this is our Green Friction technology which drastically reduces brake emissions by up to 90% an incredible milestone and significantly improving the quality of the air in our metros.
We're also leading the change to create a safer and more efficient rail network; a great example of this and a solution of growing interest among Class 1 customers is Trip Optimizer Zero-to-Zero.
These advanced technology allows an operator to autonomously start a train from 0 miles per hour and stop it using software integrated with positive train control.
It builds on Trip Optimizer's proven performance which has saved railroads more than 400 million gallons of fuel since inception and reduces emissions by over 500,000 tons per year.
Looking forward, we will continue to advance efforts toward cleaner, more energy efficient transport and will share our progress on this front as well as our broader environmental social and governance priorities in our next sustainability report which will be released in a couple of weeks.
In the third quarter, we secured new orders for our FLXdrive locomotive.
We also closed a significant order for international locomotive kits and one additional contract in Asia to help our customers improve asset utilization and reduce emissions.
In Freight Services, we want a significant long-term service contract as well as an order for 100 locomotive modernizations in North America.
Overall, mods backlog remains strong and we are showing good momentum on deliveries.
Finally in transit we won new power collection, HVAC and service contracts in Germany, Switzerland and the UK.
Looking ahead, we are confident Wabtec will continue to capture growth with innovative and scalable technologies that address our customers' most pressing needs.
We also will continue to control while we can and leverage the strength to combat the current challenges that we are facing due to supply change disruptions, increasing metal and commodity costs and labor shortages.
These dynamic have adversely impacted our third quarter results and have resulted in significant cost increases.
Across the board, our team's working hard to mitigate the impact of these pressures by triggering price escalations and surcharges as well as driving operational efficiencies wherever we can.
We anticipate our costs will continue to increase over the next few quarters and we will continue to aggressively manage these challenges.
It's great to be with you and I'm very excited to join the team at Wabtec.
It is a storied company with incredible talent, deep innovation and best-in-class differentiated technologies that is well positioned to deliver the future of rail while growing shareholder value and I look forward to meeting with many of you in the coming months.
Now, turning to Slide 8 before getting into the financials, we would like to discuss the dynamic cost environment and supply chain challenges that we face.
During the third quarter, we experienced delays in production and deliveries of our products as well as significant increases in many key input costs.
On the revenue side, we are experiencing adverse impacts to our sales results due to shortages across many component parts, including computer chips, which are causing delays in production and customer delivery.
We believe that our enterprise revenues were to 2% to 3% lower than they would have been without the supply chain disruptions and that the majority of these lower revenues represent delayed sales, not lost sales.
The impacts to Wabtec's cost structure come in four areas.
First, commodity inflation; where markets year-over-year are up more than 200% for steel, 94% for aluminum and roughly 40% for copper.
The second area of impact is elevated freight and logistics costs, which in many cases are up over 3 times to 4 times from pre-COVID levels.
Third is wage inflation and labor availability, which are adversely impacting the business and finally, we are experiencing loss manufacturing efficiencies, largely due to component and chip shortages.
Our costs have increased during the quarter and have impacted both our Freight and Transit segments.
We estimate that cost increases in the third quarter are in the range of $15 million to $20 million.
Having said that, we expect these headwinds to intensify as the full cost of rising metals and lower manufacturing efficiencies work their way through our inventories and purchase contracts.
We anticipate cost to continue to increase over the next few quarters.
Our team is working hard to mitigate the impact of these cost pressures and supply chain disruptions by triggering price escalation clauses that are included in many of our long-term contracts, implementing price surcharges, driving operational productivity, and lean initiatives and finally through higher realization of synergies.
Turning to Slide 9, I'll review our third quarter results in more detail.
We had good operational and financial performance during the quarter, sales for the third quarter were $1.91 billion, which reflects a 2.2% increase versus the prior year.
Sales were positively impacted by the continued broad-based recovery we are experiencing across much of our portfolio.
The acquisition of Nordco and favorable currency exchange, partially offset by continued weakness in the North America OE locomotive market and lower year-over-year sales in Transit.
For the quarter adjusted operating income was $325 million which was up 10.6% versus the prior year.
Most notably, we delivered margin expansion in both our segments, up 1.3 percentage points on a consolidated basis.
Margins were aided by strong mix favorability, improved productivity and better than expected realization of synergies.
As Rafael stated during the quarter, we achieved our goal of $50 million of synergy run rate a significant milestone delivered a full year earlier than originally forecasted.
What makes this quarter's margin expansion even more impressive is the fact that our margin gains were achieved in the face of an incredibly dynamic supply chain and inflationary environment.
Looking at some of the detailed line items for the third quarter; adjusted SG&A was $257 million which was up $16.1 million from the prior year due to the normalization of certain expenses, higher incentive compensation and employee benefit costs and the acquisition of Nordco.
For the full year, we expect SG&A to be about 12.25% of sales, adjusted SG&A excludes $12 million of restructuring and transition expenses, of which most was allocated to further optimize our European footprint.
Engineering expense increased from last year, we continue to invest engineering resources and current business opportunities but more importantly, we are investing, our future as an industry leader in decarbonization and digital technologies that improve safety, productivity and capacity utilization.
Our 2021 investment in technology, which includes engineering expense remains at 67% of sales.
Amortization expense was $72.5 million and our adjusted effective tax rate during the quarter was 24.8%, bringing our year-to-date adjusted effective tax rate to 25.8%.
For the full year, we still expect an effective tax rate of about 26% excluding discrete items.
In the third quarter, GAAP earnings per diluted share were $0.69 and adjusted earnings per diluted share were $1.14 up 20% versus prior year.
We are pleased with our Q3 results.
In particular, our sales growth in the face of supply chain disruptions, our margin growth in the face of sharp cost increases.
We remain diligent and proactive as we work to minimize these challenges.
Now, let's take a look at segment results on slide 10 starting with the Freight segment.
Across the Freight segment, total sales increased 4.7% from last year to $1.3 billion, primarily driven by continued strong growth at our services and component businesses.
In terms of product lines, equipment sales were down 5.7% year-over-year due to fewer locomotive deliveries this quarter versus last year and no new locomotive deliveries in North America, partially offset by strong mining sales.
This year-over-year performance demonstrates the resiliency of our equipment portfolio.
In line with an improved outlook for rail, our services sales grew a robust 13.6% versus last year.
The year-over-year sales increase was largely driven by higher aftermarket sales from our customers modernizing their fleets, the unparking of locomotives and the acquisition of Nordco.
The performance, reliability and availability of our fleet continues to drive customer demand as railroads increasingly look for predictable outcomes across their fleet.
Excluding Nordco, organic sales for the third quarter were up 6.1%.
Digital Electronics sales were down 3.6% year-over-year driven by delays in purchase decisions due to economic and cost uncertainties as well as chip shortages.
We continue to see a significant pipeline of opportunities in our digital electronics product line as customers globally focus on safety, improved productivity, increased capacity and utilization.
Component sales continued to show recovery and were up 6.7% year-over-year driven by demand for railcar components and recovery in industrial end markets.
We remain encouraged by the continuing trend of railcars coming out of storage higher order rates of new railcars and accelerated recovery across industrial end markets.
Shifting to operating income for the segment; Freight segment adjusted operating income was $266 million for an adjusted margin of 20.6%, up 1.7 percentage points versus the prior year.
The benefit of higher volumes, improved mix across our portfolio and increased synergies and productivity were partially offset by significantly higher input costs.
Finally, segment backlog was $18.2 billion, up $375 million from the prior quarter and the broad multiyear order momentum that Rafael discussed across the segment.
Turning to Slide 11, across our Transit segment sales decreased 2.5% year-over-year to $612 million.
Sales were down versus last year, due in large part to supply chain issues and COVID related disruptions.
This was partially offset by positive ridership trends.
Excluding near term supply chain challenges, we estimate that Transit sales would have been up slightly on a year-over-year basis.
We believe the medium and long-term outlook for this segment remains positive as infrastructure spending for green initiatives continues.
Adjusted segment operating income was $77 million, which resulted in an adjusted operating margin of 12.5%, up 50 basis points versus prior year.
Across the segment, we continue to drive down cost and improve project execution despite the volatile cost environment.
For the year, we remain committed to deliver about 100 basis points of margin improvement for the segment and the team continues to take aggressive action to mitigate rising costs and supply chain disruption, which will pressure the pace of near term margin improvement.
As we execute in the fourth quarter, we expect significantly improved operating margin driven by strong productivity gains, improved project mix and more favorable comps versus the prior year's fourth quarter.
Finally Transit segment backlog for the quarter was $3.6 billion, which was flat with the prior quarter after adjusting for the negative effect of foreign exchange.
Now, let's turn to our financial position on Slide 12.
We had another strong quarter for cash generation.
We generated $244 million of operating cash flow during the quarter, bringing year-to-date cash flow generated to over $759 million.
This performance, clearly demonstrates the quality of our business portfolio.
During the quarter, total capex was $23 million bringing year-to-date capex to $78.5 million.
In 2021, we now expect capex to be approximately $120 million.
This is $20 million lower than our previous guidance as the team judiciously manages every dollar of spend.
Our adjusted net leverage ratio at the end of the third quarter was 2.6 times and our liquidity is robust at $1.62 billion.
Also during the quarter we returned capital to shareholders, repurchasing $199 million of shares.
As you can see in these results, our balance sheet continues to strengthen and we are confident we can continue to drive solid cash generation, giving us the liquidity and flexibility to allocate capital toward the highest return opportunities and to grow shareholder value.
Let's flip to Slide 13 to discuss our updated 2021 financial guidance.
We believe that the underlying customer demand for our products and the end market momentum remains strong.
As John indicated, we do expect continued headwinds from a more challenging sales and cost environment into the fourth quarter.
Taking into consideration this market backdrop and volatile cost environment combined with our solid performance in the first three quarters we are narrowing our full year revenue and earnings per share guidance.
We expect sales of $7.9 billion to $8.05 billion and adjusted earnings per share to be between $4.20 and $4.30 per share.
We expect cash flow conversion to remain greater than 90% resulting in strong cash generation of about $1 billion for the full year.
Now, let's turn to our final slide; everything we've outlined today reinforces that we have a clear strategy to accelerate long-term profitable growth.
Our strategy is built on our expansive installed base and deep industry expertise grounded in innovation, breakthrough initiatives and scalable technologies that drive value for our customers and accelerated by our lean continuous improvement culture and disciplined capital allocation.
I'm proud of the strong execution by the team in the third quarter despite a challenging supply chain, cost and market environment.
You are seeing their efforts in the strength of the company and our financial results.
As we go forward the rail sector is well positioned to increase share and address the critical issues facing the world's freight and logistics sector.
We will continue to lean into the strong fundamentals of this industry and our company to deliver long-term profitable growth.
As we've said before, Wabtec's mission holds a larger purpose to move and improve the world.
After demonstrating strong performance in the first three quarters of 2021, I'm confident that this company will continue to deliver and lead the transition to a more sustainable future.
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.

user
compname reports q3 adjusted earnings per share $1.14.
q3 adjusted earnings per share $1.14.
q3 gaap earnings per share $0.69.
q3 sales rose 2.2 percent to $1.91 billion.
compname says tightened its 2021 sales guidance to a range of $7.90 billion to $8.05 billion.
sees fy 2021 adjusted earnings per share $4.20 to $4.30.

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