Wabtec Corporation Stock

Good day, and welcome to the Wabtec's Third Quarter 2026 Earnings Conference Call.[Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Kyra Yates, Vice President of Investor Relations.

Thank you, operator. Good morning, everyone, and welcome to Wabtec's Third Quarter 2026 Earnings Call. With us today are Chairman and CEO, Rafael Santana; CFO, John Olin; and Senior Vice President of Finance, John Mastalerz. 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 and our business today. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics. I will now turn the call over to Rafael.

Thanks, Kyra, and good morning, everyone. We delivered another strong quarter, and we are proud of the progress we have made year-to-date. These results reflect the strength across the portfolio disciplined execution by our teams and the continued success of the strategic actions we have taken to enhance our growth profile, expand margins and increase the earnings power of the company. Our teams continue to translate healthy customer demand into profitable growth while investing in technologies that will advance the future of transportation. These investments are strengthening our credit position and reinforcing Wabtec as a leading industrial technology company.

With that, let's move to Slide 4. I I'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 a strong quarter evidenced by continued growth in our backlog, sales, margin and earnings.

In addition, our recent acquisitions continue to perform very well. Sales were $3.1 billion, which was up 8%. Adjusted EPS was up 22% from the year ago quarter. Total cash flow from operations for the quarter was $455 million. Backlog remains a key strength. 12-month backlog was up 8.8% from the prior year, while the multiyear backlog exceeded $31 billion, up 22.9%. These results demonstrate sustained revenue and earnings momentum and provide enhanced visibility for the fourth quarter and into the future.

Our financial position remains strong. We continue to execute against our capital allocation framework, and we expect to continue to compound long-term value for our shareholders.

Shifting our focus to Slide 5. Let's talk about our 2026 and market expectations in more detail. While key metrics across our freight markets remain mixed, we continue to be encouraged by the overall strength and resilience of our business. We are pleased with the momentum in our North America and international markets. And our pipeline of opportunities across geographies continues to support our long-term growth outlook. In North America, carload traffic was up 3.5% in the quarter. As a result of this growth, Wabtec and Industries active locomotive fleet was up compared to last year's third quarter.

Internationally, carload growth during the quarter was mixed but the long-term carload growth trends continue to be robust. Significant investments to expand and upgrade infrastructure are driving our international orders pipeline. Looking at the North America railcar builds. Last quarter, we discussed the industry outlook for 2026, which was approximately 25,000 cars to be delivered and which now has been reduced by industry sources to approximately 23,000 cars. This forecast represents a 26% reduction from last year's car build.

Finally, turning to the transit sector. We continue to see encouraging indicators for growth. Ridership trends remain favorable in key markets, including Europe and India, while car builders continue to maintain strong backlogs supported by robust levels of public investment for fleet expansion and renewal programs.

Next, let's turn to Slide 6 and highlight several recent business wins that demonstrate the strength of the demand across our markets and the momentum we are seeing globally. International demand for our products and services remains strong. During the quarter, we secured $1 billion of locomotive and service orders, which included significant awards in Africa and in Brazil. This win smarter expand our global installed base, strengthen our long-term customer partnerships and create opportunities for attractive, recurring revenues over time.

In North America, we converted over $600 million of pipeline opportunities into new locomotive and modernization orders for 2 Class 1 customers. These orders reflect our customers' continued investment in fleet modernization, productivity improvements and network efficiency.

Moving on to Transit. We were awarded $159 million in brake equipment orders from various customers, reinforcing our strong market position and the healthy underlying demand we continue to see across the Transit sector. Taken together, this win highlights the value of our technology, the strength of our customer relationships and our ability to help customers improve reliability, durability, efficiency and safety. They also reinforce our confidence in the long-term growth opportunities across our freight and transit businesses.

With that, I'll turn the call over to John to review the quarter segment results and our overall financial performance. John?

Thanks, Rafael, and hello, everyone. Turning to Slide 7. I will review our results in more detail. Sales for the third quarter were $3.12 billion, which reflects an 8.1% increase versus the prior year, with strong contributions from both the freight in Transit segments, including acquisitions. Excluding the impact of currency, Q3 sales were up 8.3%. As discussed in our last earnings call, we raised our full year revenue guidance, $110 million at the midpoint, reflecting the incremental flow business activity we experienced during the second quarter and our expectations for continued demand in the back half of the year.

While timing of certain locomotive deliveries shifted out of the third quarter and into the fourth quarter, these shifts do not change our view of the strong underlying demand environment or our full year revenue guidance. From a margin standpoint, we anticipated third quarter's margin expansion would be generally in line with the performance achieved during the first half of the year.

In actuality, our operating margin expansion exceeded those expectations. The better-than-expected margin performance included favorable product mix strong operational execution, including productivity benefits from Integration 3.0 and other efficiency initiatives as well as lower operating expenses as a percent of revenue resulting from disciplined cost management.

Having said that, GAAP operating income was $625 million, which was up 27.3% versus the prior year. The increase was predominantly driven by higher sales and improved gross margin. Adjusted operating margin for Q3 was 22.9%, up 1.9 percentage points versus prior year. GAAP earnings per diluted share was $2.42 which was up 33.7% versus the year ago quarter. During the quarter, we had net pretax charges of $5 million for restructuring, which were primarily related to our integration and portfolio optimization initiatives to further integrate and streamline Wabtec's operations.

In addition, versus our Q3 expectations, our earnings benefited from a nonoperational item, which is reported as other income, resulting primarily from the impact of currency fluctuations. In the quarter, adjusted earnings per diluted share was $2.83, up 22.0% versus the prior year. Overall, the quarter reflects the strength of our execution, the resilience of the business and solid momentum as we move into the fourth quarter.

Now turning to Slide 8. Let's review our product lines performance in more detail. Third quarter consolidated sales were up 8.1%. Equipment sales were up slightly from last year's third quarter. During the quarter, revenue benefited from increased mining sales, which were largely offset by lower locomotive deliveries, partly driven by units shifting to the fourth quarter. Services revenue was up 6.7% from last year's third quarter, driven by strong core services sales growth and higher modernization deliveries as expected. Component sales were up 5.3% versus last year due to industrial, maintenance of way and international demand partly offset by the industry's decline in North America railcar build and behind our portfolio optimization efforts.

Digital Intelligence sales were up 24.2% from last year. This was driven by contributions from the Frauscher Sensor Technologies acquisition and strong core digital demand. In our Transit segment, sales were up 11.3%, driven by the Dellner acquisition and growth across our products and services businesses. Foreign currency exchange had an unfavorable impact on sales in the quarter of 1.1 percentage points.

Moving to Slide 9. GAAP gross margin was 37.3%, which was up 2.6 percentage points from the third quarter last year. Adjusted gross margin was up 1.8 percentage points during the quarter. GAAP operating margin was 20.0%, which was up 3.0 percentage points versus last year. Adjusted operating margin improved 1.9 percentage points to 22.9%. Operating margin was positively impacted by favorable product mix and productivity benefits from Integration 3.0 and other efficiency initiatives, which were partly offset by higher manufacturing costs, year-over-year net tariffs, which included a nominal tariff refund. Adjusted GAAP and SG&A expenses were higher year-over-year due largely to the SG&A expense associated with our acquisitions, however, which were lower as a percentage of revenue. Engineering expense was $67 million, $8 million higher than Q3 last year, primarily due to acquisitions. We continue to invest in engineering resources and current business opportunities but more importantly, we are investing in our future as a leading industrial technology company focused on improving our customers' fuel efficiency, labor productivity, capacity utilization and safety.

Now let's take a look at the segment results on Slide 10, starting with the Freight segment. As I already discussed, Freight segment sales were up 6.9%. GAAP segment operating income was $515 million, driving an operating margin of 23.0%, up 3.2 percentage points versus last year. Adjusted operating income for the Freight segment was $591 million, up 15.2% versus the prior year. Adjusted operating margin in the Freight segment was 26.4%, up 1.9 percentage points from prior year. The increase was driven by a 1.5 percentage point improvement in gross margin along with a 0.4 percentage point reduction in operating expenses as a percent of revenue.

Finally, the Freight segment's 12-month backlog was $6.54 billion. Our 12-month backlog was up 7.5%, while the multiyear backlog of $25.77 billion was up 23.2%.

Turning to Slide 11. Transit segment sales were up 11.3% at $883 million. When adjusting for foreign currency, transit sales were up 12.5%. GAAP operating income was $145 million, which reflected the quarter's robust revenue growth and operating margin expansion. Adjusted segment operating income was $160 million. Adjusted operating income as a percent of revenue was 18.1%, up 2.6 percentage points from prior year. With the underlying momentum of the business and the Dellner acquisition serving as key contributors to this quarter's margin expansion. Finally, Transit's 12 months Backlog for the quarter was $2.45 billion, and our 12-month backlog was up 12.2%, while the multiyear backlog was up 21.4%.

Now let's turn to our financial position on Slide 12. Third quarter cash flow generation was $455 million, resulting in a cash conversion of 82%. Our balance sheet and financial position continue to be very strong as evidenced by: first, our liquidity position, which ended the quarter over $2 billion and our net debt leverage ratio, which ended the third quarter at 2.1x. We continue to allocate capital in a disciplined way to maximize returns with an expectation of compounding our earnings for our shareholders. During the quarter, we repurchased $305 million of our shares and paid $52 million in dividends.

With that, I'd like to turn the call over to Rafael to talk about our 2026 financial guidance.

Thanks, John. Now let's turn to Slide 13 to discuss our 2026 outlook and guidance. Overall, the team delivered a strong third quarter with our earnings results ahead of our expectations. Importantly, we continue to see the underlying demand for our products and solutions across the business. That demand is reflected in a strong pipeline in both our 12-month and multiyear backlogs provide clear visibility into profitable growth ahead.

As we look at the fourth quarter, in light of our third quarter results and our ongoing underlying momentum, we are raising our full year adjusted EPS guidance. We now expect adjusted EPS to be in the range of $10.85 to $11.05, up 22% at the midpoint. Our revenue guidance remains unchanged.

Looking ahead, I'm confident that Wabtec is well positioned to drive profitable growth to close out a strong 2026. Now let's wrap up on Slide 14. As you've heard today, our team continues to execute against our value creation framework and our 5-year outlook. The strength of our performance reflects the resilience of our installed base, the dedication of our global team, our differentiated technologies and our focus on delivering value for our customers. We also remain encouraged by the integration and early performance of our recent acquisitions. These businesses have strengthened our portfolios, enhanced our technology capabilities and expanded our available markets, creating additional avenues for sustainable growth. These factors continue to reinforce our confidence that Wabtec is uniquely positioned as a leading industrial technology company with a talented global team, strong customer relationships and a clear strategy for growth, we are well positioned to deliver profitable growth and continue to compound shareholder value over time.

With that, I want to thank you for your time this morning, and I'll now turn the call over to Kyra to begin the Q&A portion of our discussion. Kyra?

Thank you, Rafael. We will now move on to questions. [Operator Instructions] Operator, we are now ready for our first question.

[Operator Instructions]

And our first question for today will come from Ken Hoexter with Bank of America.

Rafael, John, Kyra and team. So just jumping in with the margins, right, seems to set a new bar at freight over 26% transit over 18%. Can you talk about kind of the structural gains. I don't know if it's just the acquisitions or maybe, John, talk about sustainability and seasonality. What should we expect into fourth quarter given mix or going into '27?

Sure, Ken. This is John. Well, as we mentioned, we had a very strong third quarter. So why don't we start there? The third quarter was up 1.9 percentage points, and that was higher than our expectations, but we were expecting growth in the third quarter, which we've talked about throughout the year. And with that, the biggest drivers, Ken, are really around what I'd call operational excellence. Just fantastic execution by the team throughout the supply chain. With that, we got more everyday productivity, right lean comes in more favorable. Overall plant efficiencies are there.

And in addition to that, the more structural aspects also came in favorable, and that's Integration 3.0, right? We've been running ahead of expectations for that for most of the year, and the program is just running very well. The third quarter was no different. And then on top of that, we've got the portfolio optimization piece, which is basically ridding ourselves of assets that aren't going to take us to the future that we aspire to. So all of that was certainly higher on a year-over-year basis and higher than our expectations. Product mix was also favorable. While we expect the product mix in the quarter to be favorable, it was more favorable than we anticipated.

And remember, Ken, in the first half, we talked about product mix being a headwind that would turn into a tailwind in the back half. So we'll see that carry through the fourth quarter as well. And then finally, overall, the cost management, SG&A as a percentage of revenue was lower. So that's really with regards to the quarter. As we flip forward, Ken, to the fourth quarter, we've talked about this as we expect the fourth quarter to be a fair amount higher in margin expansion than the third quarter. And the reasons for that are a couple fold is: one is the tariff headwinds that we've really experienced quite significantly in the first half, a little bit less so in the third quarter, but a fair amount of headwinds in the third quarter started to dissipate on a year-over-year basis. Those tariffs do not go away, but the year-over-year impact will provide less of a headwind, and therefore, we'll see more margin expansion.

And then partly as to what we compared to in the year ago quarter, the fourth quarter of 2025, we had some comp accruals in there given the very strong overall cash delivery. So with that, we would expect, let's call it, oversized margin in the fourth quarter. And with that, it will deliver, again, $0.20 higher overall EPS as we look forward. But the margins are very sustainable, Ken. The team is doing a great job. A lot of them are cost driven and we can continue to hold that as we move into the future.

Great. And I guess just for a follow-up, your backlog was up almost 9%, I guess, 12 month was down slightly sequentially, total up slightly. I know it's lumpy, but maybe thoughts on organic growth or maybe just any other thoughts you want to throw on the backlog. I know a lot of investors really focus on the growth level there.

So let me take that one on the backlog. I think we've continued to grow that in both size and profitability. That certainly matters. But I think coverage is really a critical piece here that means having orders in hand to match what I call our product lead times. So you think about for long lead time products like new locomotives, that means having orders 24, 36 months out. Our teams have done a great job extending that visibility across the product mix. And our coverage right now is the strongest it's ever been. So that's good news. So I think the better news is the continued momentum we continue to see in the pipeline of opportunities. That continues to be very strong. .

Your next question will come from Bascome Majors with Stephens.

It's good to see more of the orders come in for both new locomotives and modernizations across the Class 1 customers after you called out some in the prior quarter. Can you talk about the pipeline specific to North American Class 1? What coverage do you have into next year. How long does this 600 and change of orders sort of extend your visibility into? And what is the pipeline look like and maybe some comments on the Class 1 ordering behavior and how long they would like to be booked out today versus a few years ago as we think about the evolution of that revenue stream into '27, '28, '29.

Our coverage, let me just start there. It's the strongest it's ever been. That's good news. I think the better news is that we continue to see momentum and the opportunities here. I was just in Central Asia early this week, and we will continue to expand our fleet here in support of the middle corridor. So that's good news.

In freight and specific, we continue to see alternatives in North America as well. That's customer-specific. At this point, we have not seen what I'll call change in buying behavior associated with the recent carload growth. But again, that's customer-specific. I think more broadly, we continue to have opportunities in Africa, in Asia. And in Transit, I mean, as you see it here in the quarter, that's being led fundamentally by India and Europe. So that continues to be a very strong pipeline, and our teams have had really strong track record here on converting that.

Specific to the North American Class I's, can you give us any sense on visibility into that market in coverage? And just any high-level expectations as if that's a growth opportunity into '27 and '28.

It is a growth opportunity as we look at it. I think some of it is tied to really the age of the fleet we see the renewal here as really an element of tailwind that's not included in our guidance, and we see that really as an element of opportunity moving forward. So as I highlighted before, we have not seen what I'll call a change in buying behavior. Again, this is very customer specific.

Next question will come from Angel Castillo with Morgan Stanley.

Congrats on the quarter. Just wanted to expand a little bit more on Integration 3.0 and the portfolio optimization, was hoping you could put a little bit more color or quantitative finer points on portfolio optimization. How much are you kind of delivering this year versus how much you might still kind of have to be delivered here over the next couple of quarters. .

And then, I guess, a notable aspect of Integration 3.0 was just 350 basis points plus of margin improvement, and you've clearly been doing very well in terms of execution on the operational front. So just any incremental kind of finer point you can put on that plus, like how much upside ultimately you're seeing and what you can deliver over your kind of 5-year target?

Great, Angel, this is John. Both programs, Integration 3.0 and portfolio optimization are aimed at increasing our overall margin, right? On the integration side, we've talked about these projects for a couple of years. We've moved from the synergies that we got out of GE, the Integration 2.0 and now on Integration 3.0. In July, I liken it to the snowball coming down the hill, right? It's coming down faster and getting bigger. And that's exactly what we're seeing with Integration 3.0, right? The savings are coming in higher than what we expected. The cost is lower to deliver those savings that we saw in Integration 2.0.

And the organization is just in a strong looking at both costs from an everyday continuous improvement standpoint, and also from a more structural standpoint, right, how do we build this or maybe the better term is to eliminate the complexities that we have to drive more efficient business. So we feel that there's still a whole lot of opportunity left there. The formal aspect of that program will end in terms of investment in 1.5 years from now and 2.5 years of savings. But we're already looking at what's next, right?

Portfolio optimization is really taking a look at it in a different way, looking at things that are adding complexity, but aren't adding the profits that we would expect. And with that, even on their best day, they might not be worthy of our ownership at this point. So those we're shedding ourselves, and that's been anywhere between $50 million and $100 million a year. And we're going to continue on that. We still see opportunity to tighten our overall portfolio. So we'll continue on that.

With regards to the 350-plus basis points, we still have a ways to go on that, but I would say that we're off to a very good start. And that's one of the reasons that Plus is there. I think this is a core strength of the company, and we'll continue to work and deliver it. But we see the opportunity on the cost side certainly continuing throughout the remainder of our long-term guidance period.

Helpful. And then, Rafael, I wanted to go back to your commentary around this robust pipeline. And I think you mentioned you're still not seeing perhaps a shift in customer behavior per se. But with the North America traffic or industry, just traffic volumes continue to be up low single digits. I guess what are your conversations like? What are the customers waiting for before you start to see potentially a shift in buying or I guess, appetite for buying more power, ultimately new locomotives. And just ultimately, just how that might convert into kind of backlog? Is it a matter of quarters? Is it a matter of years? And where does diesel kind of play into all of that?

I think as customers continue to see those trends remain there, I think there's going to be the opportunity here to relook at really an element of the fleet renewal per se. What we have seen is in the flow part of the business, certainly with the unparking of units, more ordering of parts and that's being reflected in some of the numbers here for the year. So that's something we're continuing to watch out here for the quarter. So that remains as a positive. But I think customers are going to be looking at really the continued trends here on carload growth, and I think there's certainly opportunity when you look at the availability of fleets to move and to support that growth.

The next question will come from Scott Group with Wolfe Research.

Thanks. So I guess, this year, there's been some degree of like, I guess, transactional headwinds relative to the backlog, so like same-store lagging the backlog a little bit. How should we think about that looking ahead? And I think Rafael you said, North America loco deliveries start growing again next year. Any other puts and takes to think about for '27?

Scott, I start with -- we're continuing to accelerate organic revenues in '26 and that's true for both freight and transit. Year-to-date, organic growth, it sits at 5.2%. The execution is strong in the business. We're building momentum -- and we expect that organic growth will be above 5%. That has been captured in the updated guidance we've provided. Our backlog is stronger. We have better coverage with multiyear orders, and those carry higher margins. So I think that's really important to say.

The other element, the highlight here is the acquisition is performing ahead of plan. So that also a positive. So overall, I think it's been a strong year. Teams delivering ahead of plans, and we are really well positioned with the coverage to support the continued execution for the business.

Scott, this is John. I would say that the backlog has not been a headwind at all, actually the opposite. And we've been growing in that mid-single-digit range throughout the year. I think where the headwind is, is really on tariffs, right? And we talked about that a little bit earlier, is those headwinds are going to mitigate in the fourth quarter and should be on a year-over-year basis, not a big deal in 2027. So that provides -- that's not a tailwind, but it won't be the headwind that it was. But I think that's the biggest headwind that we've experienced throughout this year.

Sorry if I wasn't correct I mean there has been some like transactional things like the railcar delivery that's not in the backlog or something like that that's...

I'm sorry. Yes. About 30% of our revenue is not included in the backlog. And you're absolutely right, Scott. That has been a headwind with the railcars being down projected by the industry to be down about 27%. I think our team in component has done a fantastic job of minimizing that the OE part of the railcar build being down so much after market is doing fine. And then this quarter, maintenance of way was a big contributor to the fact that they were up 5%.

And then our industrial businesses have chugged along over the last, I don't know, 6 to 8 quarters helping to minimize some of that. So yes, we're hoping that as we move forward, that the railcar build will stabilize and start to grow as we get into future periods.

Okay. Yes, that makes sense. That's what I was trying to figure out. And then -- so the other question, I think it's -- we're on track for our third straight year of volume growth for the rail. Some of the rails are getting back to like their highest like volume levels in a decade. Do you think it -- when do you think this starts to sort of matter for either new orders, aftermarket? Is there -- do we still need a few more years of growth before this matters? Or are we getting close?

Scott, I think we're seeing that already when it comes down like to flow, which is part to really unpark units or to sustain those levels of unpark. Now with that being said, I think there's an element here of investing in what I call both efficiency with units that are more efficient, more reliable. And I think that's the exact conversation. Those are, again, customer specific. And as I said, we do sit on significant opportunities here in North America, but this is more than North America. The opportunities in North America, we have not accounted in terms of like really a broader fleet renewal program taking place as we look to our guidance. So that would be a tailwind for the business.

The next question will come from Rob Wertheimer with Melius Research.

I had a couple of questions outside North America rail, where obviously, you have some strength in mining. I wonder if you might characterize is mining coming back in pockets and big projects you mentioned Simandou? Or is there a broader recovery. And then just in general, Rafael, you characterize international freight is strong for a while on locomotive deliveries. I wonder if you could just talk about where you stand now, what your win rate looks like, looks pretty good and just how you see that market?

Okay. Let me start with the last part, which is tied to the international markets. It continues to be a very competitive market. But on the flip side of that, we'll continue to invest in our product I think we're really continuing to extend our technology lead and that's fixed not just to the life cycle cost of our product, but also safety, I mean, efficiency overall. And I think we're continuing to win out there.

In terms of the pockets, I did mention Central Asia here. I think some of the wins we had last year in terms of Kazakhstan that's extending to other parts of the corridor. So that's going to continue to be a significant opportunity for us here and you're going to be hearing back from us on that.

Africa, we continue to see some specific pockets of opportunities. And in Asia, we have that as well. I think on more specifically mining. Well, I think we're seeing that on both. We see that in elements of pockets, but we see that if you think of the ultra-class size trucks as well, those are trucks above the 300-ton range. I think we're very well positioned there. The technology that we've had and that we've led from early on, and we continue to progress there and the trends are positive connected to really some specific commodities.

The next question will come from Ben Mohr with Citigroup.

Congrats on the beat and EPS raise. I wanted to focus on the equipment revenue for 3Q. You had mentioned some of that shifted from 3Q to 4Q. And I wanted to just maybe get a sense from you how we should model that going into 4Q kind of coming from both the 3Q stuff that was shifted as well as what would have been in 4Q in the first place.

And I wanted to see if that may have been tied to on Page 5 where you show the Kazakh industry freight volumes year-to-date being down 1.8% and Brazil was also kind of flattish at up 0.1%. Are this -- is the equipment being pushed to 4Q related to some of these country-specific freight volumes?

Thanks, Ben. Starting with the second part of that question. No, it has nothing to do with any international or domestic carload movements. I'd say a usual thing to have things move from 1 period to the other. It's not that big of a deal. But in the third quarter, we did see some units move out of the third quarter into the fourth quarter. Nothing from an operational standpoint. I talked about our operational execution has been fine. But at times on the scheduling of a movement of a piece of equipment like that or a customer accepting it, we do see things move from time to time.

So as we look at our own expectations for the third quarter, we came in less than -- revenue growth came in less than expected. But it is simply timing and nothing more, and that's just moved to the fourth quarter. A matter of fact, they're already gone and shipped. So with that, we don't expect any full year impact on that. We raised our guidance in the second quarter by the $110 million to recognize the North American growth of carloads. We're tracking very well to that. The momentum of the business is strong, and we will see versus our expectations, a higher level of revenue in the fourth quarter, driven by it. But we are coming in, right in line with the guidance that we set a quarter ago.

Wonderful. And related to that, kind of extending to touching on your backlog at your 12-month backlog did step down sequentially, which could imply softer revenues would imply in the next few quarters. But your multiyear backlog stepped up, as has been discussed in the last few questions. So that should drive very strong revenue in the long term. How should we think about modeling your revenue, especially going into 4Q on this point? And because the North American rail carloads strength have been sustained, how should we look at kind of the flow business potentially turning into backlog? And how much should we kind of break that out and just services, equipment digital Intel revenue for 4Q. I understand a lot of it's been overhauls and mods that hit your services, should we see the North America carloads sustained hitting your equipment and your digital Intel as well.

Okay. Starting with the backlog, Ben, from a sequential standpoint, it has come down, but it was expected to come down. We are lapping the evident acquisition. And while they don't have a huge concentration of backlog, they did have some backlog. And so that's now pulled out. I think when you take a step back and look at the backlog growth over the last several quarters, it has been in the mid-single-digit range, right?

So acquisitions and currency are making more of the movement between quarters than anything else. And we've had a growth in terms of organic or the organic piece of the 12-month backlog. With regards to the flow business, right, we just talked about, about 30% of our revenue does not fall into a multiyear or a 12-month backlog. It just means the cycle times are quicker. And with that, there's 2 major areas that fall into there. One is the railcar business. And the second one is a lot of the parts businesses for our service side that are not under contract, not under a long-term agreement or MSA.

And so with regards to these really depends on what is under -- well on the service business, the underlying carload growth is a driver of that. And with that, we saw that step up in acceleration in the second quarter, and we've seen that carry forward to the third quarter. And that's manifested in the fact that we've got more locomotives moving active locomotives in North America this quarter versus the year ago quarter. So those things are just stuff that we follow closely, and they're a little bit more nimble in terms of the movement versus the backlog which we have orders for that go out up to several years.

The next question will come from Jerry Revich with Wells Fargo Securities.

I wonder if you could just go back to talk about the long-term margin framework and growth framework. As we think about '27, we should see much higher MOD deliveries for you folks based on major contract ramp. And it sounds like mid-single-digit organic growth is on track. I'm wondering, is there an opportunity for margin expansion in '27 to be higher than the 70 basis points of operating improvement that you folks typically target given the mix. Can you just comment on the puts and takes as we think about from a high level margins?

Yes. Jerry. So it's a little bit early to talk about '27. But when we look at the construct, as we move out of '26 in terms of margin, it's going to relatively similar to what we've seen in the past and what we've got in that 350-plus basis points in terms of the elements. And we would expect about 2/3 of it to come from the cost side. And we just talked about that things are going very well. We continue to come in higher than expected. So we feel great about that. And the pool of opportunity, it seems that the more we deliver, the more we find out we've got or find out how to get at it. And so that bucket doesn't seem to be going down. And it will provide a lot of opportunity going forward.

The other 1/3 of it is on delivering innovative products that we can get the value for. And we've got a lot in our pipeline. We haven't talked much on this call, but our innovation continues to be very, very strong. And we'll see some of that transact as we go forward. But in terms of specifics, we would expect margin growth certainly in 2027, but a little bit early to talk about the magnitude of that, Jerry.

Thank you John, and then separately, Rafael, can we just expand on the international pipeline? When do you expect to see the inquiries turn into bookings based on the cadence? And can you comment on the opportunity set in Argentina specifically? Could that be a meaningful part of the opportunity set as you look out over the next 12 months?

Yes. We are -- again, as I look at the various opportunities, I mean, there's certainly, I think, some pockets and markets to highlight Africa continues to be one of those. I think you're still looking at some sizable opportunities there. I didn't bring in Central Asia as we do expect opportunities here also for sizable growth I think in Asia, some of those opportunities continue. And you're going to see that converting the next -- into the future here.

But it's a strong pipeline of opportunities. The momentum is there. I need to mention here in North America where we certainly have opportunities too. So I think that's the positive side of it. It's not concentrated on a single customer or a single market. I think the trends remain there, and they do support a strong pipeline of opportunities to our team. Happy to have a strong track record here in converting. So I feel positive about the opportunity to continue to expand.

But Argentina and South America specifically, can you comment on your level of optimism there? That meaningful .

I think we're well positioned in South America certainly had a strong, call presence there a -- we've made, I think, some significant progress even on some markets with smaller orders Argentina, it is a market that we have installed base, and we're well positioned here for the discussions that are taking place in the South America market, where it's associated with new concessions, expansion of new concessions I'm not going to discuss any specific opportunities here, but we certainly feel very strong about presence we have into that market.

The next question will come from Tami Zakaria with JPMorgan.

I had a question regarding your very strong margin performance in the quarter. And I think you said it was better than expected. So are you able to rank the different drivers in terms of magnitude coming from Integration 3.0 versus portfolio optimization versus product mix, I think that would be helpful.

Well, as a broader bucket, Tami, certainly, under the banner that I called out in terms of operational excellence, that was the biggest driver. That was the biggest driver on a year-over-year basis, and it was the biggest driver over our expectation. We haven't quantified the differences between lean, everyday continuous improvement and Integration 3.0. And then again, there was some portfolio optimization in there. But that is really the piece that is driving faster and harder than anything else during the quarter. Again, mix came in favorable as well. That would be lesser certainly to the operational excellence. Also things fixed cost absorption is a benefit when we're growing revenue at 8%, not needing to add additional assets to do that or fixed costs to do that. So all of that was contributing, but the biggest one really was on the cost side and the discipline that we've got coming from on our plants around the world.

Understood. And then do you currently have a view of what real car build or deliveries could look like next year after about 23,000 this year in North America? And how does that inform your view of the Components segment growth in the next few quarters after a very strong 5%, is 5% sort of -- or mid-single digit the new normal for the Components segment for the next few quarters?

Get me a couple of comments there. That's something we're certainly watching very carefully, especially for the quarter. That's one of the things that could move numbers. We do expect to be hitting an inflection point here for the year. And as we go into 2027, I think industry forecast is really to be going up back to really 2025 number, still well below here the replacement ratio. .

The next question is a follow-up from Bascome Majors with Stephens.

And I know we'll hear your next year view in February in due time here. But big picture, as you look out over the next 2 to 3 years, do you see more opportunity to sort of gradually accelerate the organic growth trajectory of the business? Or is it really more about executing on the really fine margin expansion that you guys have been delivering here?

I think it's both plus some, and I'll start with the fundamentals of the business being strong. I think we are winning both in North America and international, certainly in freight and transit I think we've extended the order coverage while improving really the quality of the backlog. The execution is strong with on-time delivery. We're continuing to see opportunities to drive both productivity, simplification, efficiency across the business.

I think we're very happy on how we're extending the technology leads through automation, best-in-class gains and efficiency, safety, life cycle cost. So I think there's opportunities here not to only keep growing our installed base but to ultimately really help our customers improve the return on investments on really updating and modernizing their fleets. Fleets that are over 20 years old. And just keep in mind the dynamics of obsolescence. I've talked to you about electronics that is coming to play in a big way, and that's a function of really having to update units, and you will update them so you can have gains in efficiency and safety in a number of fronts.

So I think we see it here an opportunity with technology to accelerate that growth. And of course, as you think beyond organic growth, I think we stand on some significant opportunities to also look at inorganic plays, and we do have a good pipeline. So all in all, I think the fundamentals of the business are strong. Our portfolio is more resilient, and we're highly confident in our ability to deliver on the long-term guidance.

Thank you Rafael. I could just add one more clarifying question. Can you update us on the regulatory framework and review of Zero-to-Zero and if we're at a point where that could become a tactical revenue driver for the business in the next couple of quarters?

Just continue to progress. We're expecting FRA approval on that. And I think you'll be hearing on that.

The next question is another follow-up from Ken Hoexter with Bank of America.

Thanks for the update on Zero-to-Zero. Definitely look to hear more. The competitive market, last -- I guess a few quarters ago, we had heard orders from maybe a dormant competitor now getting back in the market. Are we seeing that competitive market increasing at all for domestic locomotives. I just want to see if there was any follow-on or completion to that order and if you're seeing that in the market.

It remains a competitive market out there, Ken. What I would say is we're continuing to extend our technology lead and that has to do with the investments we've made in technology. And it's not just at the product level, if you think about automation, best-in-class gains that ultimately translate into not just life cycle cost, safety and efficiency. So if anything, we are committed to continue to extend that technology which positions the business very well to continue winning out there, and that's what we're saying.

And this will end our question-and-answer session. I would like to turn the conference back over to Ms. Kyra Yates for any closing remarks. Please go ahead. .

Thank you, Chuck, and thank you, everyone, for your participation today. We look forward to speaking with you again next quarter. Have a great day.

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

Good day, and welcome to the Wabtec Second Quarter 2026 Earnings Conference Call. [Operator Instructions] please note this event is being recorded. I would now like to turn the conference over to Kyra Yates, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Wabtec's Second Quarter 2026 Earnings Call. With us today are Chairman and CEO, Rafael Santana; CFO, John Olin; and Senior Vice President of Finance, John Mastalerz. 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 and our business today. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics.

I will now turn the call over to Rafael.

Thanks, Kyra, and good morning, everyone. We are proud of the progress we have made in the first half of the year, which is strengthening our position as a leading industrial technology company. It reflects the strength of the leadership vision, we continue to build across our portfolio and the continued focus of the Wabtec team to deliver for our stakeholders.

With that, let's move to Slide 4. I'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 a strong first half of the year, which exceeded our expectations despite tariff headwinds on favorable business mix and challenging prior year comparisons. Through disciplined execution across the organization, we achieved robust growth, expanded margins and delivered double-digit earnings per share growth.

Looking ahead to the second half, I remain encouraged by the healthy pipeline and continued demand for our core products and services. The profitable growth of our 12 months and multiyear backlogs and our focus on driving productivity and efficiency. This momentum is evident in our second quarter operational execution and our overall financial results. Having said that, sales were $3.2 billion, which was up 17.5% and adjusted EPS was up 22% from the year ago quarter. Total cash flow from operations for the quarter was $441 million, backlog remains a key strength. 12-month backlog was up 11% from the prior year, while the multiyear backlog exceeded $30 billion, up 42%.

Our financial position remains strong. We continue to execute against our capital allocation framework and expect to continue to compound long-term value for our shareholders.

Shifting our focus to Slide 5. Let's talk about our 2026 and market expectations in more detail. While key metrics across our freight markets remain mixed, we continue to be encouraged by the overall strength and resilience of our business. We are seeing solid momentum in our international markets and the pipeline of opportunities across geographies remain strong. In North America, carload traffic was up 4% in the quarter. As a result of this growth, Wabtec and industries active locomotive fleet was up compared to last year's second quarter. Internationally, carloads growth during the quarter was mixed, but the long-term carload growth trends continue to be robust, significant investments to expand and upgrade infrastructure are driving our international orders pipeline.

Looking at the North American railcar build, the industry forecast for new railcars slightly up compared to prior quarter, and is now projected to be approximately 25,000 cars for 2026, which is still down 21% from 2025.

Finally, turning to the transit sector. we continue to see positive underlying indicators for growth. Ridership continues to increase in key markets such as Europe and India, and we continue to see strong backlogs at car builders supported by robust levels of public investment for fleet expansion and renewals.

Now let's turn to Slide 6 and highlight several recent business wins. During the quarter, we secured a $1 billion order from an Australian customer spending across locomotives, services, components and digital solutions. This award highlights the breadth of Wabtec's capabilities and demonstrates how our integrated offerings are creating value throughout the product life cycle. We also signed a $184 million order for positive shrink control with Vale, strengthening our long-standing partnership in marking an important step forward in advancing rail safety, efficiency and automation across Brazil's rail network.

In Transit, we were awarded a $55 million platform door order for the Grand Paris Express project.

Moving to mining. Our APAC team secured a $52 million order to supply Drive Systems for 240-ton mining trucks. Overall, the successes continue to demonstrate our leadership in the markets we serve, the strength of our pipeline and the commitment of the Wabtec team to deliver meaningful results for our customers and stakeholders.

With that, I'll turn it over to John to review the quarter segment results and our overall financial performance. John?

Thanks, Rafael, and hello, everyone. Turning to Slide 7, I'll review our results in more detail. Our second quarter results came in better than expected, driven by stronger revenue growth and increased operating margin expansion. As we discussed in our last call, we expected the quarter's revenue growth to be similar to first quarter's results. Second quarter revenue growth came in stronger than the first quarter, driven by a combination of a couple of things. First, we had favorable timing of shipments and second, we experienced incremental flow business revenue. We also expected our margin expansion to be similar to the first quarter. In actuality, our operating margin expansion also came in favorable to Q1's results. This was driven by better-than-expected product mix and our continued focus on productivity and efficiency with programs such as integration 3.0.

Having said that, sales for the second quarter were $3.18 billion, which reflects a 17.5% increase versus the prior year, with strong contributions from both the freight and transit segments, excluding the impact of currency, Q2 sales were up 16.6%. For the quarter, GAAP operating income was $600 million, which was up 27.1% versus the prior year. The increase was predominantly driven by higher sales, improved gross margin and lapping prior year's transaction costs resulting from our recent acquisitions. Adjusted operating margin for Q2 was 21.9%, up 0.8 percentage points versus the prior year. This improvement was achieved despite tariff-related headwinds, unfavorable mix and tough year-over-year comps.

GAAP earnings per diluted share was $2.33, which was up 18.9% versus the year ago quarter. During the quarter, we had net pretax charges of $6 million for purchase accounting charges and transition costs associated with our recent acquisitions. In the quarter, adjusted earnings per diluted share was $2.76, up 21.6% versus the prior year. Overall, the quarter reflects the strength of our execution the resilience of our business and solid momentum as we move through the year.

For the second half, we expect year-over-year revenue growth to temper as we lap the inclusion of inspection technologies in the prior year period. We also expect the majority of our margin expansion for the year to occur in the back half of the year. Our second half margins are expected to benefit from: first, tempering year-over-year tariff impacts as we begin to lap 2025 tariff increases. Next, increasing productivity momentum from our Integration 3.0 and portfolio optimization initiatives and finally, lapping more moderate prior year margin growth.

When we look at the cadence of growth between the third and the fourth quarters, we expect revenue growth to be slightly higher in the third quarter versus the fourth. And on the margin side, we anticipate the opposite dynamic. We expect a meaningful acceleration in margin growth in the fourth quarter with third quarter's performance generally consistent with the margin growth rates delivered in the first half of the year.

Now turning to Slide 8. Let's review our product lines performance in more detail. Second quarter consolidated sales were up 17.5%. Equipment sales were up 35% from last year's second quarter. This was driven by higher locomotive deliveries and increased mining sales. Our services group drove strong core services sales growth in the quarter, which was offset by lower modernization deliveries as we expected. Looking ahead, we expect modernization deliveries to grow in the second half of the year returning services to growth in the back half. That said, we continue to expect full year services revenue to be down due to the lower number of modernization deliveries that were shipped in the first half when we compare that to the prior year. Consequently, as modernization deliveries ramp up in the second half, we would expect equipment revenue growth to remain positive, but at a very moderate pace versus the 43% growth achieved in the first half.

Component sales were down 0.7% versus last year due to the industry's decline in the North America railcar build and due to lower revenue from our portfolio optimization efforts, partially offset by increased industrial product sales. Digital Intelligence sales were up 88.5% from last year. This was driven by contributions from the inspection technologies and Froster acquisitions. In our Transit segment, sales were up 18.9%, driven by the Delmar acquisition and growth across our products and services businesses. Foreign currency exchange had a favorable impact on sales in the quarter of 1.3 percentage points.

Moving to Slide 9. I GAAP gross margin was 36.5%, which was up 1.8 percentage points from the second quarter last year. Adjusted gross margin was up 1.9 percentage points during the quarter. GAAP operating margin was 18.9%, which was up 1.5 percentage points versus last year. Adjusted operating margin improved 0.8 percentage points to 21.9%. Operating margin was positively impacted by cost recovery from contractual price escalation, increased productivity and integration savings, partially offset by rising manufacturing costs higher year-over-year tariffs and unfavorable mix.

Adjusted and GAAP SG&A expenses were higher year-over-year due largely to the SG&A expense associated with our acquisitions. Engineering expense was $70 million, $20 million higher than Q2 last year, primarily due to acquisitions. We continue to invest in engineering resources and current business opportunities, but more importantly, we are investing in our future as a leading industrial technology company focused on improving our customers' fuel efficiency, labor productivity, capacity utilization and safety.

Now let's take a look at segment results on Slide 10, starting with the Freight segment. As I already discussed, Freight segment sales were up a strong 16.9%. GAAP segment operating income was $504 million, driving an operating margin of 22.5% up 0.9 percentage points versus last year. Adjusted operating income for the Freight segment was $579 million, up 20.6% versus the prior year. Adjusted operating margin in the Freight segment was 25.8%, up 0.8 percentage points from the prior year. The increase was driven by higher gross margin of 1.7 percentage points partially offset by an increase of 0.9 percentage points and our operating expense expressed as a percentage of revenue.

The key driver of this is due to the mix of higher gross margin businesses as a result of our acquisitions of Inspection Technologies and Fraser and our continuous focus on productivity and efficiency. Finally, the Freight segment's 12-month backlog was $6.64 billion. Our 12-month backlog was up 10.2%, while the multiyear backlog of $25.33 billion was up 47.8%.

Turning to Slide 11. Transit segment sales were up 18.9% at $936 million. When adjusting for foreign currency Transit sales were up 17.7%. GAAP operating income was $146 million, which reflected the quarter's robust revenue growth and operating margin expansion. These strong results were partially offset by $20 million of purchase accounting charges and noncash amortization expenses, which were primarily associated with the acquisition of Delmar in the first quarter. Adjusted segment operating income was $166 million. Adjusted operating income as a percent of revenue was 17.7%, up 2.5 percentage points from prior year.

With the underlying momentum of the business and the Delmar acquisition serving as key contributors to this quarter's margin expansion. Finally, Transit segment 12-month backlog for the quarter was $2.5 billion, and our 12-month backlog was up 14.5%, while the multiyear backlog was up 19.4%.

Now let's turn to our financial position on Slide 12. Our second quarter cash flow generation was $441 million, resulting in a cash conversion of 82%. Our balance sheet and financial position continue to be very strong as evidenced by: first, our liquidity position, which ended the quarter over $2 billion and our net debt leverage ratio, which ended the quarter at 2.2x. Our leverage ratio remained in our stated range of 2 to 2.5x. Even after funding the purchase of Delmar during the first quarter for approximately $1 billion and repurchasing $457 million of our shares in the first half.

We continue to allocate capital in a disciplined way to maximize returns with an expectation of compounding our earnings for our shareholders. During the quarter, we repurchased $215 million of our shares and paid $53 million in dividends.

With that, I'd like to turn the call over to Rafael to talk about our 2026 financial guidance.

Thanks, John. Now let's turn to Slide 13 to discuss our 2026 outlook and guidance. Overall, the team delivered a strong second quarter with operational results ahead of our expectations. Importantly, we continue to see underlying demand for our products and solutions across the business. That demand is reflected in a strong pipeline in both our 12-month and multiyear backlogs provide clear visibility into profitable growth ahead. With that backdrop, we are increasing our full year guidance. We now expect 2026 revenue of approximately $12.5 billion at the midpoint, up 11.5% from last year, which is an increase of 1 percentage point versus our prior guidance. We also now expect adjusted EPS to be in the range of $10.60 to $10.90, up 20% at the midpoint.

Now let's wrap up on Slide 14. As you heard today, our team continues to execute against our value creation framework and our 5-year outlook. The strength of our performance is driven by our resilient installed base, world-class team, innovative technologies and our customer-focused approach. We are also encouraged by the integration and early performance of our recent acquisitions, which are strengthening our portfolios and expanding our total available markets for future growth.

Overall, I believe Wabtec's uniquely positioned as a leading industrial technology company with a strong foundation, a talented global team and significant opportunities ahead we are well positioned to deliver profitable growth and continue to compound shareholder value over time.

With that, I want to thank you for your time this morning, and I'll now turn the call over to Kyra to begin the Q&A portion of our discussion. Kyra?

Thank you, Rafael. We will now move on to questions. [Operator Instructions]. Operator, we are now ready for our first question.

Our first question comes from Ken Hoexter with Bank of America.

Congrats on raising the outlook. Rafael or John, maybe you noted kind of the mixed carload outlook on a global basis, some wins on international, Australia in particular. Maybe thoughts on sustaining the 12-month backlog at that nearly onetime book-to-bill. Are you seeing maybe Rafael just give an update on kind of what you're seeing out in the market in terms of keeping that progress going on the orders?

Okay. Ken, in terms of demand and backlog conversion, I mean, we are seeing improved demand in the year, and we're converting a strong pipeline into multiyear backlog and higher margins. You certainly see that globally. You saw that strong win we had in Australia in the second quarter. We continue to have opportunities of size, and you're going to see a couple of those coming to the second half of the year. So strong from that perspective.

On the execution front, I'd say we're continuing to drive better execution, and that's really coming with improved margins and that's driven by productivity gains and the progress on simplification Integration 3.0, despite of the headwinds we still face with inflationary pressures, still managing through tariffs and cheap shortages with the impact to electronics. I think the other item to highlight is the acquisitions, which continue to perform very well, early days. So overall, it's been a stronger year with our teams delivering ahead of plan in support of the long-term guidance.

John, you might want to comment more on the specifics of the quarter.

Yes. When we look at the second quarter, Ken, revenue was ahead of expectations as well as earnings. When we look at revenue, revenue was driven by a couple of things. Number one, on more of a sustainable basis. We saw our flow businesses accelerate. And that is on the freight side. And as you pointed out, Ken, partially driven by the improvement in carloads, which is driven to higher year-over-year locomotives and operations during the quarter. And then we also saw some strength in the aftermarket in our transit business.

The other piece of our revenue in the second quarter was some timing on shipments. We did see some pull forward in the -- from the back half into the second quarter. And also, as we talked about in the first quarter, we had a lower organic growth. We saw some pushouts of that. So they landed in the second quarter as well. But overall, a very strong revenue growth at 17.5%, with organic growth up 8.5%. When you kind of shift to the earnings side of it -- and I'm sorry, going back to revenue for that and the piece that is really more sustainable on the flow business. We've looked at that. We've forecasted it forward and that growth to continue in the second and the third and the fourth quarters at largely the same rate, and that has resulted in us raising our overall revenue guidance by the $110 million or a full percentage point on the year. So now we're sitting at a midpoint of 11.5%.

On the other side, the earnings. We did see earnings come in a bit more than what we had expected. And a fair amount of that was driven by 2 things. Number one, is on the revenue, on the flow revenue, it comes at typically a higher margin, and we saw that reflected in favorable mix, but overall, mix was still unfavorable but less unfavorable than what we had anticipated. And then the other area is on their integration and productivity came in stronger, making really good progress on Integration of 3.0. And with that, we did the same thing and extended that goodness over the back half. And with that, raised our midpoint of our guidance by $0.30 up to the $10.75.

John, if I can just get a follow-up there. You mentioned the 3.0. Can you talk about how much cost savings were realized and it sounds like, I don't know, maybe the message you're trying to give for margins into the third quarter from second quarter based on the run-up you gave us?

Yes. So Ken, as you know, in the first quarter, we raised our guidance by $15 million on Integration 3.0, and we saw the momentum and the timing of these projects at that time. And we've seen that convert certainly in the second quarter, and we would expect from our original thoughts on the year that Integration 3.0 is going to drop more goodness on the year. And again, that is part of that increase in the EPS guidance of $0.30.

Our next question comes from Scott Group with Wolfe Research.

So if I look, the 12-month backlog is up 11%, the total backlog is up 42% year-over-year. I think that's the big spread we've ever seen between the 2. I guess, I'm trying to understand like what's the timing for that multiyear backlog to start converting to revenue? And ultimately, I guess what I'm trying to figure out is like we had high single-digit organic growth in Q2. Is that sustainable?

Well, thanks. I'll start with just the total backlog, and this is very strong coverage, Scott, to your point, and that's how we run the business, make sure that we have that coverage. It's probably the strongest coverage we've had and some multiyear backlog to call over really a multitude of years. So that's very good and really strengthens our position to deliver on the long-term guidance we provide. In terms of the 12-month backlog, I think that number really supports the mid-single-digit growth on 5% to 6% that we've described for the year. And I think you've got to extract from that some of the nuances associated with especially the acquisitions we've done.

John, I don't know if you want to add to that?

Yes. Scott, you had mentioned organic growth in the second quarter. When you look at our overall growth of 17.5%, the easy way to look at this is half of it, about 8.5% is driven by the year-over-year impact of acquisitions. And the other half of that, about 8.5% is driven by organic growth. And that's certainly an acceleration from what we saw in the first quarter. If you remember, our first quarter organic growth was up 2.3% based on tighter shipments as well as the write-down of a digital project.

So I think the best way to look at organic growth is to look at it on the first half basis that takes care of some of the timing nuances there, which were up 5.5%. And we feel good about that. When you look at the 12-month backlog is an indicator of that, if you take out the acquisitions and currencies and more normalize that, we are in that range of mid-single digits. And we see that continuing on in the back half of the year given the strength that we're seeing in particular of our flow business.

Okay. That's helpful. And then just 1 follow-up for you, John. I think your comment about like the pace of margin suggests Q4, we see some really strong year-over-year margin improvement. I know it's early, but like is that a good way to think about what '27 could look like that exit rate?

I would say, looking at the half, Scott, is more indicative of that. So let's talk about why we're expecting what we're expecting, right? We're expecting the -- probably a significant majority of organic growth to be in fourth quarter. We expect growth in the third quarter, but that's going to be in the range of around 0.5 point that we saw in the first half of the year. So why is the fourth quarter going to be up so much? And I think first, we start with what happened a year ago in the fourth quarter.

If you remember, Scott, we had 1 heck of a cash flow in the quarter. And next cash conversion was just shy of 300% and as I think you also know is our comp plans and our focus on cash is throughout the organization, but it is embedded in both our short-term and long-term comp plans and then drove a higher expense than we had anticipated. The second area in last year was the fact that our transit business was level loading some production and move forward some benefit through production and moving production forward in the second and the third quarter. And consequently, we had a pretty weak margin in transit in the fourth quarter, and that was driven by the manufacturing inefficiencies as we rebalance that. So we're lapping those 2 things that aren't going to repeat again this year.

The other piece of it, again, goes back to tariffs, right, our tariff expense is going to be pretty even between quarters this year and certainly in the back half. However, the comparable is very different. In the third quarter last year, we had very little expense. We just started to see some, but it was nominal at best. The fourth quarter, though, we saw a large rise in our expense for tariffs as things keep up the balance sheet, right, from when we incurred the tariff. And so the headwind in the fourth quarter is going to drop quite significantly between what we saw in the first 3 quarters. And between the confluence of those 3 things, we expect our fourth quarter to be up more than we would typically expect in a quarter with regards to margin growth.

Our next question comes from Angel Castillo with Morgan Stanley.

Just maybe I wanted to start on components. I was hoping we could kind of unpack that a little bit more. I guess, you still have railcars down even though the outlook has improved a little bit, but just the 1% decline is quite notable and you've talked about some of the pieces around flow and you also mentioned, I guess, Industrials business. So can you just help quantify, I guess, how much has the flow business improved? How much is maybe the railcars OE side down and then on the industrial part of the business, we would love to just hear a little bit more about how that's progressing, what changes you're seeing there, in particular, I guess, the data center part of your components business. Just curious one, what you're seeing in terms of demand there and then just more broadly from data centers, how is your strategy kind of changing or evolving base of the demand you're seeing? So I know there's a lot in there, but all kind of related to components.

Angel, I'll start, and I'll let John dive into a little bit of the details. We described -- I mean we saw North America freight volumes strengthening. With that, we saw really more of a demand for our full product rated on parts, some fleets being on par as part of that. And we've seen that continued strengthen the transit backlog when you talk specifically about the components business, I think despite of the lower freight car build I think our teams have continued to adjust, number one, the operations to align with that volume.

I think they've driven significant cost discipline and margin improvement for the business. And we are continuing to see strong demand in the industrial applications and some of that is particularly visible the heat exchangers which go into some of the demand for power generation, which is a positive in that regard. John?

Yes. Specifically, Angel, the components was down 0.7 percentage point and except if you go back over the last 6 quarters, we've really seen pretty much the same thing as we're bouncing around that flat. Certainly, the team has been absorbing a significant downstroke with regards to railcar businesses -- business, which is about 60% of overall revenue. And the other piece of it that we're finding this year seeing this year is the exit of some nonstrategic business and revenue in there. So they're fighting, as Rafael amended from a cost standpoint, certainly from a market share and they're offsetting a fair amount of what they can, but also getting a little bit of help on the industrial side.

And we're not seeing a big shift in what we've seen in the industrial side for the last 6 or so quarters. It is up on a small basis. It's up pretty good, again, benefiting from some of the data center stuff, but it's a small base, but it is enough to largely offset what we're seeing that and the work of the team to offset what we're seeing with railcars being down. We're hoping that, that turns in 2027, and that's what the early forecasts are. But we still got a couple of more quarters that we expect railcars to down in the 20% range.

Got it. That's very helpful. And maybe just as a follow-up, I guess, could we maybe unpack the data center portion of power generation maybe separate from what you might be seeing in heat exchangers and how that's progressing versus maybe any potential equipment demand and how your strategy, if it's changing at all, how you're viewing that market, the attractiveness to potentially look to target that a little bit more readily. I guess just how are you thinking about that? Or what are you seeing? .

Angel, I mean, as you mentioned, all sort of the positive heat exchange is a positive for us. You're seeing that as, I'll call it, significant offset some of the pressures we've got on the freight car side of the house. In terms of the engine side, when you look at engines and specific, I mean, our engines are really built for some of the most demanding applications in the world. They are exceptional for reliability and fuel efficiency. With that being said, when we think about data centers, a large part of that is connected to back power only applications.

We charge engines are generally not the most competitive solution for that application. We're continuing to look into selective opportunities for power generation applications, especially where we have more restriction around emission standards, but this is very much a niche segment of the market. And at this stage, we have had really only very, very nominal sales in this space.

Our next question comes from Bascome Majors with Stephens.

I wanted to revisit the EVO Advantage modification program. I know you guys reported quite a bit of orders earlier this year in that space. Can you just give us an update on how the product is resonating with the Class 1 rails in North America, where you are on the ramp up of actual delivery to where you think you'll be a run rate into next year? And how the pipeline compares to the backlog and just a big picture of how you expect that to evolve as this product continues to out in the marketplace?

First, I think we've seen continued progress in terms of the program. We've announced that in the first quarter. We began our first order in North America in the second quarter that's consistent with what we expected. We see that as an opportunity to really continue momentum with regards to refreshing our installed base around the world, especially in North America, providing what I'll call more value for our customers with fuel efficiency and really driving, I think, greater and better value outcomes for our customers. So we continue to expand on the value that we can bring to our customers on fuel efficiency and continue to stay ahead and widen really the competitive advantage versus our competition. So positive from that perspective.

And you said first order in 2Q. So just to be clear, the $1.3 billion in orders you received later last year that was not for the advantage the order conversion for this product is still mostly ahead.

Exactly. That's correct.

Our next question comes from Rob Wertheimer with Melius Research. .

Rafael, you just touched on some of the fuel savings. But just given the global uncertainty around diesel, could you remind us of kind of the fuel economy savings on mods and new? And then just how do your customers react to that to see elevated prices for a year and then they think about doing more mods, do they park owner locals and run newer ones? Is there any impact from your business from diesel spiking now?

So let me start at a high level. The short answer is we're much more efficient in moving goods through rail than by road. And I mean that's favorable to the overall business as we see it. And I think that drives positive dynamics. And when we look at it specifically in North America, I think some of the comments I'll make is I mean, you're seeing some of that movement of freight going into rail. I think that has translated into, I'll call, more visibly in our flow businesses, especially in freight, but we've seen debt with especially parts. With that, we have not seen -- if you had any, I'll call shift on demand for mods or new units on that. It's remained consistent with the demand as we have described before. But fuel price is up, it's a positive for the overall business.

Perfect. And then just on your last question, you touched on EVO orders. Are people still doing work on mods on older FDL as well or are they kind of waiting for EVO to be exciting. And I'll stop there.

Yes, they are. I think this is twofold. And keep in mind, it's not just a function of North America. It's a function of international as well. These programs drive all-in average 5-plus percent advantage point on the fuel side. So very significant returns for our customers. But very customer dependent. You've got to look at the application, you got to look at how they run their fleets. But this is a program that's going to advance our ability to continue to modernize the fleet. And that's how we think about it. It's continue to drive replacement continuing to drive modernization in that context. Early days even mods, but it's good to see the first order here in the second quarter.

Our next question comes from Ben Mohr with Citigroup.

Rafael, John, Kyra, congrats on the quarter in the raise. I just wanted to continue on Ken and Scott's questions there on revenue-related backlog, your midpoint of your revenue guide raise of up 1%. Can you help us parse out how much of that is related to the rail volume strength in North America rails in 2Q that could generate non-backlog revenue. You've got your 2Q organic revenue up 8.5%. It sounds like you're guiding to second half organic revenue being roughly closer to mid-single digits. How much are you embedding continued rail volume strength to generate non-backlog revenue in the second half. Is it assuming the up 4% carloads is still there? Or is it more bringing that down to flattish and anything above could be upside?

Yes. So going back to when we look at the revenue raise of the $110 billion -- $110 million is largely driven by the flow business. And Ben, as we've talked about 30% of our businesses flow, 70% is backed up by long-term agreements. And so that's really just executing against the orders that we have. So where we've seen the growth is coming certainly from that. And as I mentioned, it's coming from 2 places. One is on the freight side, and that is driven by that increase that we saw in the first half. Overall, carloads were up about just shy of 3% on the half, 4% on the second quarter. So what we've done is we've looked at that and held what we're seeing in the second quarter throughout the back half and looking at the revenue that's behind us, driven by the flow business in the second quarter and adding on what we believe is a similar run rate in the second half and that's delivering the $110 million of additional benefit.

I appreciate that. That's very helpful. And then maybe looking further ahead, can I just ask -- and congrats on this $1 billion Australia order. It seems like it's across equipment and services and other segments as well. Has that entered into your 2Q backlog. And then related to that, it has great -- related to that, are you still looking ahead in 1- to 2-year negotiations with some of those regions, I'll quickly listen out Australia, East Asia, Uzbekistan, Mongolia, Pakistan, Brazil, parts of Africa. Are you still excited about potential orders from these in upcoming quarters where you're still in 1- to 2-year negotiations?

Very much. And that's why I mentioned really continued strength in the pipeline of opportunities. I feel like we've been talking about Australia for more than a couple of quarters. It has materialized. We continue to progress those international deals can take a bit longer than you'd normally see we feel very strong about more than a couple of significant deals happening here in the second half of the year, and they're exactly tied to what you described there. And there -- they're meaningful in that context. So pipeline remains strong. And I think it's providing us a stronger and stronger coverage as we look out years ahead for Wabtec.

Our next question comes from Steve Barger with KeyBanc Capital Markets.

This is Christian Zyla on for Steve Barger. Can you just give us a sense of the current breakdown of the backlog for freight? Is it primarily equipment and services in there? Or does it look more like the product mix for freight -- and then, I guess, just following up, which category are you seeing the most growth in the backlog?

Christian, the backlog would be made up more of the equipment side. They've got long lead times. And not so much on the flow stuff. That doesn't all into our -- it doesn't fall into the 12 or the multiyear backlog because it's more of a turn product. And again, about 70% of the revenue falls into that the backlog category, either 12 or the multiyear, but it is predominantly on the longer lead time equipment.

Got it. That makes sense. And then just second question, kind of switching gears on the international opportunities and the regions you talked about. Are you guys starting to see a deeper penetration for the digital offering in international? Or is it still mainly core equipment, mods, service, et cetera?

No, we are. And I think that's a very exciting part of what we're saying is this -- if you think about the technology and the strong momentum in digital innovation and automation, you asked specifically internationally, I mean, this is -- we're seeing meaningful advancements. You saw our win on PTC 2.0, that's becoming more of a vital element of how you run the railroad internationally. You combine that with 0 to 0. This really brings great advantages to our customers. So significant advantages there. We're continuing to also advance versus competition. I think we mentioned about EVO advantage. We're continuing to advance on hybrid battery program. So a lot of those things are really driving, I think, significant opportunities for us to continue to win internationally.

Our next question comes from Harrison Bauer with SIG.

As you've implemented some of your tariff mitigation actions, have any of those changes proven structurally beneficial enough that they're likely to remain permanent regardless of how tariff policy evolves, specifically regarding sourcing, localization, supplier diversification, stickiness of pricing processes.

Thanks, Harrison. I would say that some are -- and some are waiting to be implemented once we see the -- some of the shifting of tariff rates, it will become more concrete, right? So some of these moves on the supply side. So Harrison, we talk about a 4-point plan to minimize these. One of those is working with the supply chain. So yes, where we can, we've moved products from higher tariff areas to lower tariff in the United States. And a lot of these require a fair amount of investment to move.

So there's still opportunity ahead of us once we get some stability in the overall rates before we start to change things around. But yes, some have proved to be good moves, and that will stay that way if rates change again.

Okay. Great. And maybe just a follow-up on some of the discussion regarding your mix within your long-term margin framework, and I know you don't separately disclose freight components of margin growth. But can you help us understand what the relative contributions are from operational improvements mix and synergies from some of your recently acquired businesses? And maybe just the natural maturation of your installed base toward a higher-margin aftermarket and digital revenue and how each of those contribute to steady margin expansion over time?

So Harrison, number one, in terms of strictly mix, over the long term, we would expect there to be a mix headwind as we grow our mods and locals at a faster rate than the average. And here is some I would like to say is there's 2 kinds of mix in this world. There's good mix and bad mix. And what we have here is a case of really good mix, right? Because putting these out even at a lower margin than the average allows for us to garner service revenue off those for the next 20 to 30 years and the components and certainly the modernizations that come from that.

When we look at overall, the margin growth that we expect in our long-term plans. We've talked about 350-plus basis points of margin growth. I think the way to think about that Harrison is about 1/3 of it is going to come from the hard work that we do on managing the company's productivity and driving the company's productivity, right? And those are things such as every day productivity and lean. We got a lot of opportunity to continue to propagate lean throughout the organization. Then there's the integration programs, which are more structural changes that are driving significant margin expansion. And then we got portfolio optimization as getting rid of some of the things that aren't going to take us to the future that we aspire to. So that's how we see a fair amount of that 350 basis points going forward.

The rest of it is on adding more value, which is recovering the costs and the inflationary aspects that we have -- most of our contracts or 60% of our revenue have long-term contracts, and they have predominantly price escalators in -- and so that, along with the innovation that we're investing in and the selectivity that we're displaying certainly on the transit side would drive the extra 1/3 of that margin expansion over our time horizon.

Our next question comes from Jerry Revich with Wells Fargo.

Rafael, I wanted to ask on service. As we've seen these really good freight volumes this year. Has your service business picked up seen? Are you looking for the pure service part to accelerate? And then back on the mods part of the conversation, you've got via a product line transition here. or life cycle transition here. Are we thinking about mods being down again '27 versus '26 given that FDL to EVO transition, can you just calibrate us on that life cycle?

Jerry, I mean, I think we've been quite clear in terms of the benefit we've seen from the flow business, which is tied to this volume growth in North America and unparking of locomotives. So that's positive. It's kind of early to comment on '27 at this point. But what I'll tell you is we look at the balance of the year, the things we're watching are -- like if you think about upside, where it could come from, it could come from customers continue to on part units and sustaining that on part fleet. So I think that's something to watch. It could also come from -- as we continue to advance integration 3.0 in implication if the productivity that we get from these initiatives materialize faster.

Now, and we've got to take into consideration the risk side, which we continue to be mindful of, well, I guess, inflation pressures, especially on the container side. We mentioned chip shortages of electronics, and we're usually watching here the North America rail car built in this context and managed through tariff-related changes. But execution remains always a key variable to watch but it's been a positive so far.

Okay. Super. And then can I ask on transit, really nice margin performance. Can you just talk about out of the legacy business, excluding the acquisition. Where are we in terms of the proportion of backlog that's at your target margin levels? And is it fair to think about the margins in backlog is higher than what's flowing through margins through sales this year?

I'll start. When we think about transition. I mean it's great progress -- our teams are continuing to drive a lot of the actions around productivity and simplifying the operating footprint. I think we see here a clear path towards the high teen margin performance that we've described before. Mix was positive for the quarter. And I think the other positive point here is the acquisitions. The Downer acquisition, still early days, but it's going very well. In fact, when we think about the acquisitions overall, I mean they're on track to deliver on the synergies and when we think about the overall dynamics, it's positive there had to plan.

Our next question comes from Tami Zakaria with JPMorgan.

Congrats on very impressive results. I wanted to double-click on a prior question. on freight traffic because North America freight traffic accelerated quite notably in the quarter. What are some of the factors you believe drove that? Was it driven by any specific industry? Or was it broad-based? And do you believe this is sustainable going forward because it's probably great news for your flow business? Any color would be helpful.

Tami, I think we're certainly seeing movement into rail. And I think there's a combination of factors there, which tie to the dynamics on the truck market, fuel prices being up, some still driver shortages there. And I think some of those dynamics connected with better service in rail and I think are kind of well driving some positive results so far. Now that's certainly very visible in the second quarter.

As I mentioned, I think we'll continue to watch that. And that's where, I'd say, upside could come from its customers continue to unpark units and continue to sustain that level of on part units in that context. But that's something that you need more than a couple of quarters, and that has not yet translated in 20 shift in terms of demand for mods or new units in North America. The demand there continues, but to be very consistent with how we've described before.

This concludes our question-and-answer session. I would like to turn the call back over to Kyra Yates for any closing remarks.

Thank you, Bailey, and thank you, everyone, for your participation today. We look forward to speaking with you again next quarter.

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

Good day, and welcome to the Wabtec First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kyra Yates, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Wabtec's first quarter 2026 earnings call. With us today are President and CEO, Rafael Santana; CFO, John Olin; and Senior Vice President of Finance, John Mastalerz. 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 and our business today. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics. I will now turn the call over to Rafael.

Thanks, Kyra, and good morning, everyone. At Wabtec, we are focused on advancing mission-critical transportation and industrial technologies. We are committed to building a more efficient, high-performing global platform that drives and compounds long-term value for our customers, shareholders and for our employees. We are inspired by the progress we are making, and we remain dedicated to executing this strategy as we report out our first quarter results. With that, let's move to Slide 4.

I'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. The team delivered a strong first quarter with operational results ahead of our expectations. EPS also benefited from nonoperational benefits driven by currency fluctuations and taxes. The momentum that we had as we exited 2025 was clearly evident in our first quarter operational execution, pipeline conversion and our overall financial results.

Sales were $3 billion, which was up 13% and adjusted EPS was up 19% from the year ago quarter. Total cash flow from operations for the quarter was $199 million. Backlog remains a key strength. 12-month backlog was up 13% from the prior year, while the multiyear backlog exceeded $30 billion, up 38%. These backlog results provide strong visibility and reflect continued momentum across our businesses, positioning us well as we execute against our strategy. Our financial position remains strong. We continue to execute against our capital allocation framework and expect to continue to compound long-term value for our shareholders. Shifting our focus to Slide 5.

Let's talk about our 2026 end market expectations in more detail. While key metrics across our Freight markets remain mixed, we continue to be encouraged by the overall strength and resilience of our business. We are seeing solid momentum in our international markets and the pipeline of opportunities across geographies remain strong. In North America, carload traffic was up 2% in the quarter. Despite this traffic growth, the industry's active locomotive fleet was down slightly, while Wabtec's active fleet trended up when compared to last year's first quarter. Internationally, carloads continue to grow at a robust pace across core markets such as Kazakhstan, Latin America, Africa and India. Significant investments to expand and upgrade infrastructure are supporting our international orders pipeline.

Looking at the North American railcar build, demand for new railcars is down compared to the prior year and is projected to be approximately 24,000 cars for 2026, which is down 22% from 2025. The industry forecast remained unchanged from last quarter.

Finally, turning to the Transit sector. We continue to see positive underlying indicators for growth. Ridership continues to increase in key markets such as Europe and India, and we are seeing strong backlogs at car builders, supported by higher levels of public investments for fleet expansions and renewals.

Next, let's turn to Slide 6 and highlight several recent business wins. During the quarter, we secured a multibillion-dollar multiyear mining order for drive systems and aftermarket parts. This win reflects our close collaboration with our customers and the strength of our differentiated technology and life cycle support offerings.

In North America, we secured a $210 million multiyear modernization with MBTA that highlights our ability to innovate and deliver fleet scale upgrades that improve reliability, efficiency and life cycle value for our customers. We also continue to make progress on innovation as we are executing the first EVO modernization build to support our commercial rollout of this new product. This represents an important milestone as we transition from development to commercialization and begin to scale this technology across our installed base for years to come.

Moving to our Transit segment. We signed a $54 million brake and couplers order with Kawasaki for the New York City Transit, further validating the positive impact of the recent Dellner acquisition in enhancing our Transit portfolio. Overall, these successes continue to demonstrate our leadership in the markets we serve, the strength of our pipeline and the commitments of the Wabtec team to deliver meaningful results for our customers and for our business.

Moving to Slide 7. Before turning it over to John, I want to briefly discuss our acquisition strategy and history. Our strategy remains disciplined, targeted and focused on driving long-term value creation. Since 2020, we have deployed over $4.5 billion of capital across 20 acquisitions, largely centered on bolt-on and near-end adjacent opportunities that enhance our portfolio and further strengthens Wabtec's position as a leading industrial technology company. These transactions are highly strategic. They expand our capabilities, they deepen customer relationships and they deliver strong synergy potential while meeting our financial objectives.

Capital deployment has been highly focused on the quality of the assets purchased and on their investment returns for our shareholders. We have remained patient and selective in an effort to improve portfolio resilience and position us for profitable growth over time.

With regard to our most recent acquisition of Inspection Technologies, Frauscher and Dellner, these businesses are off to a great start with Wabtec. While still early, they are delivering ahead of our acquisition plan. Our integration of these acquisitions, we continue to execute very well. Currently, our teams are making solid progress where our integration plan is firmly in place and early synergy realization is also tracking as expected.

We're already seeing early benefits and expect synergy run rate savings to scale meaningfully over the coming years. Overall, our approach to M&A is to execute targeted high ROIC acquisitions supported by repeatable integration model aimed at delivering sustained profitable growth as we accelerate the compounding of value for all of our stakeholders.

With that, I'll turn the call over to John to review the quarter, segment results and our overall financial performance.

Thanks, Rafael, and hello, everyone. Turning to Slide 8. I'll review our first quarter results in more detail. As a reminder, last quarter, we expected first half of this year to be characterized by robust revenue growth behind continued organic growth, coupled with the revenue benefit from our recent acquisitions. Furthermore, we expected our margins to expand modestly in the first half of 2026 as we lap very tough comps from the first half of 2025 and experienced significant headwinds from tariffs.

As Rafael mentioned, our first quarter operational results came in slightly better than expected. This performance included the impact of an exit from a low-margin Digital project, which was fully reflected in the quarter. In addition to the better-than-expected operational results, we experienced better-than-expected nonoperational results. This favorability was generated in 2 areas. First, other income was significantly favorable on a year-over-year basis, which resulted primarily from the impact of currency fluctuations on our international assets and liabilities. Next, we experienced favorable timing in our effective tax rate. In the quarter, our adjusted effective tax rate was 22.2%. Our expectations for the full year remain at approximately 24.5%.

Having said that, sales for the first quarter were $2.95 billion, which reflects a 13.0% increase versus the prior year, with strong contributions from both the Freight and Transit segments. Excluding the impact of currency, Q1 sales were up 10.4%. Organic growth in the quarter reflects the Digital portfolio exit. Excluding that impact, organic growth was in line with our expectations for the first quarter. For the quarter, GAAP operating income was $517 million. The increase was predominantly driven by higher sales. GAAP operating margin was down in the quarter due to the noncash purchase accounting adjustments resulting from our recent acquisitions. Adjusted operating margin for Q1 was 21.9%, up 0.2 percentage points versus prior year. This modest improvement was achieved despite the year-over-year tough comps, tariff-related headwinds and the Digital portfolio exit.

GAAP earnings per diluted share was $2.12, which was up 12.8% versus the year ago quarter. During the quarter, we had net pretax charges of $41 million for purchase accounting adjustments and transaction costs associated with our recent acquisitions as well as restructuring costs, which were related to our integration and portfolio optimization initiatives to further integrate and streamline Wabtec's operations. In the quarter, adjusted earnings per diluted share was $2.71, up 18.9% versus the prior year. Overall, the quarter reflects the strength of our execution, the resilience of the business and solid momentum as we move through the year.

Turning to Slide 9. Let's review our product lines in more detail. First quarter consolidated sales were up 13.0%. Equipment sales were up 52.5% from last year's first quarter. This was driven by higher locomotive deliveries and increased mining sales. Our Services sales were down 17.3% due to lower modernization deliveries as we expected, which was partially offset by core Services sales growth.

In Q2, we expect to post another quarter of strong Equipment growth and lower year-over-year Services revenues driven by lower modernization deliveries. Component sales were down 6.3% versus last year due to the industry's decline in the North American railcar build and due to lower revenue from our portfolio optimization efforts, partially offset by increased industrial product sales. Digital Intelligence sales were up 75.7% from last year. This was driven by contributions from the Inspection Technologies and Frauscher acquisitions.

In our Transit segment, Sales were up 17.8%, driven by a partial quarter of the Dellner acquisition and growth across our Products and Services businesses. Foreign currency exchange had a favorable impact on sales in the quarter of 6.8 percentage points.

Moving to Slide 10. GAAP gross margin was 36.0%, which was up 1.5 percentage points from first quarter last year. Adjusted gross margin was up 2.3 percentage points during the quarter. GAAP operating margin was 17.5%, which was down 0.7 percentage points versus last year. Adjusted operating margin improved 0.2 percentage points to 21.9%. Operating margin was positively impacted by cost recovery from contractual price escalation, increased productivity and integration savings, partially offset by rising manufacturing costs, higher year-over-year tariff costs, unfavorable mix and the Digital portfolio exit.

Adjusted and GAAP SG&A expenses were higher year-over-year due largely to the SG&A expense associated with our acquisitions. Engineering expense was $56 million, $10 million higher than first quarter last year, primarily due to acquisitions. We continue to invest engineering resources and current business opportunities, but more importantly, we are investing in our future as a leading industrial tech company focused on improving our customers' fuel efficiency, labor productivity, capacity utilization and safety.

Now let's take a look at segment results on Slide 11, starting with the Freight segment. As I already discussed, Freight segment sales were up a strong 11.3%. GAAP segment operating income was $450 million, driving an operating margin of 21.3%, down 0.8 percentage points versus last year. GAAP operating income included $24 million of purchase accounting adjustments resulting from our recent acquisitions and restructuring costs for our integration and portfolio optimization initiatives.

Adjusted operating income for the Freight segment was $550 million, up 12.7% versus the prior year. Adjusted operating margin in the Freight segment was 26.0%, up 0.3 percentage points from the prior year. The increase was driven by higher gross margin of 2.1 percentage points, partially offset by an increase of 1.8 percentage points of our operating expense as expressed as a percent of revenue. The key driver of this is due to the mix of higher gross margin businesses as a result of our acquisitions of Inspection Technologies and Frauscher. Finally, the Freight segment's 12-month backlog was $6.68 billion. Our 12-month backlog was up 10.1%, while the multiyear backlog of $25.18 billion was up 41.0%.

Turning to Slide 12. Transit segment sales were up 17.8% at $835 million. When adjusting for foreign currency, Transit sales were up 11.0%. The acquisition of Dellner added a partial quarter of revenue, adding approximately 5.8 percentage points of sales growth. GAAP operating income was $121 million, which reflected the quarter's robust revenue growth and operating margin expansion.

These strong results were partially offset by $6 million of restructuring costs and the costs associated with our acquisition of Dellner in the first quarter. Adjusted segment operating income was $138 million. Adjusted operating income as a percent of revenue was 16.6%, up 2.0 percentage points from prior year, driven by increased gross margin, which was partially offset by higher operating expenses as a percent of revenue. Finally, Transit 12-month backlog for the quarter was $2.57 billion. Our 12-month backlog was up 20.7%, while the multiyear backlog was up 26.4%.

Now let's turn to our financial position on Slide 13. First quarter cash flow generation was $199 million, resulting in a cash conversion of 40%. We are off to a solid start for the year with cash flow up slightly versus last year's first quarter cash flow of $191 million. Our balance sheet and financial position continues to be very strong as evidenced by: first, our liquidity position, which ended the quarter at $2.09 billion; and our net debt leverage ratio, which ended the first quarter at 2.3x.

Our leverage ratio remained in our stated range of 2 to 2.5x, even after funding the purchase of Dellner during the quarter for approximately $1 billion. We continue to allocate capital in a disciplined way to maximize returns with an expectation of compounding our earnings for our shareholders. During the quarter, we repurchased $242 million of our shares and paid $53 million in dividends.

With that, I'd like to turn the call over to Rafael to talk about our 2026 financial guidance.

Thanks, John. Now let's turn to Slide 14 to discuss our 2026 outlook and guidance. Overall, the team delivered a strong first quarter with operational results ahead of our expectations. EPS also benefited from nonoperational favorability driven by currency fluctuations and taxes. Importantly, we continue to see underlying demand for our products and solutions across the business. That demand is reflected in a strong pipeline and both our 12-month and multiyear backlogs provide clear visibility into profitable growth ahead. Our team remains fully committed to driving top line growth, margin expansion and executing with discipline.

With that backdrop, we are increasing our previous adjusted EPS midpoint guidance, and we now expect adjusted EPS to be in the range of $10.25 to $10.65, representing approximately 17% growth at the midpoint. Our revenue guidance remains unchanged. Now let's wrap up on Slide 15.

As you heard today, our teams continue to execute against our value creation framework and our 5-year outlook, driven by strength of our resilient installed base, world-class team, innovative technologies and our customer-focused approach. With solid underlying demand for our products and continued focus on operational discipline, we feel strong about the company's future and our ability to deliver profitable growth and long-term shareholder value. Additionally, our recent acquisitions are running ahead of plan and strengthening our financial position. I believe Wabtec is well positioned as a leading industrial technology company with the capabilities and foundation to drive sustainable, profitable growth for years to come.

With that, I want to thank you for your time this morning. I'll now turn the call over to Kyra to begin the Q&A portion of our discussion. Kyra?

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.

[Operator Instructions] The first question comes from Ken Hoexter with Bank of America.

So just maybe, John, a little bit of update on the tariff mitigation given the recent 232 updates. What -- talk about the impact. We've got a lot of questions over the last few days, the impact that you see on the business. I don't know, Rafael, if you want to talk about if it's affected orders or slowed down things, just what's gone on and maybe the cost implications for you?

Let me start, and I'll let John go into the details. Number one, as we look into tariffs, any tariffs that have been announced up to this point are included in the guidance. The other comment I'll make, we're not seeing any impact with regards to revenues. We continue the guidance as per the same time last time. What we are seeing is we are executing better in the business, and that's reflected with the guidance on a higher profit rate for the year. But John?

Thanks, Rafael. Ken, when we look at all the activity that's been in the market with regards to the tariff regime change of the Section 232s, as we look at the way it was and the way it will be, 2 things come to mind. Number one is there is no difference. We're largely indifferent between that from a financial standpoint. The second thing is from an administrative standpoint, the new tariff regime is certainly much easier to administer. But again, no overall impact to that.

As Rafael had mentioned, as you look at our guidance, everything that we know with regards to tariffs is built in there and really business as usual. We continue to pull the levers on our 4-pronged approach. And while as Rafael had mentioned, this is a heck of a headwind on a year-over-year basis from a gross perspective, the team is doing a fantastic job at mitigating these tariffs. As we've talked, we're going to see timing of this. We're going to feel margin pressure in the first half of the year because of tariffs, and that pressure will dissipate in the back half as we start to lap a more steady tariff cost and lap some of the costs that were in last year. But we're moving fine with regards to our plan to cover the tariffs, Ken.

Great. And if I can get my follow-up on just the outlook and the long-term outlook sounds great, still everything on track and great backlog growth. But the near term, I just want to understand the messaging here. So you've taken the midpoint up about $0.20. I guess you had a huge tax benefit this quarter. You had the below-the-line gain, John, you talked about. So if you add the 2 together, is that the $0.20? Or is there something going on, on the cost side that you're trying to tell us is getting better, and I don't know, tax normalizes itself, and so that's not the guide. I just want to understand maybe more details on that messaging for that outlook.

Sure, Ken. When we look at the $0.20 increase, it's reflecting 2 things. And the way to think about it is roughly half of it, call it, $0.10 is due to the operational side of things and the other $0.10 is due to the nonoperational. So let's take a look at both of those, Ken.

As we look at the operational, as Rafael had said, we came in slightly favorable to our expectations, and we managed an exit of a Digital project. So we went back and looked at that and how much of that was structural versus timing and all those types of things. And we're doing a better job, even though our costs are rising quite a bit. We're doing a good job of managing them through all the levers that we commonly pull.

And so we took that across the remainder of the year, and then we netted out that against higher costs that we're seeing. And that's largely, Ken, in terms of inflation. And while we do have price escalators, the timing of that and the fact that 40% are not covered by price escalators has our cost rising. And this is largely behind metals. We're seeing copper, aluminum, steel up. We're seeing precious metals up, silver impacts us as well. And transportation costs are up as well as we're seeing some pressure on memory chips in our Digital business.

So when we take all of that in aggregate with the structural improvement that we had in the first quarter and that we think will extend for the remainder of the year, that nets out to a $0.10 increase to the overall EPS guidance. The second piece, as you pointed out, Ken, and you're thinking about it exactly the right way, is $0.10 is nonoperational. That is driven by 2 pieces, and one is the currency fluctuations.

Ken, we don't know if currencies are going to go up or down from here. But what we've said is that other income, which was up on an adjusted basis, $23 million is largely going to stick. Now that could be right or wrong, but that's the way we're thinking about it. In terms of the tax piece is we had favorability in the quarter, but actually, it will be a little bit of a headwind for the remainder of the year as we still expect the 24.5% full year rate. So again, very good news. We are holding our revenue forecast. We came in right where we expected to on revenue. And so I think the way to think about this is that we're holding revenue, and it will be a little bit more profitable as we go forward and as we run the company in a better fashion.

The next question comes from Angel Castillo with Morgan Stanley.

I just wanted to maybe talk a little bit more about the revenue part of the guidance. So you had a -- I guess, if you could talk a little bit about why that was unchanged. I guess, when I look at the backlog and the strength in that continuing of strong book-to-bill kind of 3 quarters back to back of strong growth in that sequentially and year-over-year. Just curious if there's any offsets to the degree of confidence you're seeing of maybe how much of your revenue is perhaps covered for fiscal year '26. Or just how we should think about that unchanged guide in light of the backlog?

Angel, let me start here with a few comments in terms of potential headwinds and upside drivers as we think about the year. On the headwinds, I think we would probably highlight the Freight car deliveries potentially being further down than what it is. There's certainly what John mentioned in terms of the inflation in our input cost. Electronics continue to be one that it's certainly a headwind and obsolescence as well.

On the flip side of that, I'll probably start with obsolescence because that can drive, I think, some upside for us in terms of the opportunity to continue to modernize subsystems for our customers. The strong momentum on acquisitions being ahead of plan for the quarter, I think that's also a positive. I think we're seeing really -- we're gaining traction on new product introductions, and that's really across more than a couple of businesses. And we're seeing incremental demand on existing projects.

Maybe midterm, longer term is North America CapEx recovery. But what I would say is despite of these dynamics, I mean, we're faced right now with probably the most significant financial headwind this business has had since '19, which is the tariffs. We're executing well. We've been able to mitigate those. The business momentum is strong, and we feel we're ready to deliver on both the guidance that we've given and the long-term projections.

That's very helpful. And maybe just to, I guess, clarify on that tariffs point. I think it sounds like the Section 232 is essentially neutral to your tariff expectations, but on a net basis. But I think previously, you talked about the first half as being kind of peak pain from a tariff standpoint and first quarter gross profit margin was very solid. So just curious, as we think about the cadence of the incremental tariffs or any of these changes or your assumptions and the costs you mentioned on inflation, is gross profit margin in 1Q, should we view that as kind of a low point for the year? Or how should we think about the cadence of the quarters?

Yes. The second question has got several of them in there, Angel. The first part of it is on tariffs. As we've talked about, and I think our team has forecasted them very well, right? A tariff comes in, it's got to flow through inventory and then it comes out of inventory. And we saw our tariff obligation grow through the beginning of last year and through August as the 232s really began to take hold. So what we've said all along is that it's going to be about 3 quarters out as we start to see this stuff rise. We saw a significant rise in the absolute level of tariffs moving from Q3 to Q4, an exponential gain, right? And we're seeing a similar thing as we move into Q1.

Now in Q2, we're going to start to see a plateau in terms of the absolute. And again, the 232s was largely neutral. So we don't expect a big change to that. And as that now plateaus in the back half in terms of overall tariffs, we're going to see the base kind of creep up here. Not a ton in the third quarter, but we'll see some more of that in the fourth quarter in which we paid tariffs in the previous year. So again, we feel we got them forecasted. But as I mentioned, Angel, it will provide headwinds on our margins, squeeze our margins in the first half. And that will dissipate in the back half as we start to lap the year ago piece.

The second thing is when you talk about the cadence, last quarter, we spoke very much about we're going to see higher revenue growth in the first half than the second half, and that's largely due to how we lap the acquisitions that we have and in particular, Inspection Technologies. I think you're seeing exactly that in the first quarter. We're right on what we planned in terms of revenue growth. The second piece is we said we would see modest operating margin growth, and we saw that in the first quarter of the 0.2 percentage point gain. So we're feeling really good about where we're sitting, again, with a little bit of underlying favorability that we're extending and taking our guidance up for.

When we look at the second quarter or the remainder of the half, we haven't changed our perspective of that at all. I think as you look at the second half, you should think about it's going to mirror pretty closely the -- I'm sorry, the second quarter. It's going to pretty closely mirror the first quarter in terms of revenue growth, in terms of margin growth and in terms of EPS, less the operational benefit that we had in the first quarter.

And the next question comes from Scott Group with Wolfe Research.

So on the backlog strength, how much, if any, is just assuming backlog of some of the acquisitions? Or is this all sort of net new orders? And ultimately, I'm trying to just understand like how to think about this backlog translating into revenue. It's up like 13% exiting Q1. Like is there a path to as we look ahead, like sort of high single-digit type organic in rest of the year?

Great, Scott. I'll take the first part of that. And then I'm sure Rafael will have something to say with regards to the backlog in general. When we look at our first quarter backlog, we're very happy. We're seeing momentum -- underlying momentum in that backlog. But on the face of it, we are being favored by the Dellner acquisition in particular.

Dellner's backlog is very similar to the remainder of the companies. So when we look at the 12-month backlog, Scott, we posted a 12.8% growth rate. But Dellner accounts for about 3 percentage points of that on an enterprise-wide basis. And on a -- just a Freight basis, when you look at the 12 months, it accounts for about 12 percentage points of that backlog growth that we -- I'm sorry, in Transit that we saw in the Transit group. Transit was up 20.7%, 12% of that was driven by Dellner. Multiyear is very similar. When we look at the multiyear backlog, we were up 38.1% on an enterprise-wide basis and about 3.5 percentage points of that is driven by Dellner. And Transit was up 26% in terms of their backlog and about 15.5% of that was Dellner.

Scott, the only thing I would add is, I mean, we've talked a while now about this very strong pipeline of opportunities we have, and we're continuing to convert that into backlog. This is really strong momentum across both geographies and a number of sizable opportunities that we're advancing. I think a piece of it is really anchored in our installed base. So think about Service agreements that really drive recurring revenue for those fleets. They're going to be running out there. So that's service, parts, upgrades. So that's a positive.

At the same time, on the Equipment front, we are continuing to expand on existing agreements. And as we extend this technology differentiation in the market, we're seeing customers investing and extending some of these agreements. So our overall installed base continues to grow in that regard. Internationally, we will continue to see strength here. We see it certainly in Freight across Africa, Australia, Brazil and East Asia. In Transit, it's predominantly, as I think about India and Europe. And in North America, which would be my last comment, while the overall fleet renewal remains muted, we continue to see very specific customers investing for cost reduction, efficiency, service and reliability, and that continues to provide, I think, strong opportunities ahead.

Okay. Helpful. And then maybe just, John, I just want to clarify your comment about Q2 similar with 1Q. When you say similar with 1Q, what you're talking about the 270 or more like the 250 if you exclude the tax and the other income or some -- I wasn't sure exactly what you were trying to say. So I just hope you can just clarify.

Just in general, Scott, the second quarter is going to look a lot like the financial performance of the first quarter in terms of revenue growth, in terms of margin growth and in terms of absolute EPS with the exception of the nonoperational items we don't expect to repeat. So it'll be in the same range as the first quarter.

The next question comes from Ben Mohr with Citigroup.

I wanted to just ask about your 12-month versus multiyear backlog and get a sense from you in terms of the 12-month backlog being up 13% in 1Q, do you get a sense that they should normally convert to organic growth in, say, roughly 1 to 2 quarters? And then the greater than 12-month backlog is up 50% year-over-year, how should we see that converting to revenues flowing into 2027? Should we see a lot of that flowing in 1Q '27?

This is Ben -- I'm sorry, Ben, this is John. Looking at -- in particular in the 12-month backlog in the multiyear, what we always stress is there is a fair amount of volatility in these. It's not a straight and direct line to that. And I'd love to share an example with you of that on the 12-months. In the prior 2 years ending in the December quarter, we had a low growth in our back -- 12-month backlog of 1.4% and a high growth of 14.5%. And when you average those about 8%, that's exactly what we had in revenue growth over that 2-year period of time. I would not say that it translates on a 1-month lag or a 2-month lag. But over time, it is going to emulate what our revenue growth is or at least 70% of that coverage in the revenue growth.

But I do think that there is volatility in it, and we're not always going to see that straight line or that straight connection. Where we're at today, we feel real good about it. In terms of the multiyear, that is a really tough equation to answer when you're talking of some contracts that are 1.5 years long or 2 years and some that are 7 years and so on and so forth. I think the takeaway with regards to the multiyear is we've seen very good growth on it. And this is what Rafael has been talking about for the last year in terms of that international pipeline. And I think the takeaway is that we're seeing markets around the world and the replacement market in North America being very strong, and they're looking and seeking our equipment, and we're supplying it, and we've got good visibility into the future now, certainly with the multiyear at over $30 billion.

Great. Maybe as a follow-up, you mentioned the organic growth in 1Q was actually in line if we exclude the Digital portfolio exit. And so we'd imagine that should be roughly kind of the mid-single digits, roughly around 5%. Can you talk to cadence of organic revenue expectations through the rest of '26 to meet your mid-single digits? Any other expected exits that can drive it differently?

And then maybe as a second part, we've been getting asked a lot about the Alstom recent guide poll on their internal and supplier bottlenecks and affecting the ramp-up, including their Coradia platform, where you have a door and HVAC contract in Norway. Any outlook and thoughts from you on possible delays of payment from that?

I'll take the first part of your question, and Rafael will talk about Alstom. So Ben, no, there's -- we don't provide cadence in terms of our organic growth. And this is largely a function of our large equipment and when it's planned to go out. And we've got quarters that we're expecting a little bit under the average. As you aptly pointed out, we expect our organic growth to be in the mid-single-digit range on a full year basis. But that isn't to be taken that every quarter is at 5%. They move around depending on how we're delivering it.

We do not see any other exits that we're showing in the first quarter outside of a portfolio optimization program, right? And we're going to continue to do the things that strengthen this company's foundation to reduce complexity and to improve profitability and invest in the things that require our focus. This Digital project was not one of those, and it was exited in the first quarter, and we feel great that it's behind us. But overall, organic growth in the quarter was on track when you exclude that, and we still expect organic growth to be in the mid-single-digit range on a full year basis.

Ben, on Alstom, in your specific question, number one, I'm not going to comment on any customer specifics. What I will tell you is that most of our business in Transit is done with transit operators. We provide what I'll call mission and safety critical systems. Those are things like brakes, couplers and doors. And we're continuing to see strong demand and commitment from governments that continue to invest in public transportation there.

The project delays, that has been a reality, which it's been amplified during COVID. I think our teams have continued to manage that well. With that being said, we're continuing to see record backlogs there for our customers, and we're continuing to partner with them to improve on-time delivery, improve quality, improve costs. So that's very much -- that continues to be how our teams are progressing and managing that well.

And the next question comes from Jerry Revich with Wells Fargo Securities.

Over the past couple of years, you've had a nice ramp-up in international orders. Can you just talk about based on outstanding bids, tenders, your expectations, what do you expect the bookings opportunity to look like for your international business over the balance of this year?

Thanks for the question. I think that's -- if I have to look at some of the opportunities, I mean, international looks quite strong, and it's connected back to my early comments on really some of that being anchored into the installed base. Think about some of the fleets that we've added and the need to service, the need to provide really a support for those services. So that's -- recurring revenue is quite strong from that perspective. It's, of course, tied to some of the geographies I have mentioned here, and I do expect the continued conversion of some of that. But it's not limited to that.

If you think about the Equipment front, it's what I also mentioned, which it's really connected to expanding some even existing agreements on customers interested on taking additional units. And as we provide here really more technology differentiation, I think we're also advancing it there. So I think what's important to highlight here is this pipeline of opportunities continue to be strong despite of the fact that we are really staring right now at a backlog that's an all-time high. We continue to expect strong conversion here. It's now completely balanced. It goes with, I'm going to call it the lumpiness of some very sizable orders, but it's positive. It's reflected in the 12-month backlog, and it's reflected really on greater visibility than we've had since '19 here for the future. So that gives us really, I think, a strong ground to continue to improve the footprint.

And Rafael, on that note, obviously, shipments can be lumpy, but it looks like based on contract ramps in Kazakhstan, Guinea, a couple of large miners, it looks like on paper, your deliveries in international markets should still be up '27 versus '26, even though this is a big delivery year just based on existing contracts. Is that the right way to think about it? Or is India production coming down or any other moving pieces that we need to keep in mind as we think about deliveries in '27 given your backlog comments and what looks like a step-up in contract time for shipments?

Yes. It's early to start providing, I'll call comments in '27. But what I'll tell you is the way we manage the business, it's really on -- based on what I'll call a multiyear coverage. And it's really looking at our visibility across 12, 18, 24 and 36 months, and that has continued to strengthen, which really reinforces our confidence on really -- on our ability to continue to deliver sustained profitable growth over time, very much aligned with the guidance we've provided, not just for the year, but the long-term guidance we've provided. So that's the strongest visibility we've had.

And the next question comes from Tami Zakaria with JPMorgan.

My question is not related to rail per se. Can you remind us whether you have any LNG or natural gas variations of your marine engines or even locomotives that could be used for non-rail power generation. The reason I ask, we've seen recently some industrial customers to marine engine makers to power data centers, for example. So just curious, are you receiving any business queries that might be looking to use your locomotives or marine engines for power generation for industrial purposes?

Let me make a couple of comments. I'll start with Marine. We certainly have an engine that fits into marine. It's Tier 4 compliant. It's one that really plays on the niche, and we're continuing to support customers there. When it comes down to the power gen, we do have an engine that's, of course, able to generate power in that regard. We've seen a very specific and limited opportunities connected to that, Tami.

But well, if you think about a locomotive, it's really a generator on wheels, providing power to the traction motors that really make that train move. So -- but we've seen, I'll call it, very specific and limited opportunities there.

Understood. That's helpful. And one quick follow-up. Your Equipment revenue is up more than 50% in the quarter. Could you provide some color how to think about the rest of the year? Would growth be lumpy through the next 3 quarters? Or how should we sort of think about it as we try to model it?

Yes, Tami, this is John. Remember, this is a function of the fact that our new locomotives go through the Equipment Group and Modernizations go through the Service Group. So -- and when we do a run of locomotives, we like to stick with the same customer and the same model. And so from time to time, you're going to see this flip, right?

A year ago in the first half, we saw Services running very much favorable and Equipment was down. And that was just a function of during the first 2 quarters of last year, we were running more of the mods than in the back half of the year, and we saw that flip in the back half. And the way to look at our first half is going to be stronger growth in our Equipment growth as we do more new locomotives and a little bit less on the service side, and that will somewhat temper in the back half. But overall, we've talked about we expect the combined mods and locos on a worldwide basis to be up and versus in North America, we would expect the combined mods and locos to be down a little bit on a full year basis. And -- but you're going to see this lumpiness, as Rafael mentioned earlier, between our groups in Equipment and in Services and really need to look at those more together.

I mean, the only thing I would add here is on modernization, and we've made that comment before, that's down. It's down significantly. It's down double digits, and it's largely driven by the North American market.

And the next question comes from Steve Volkmann with Jefferies.

I sort of guess I had the same question, but I want to ask it slightly differently. When you look at the backlog, especially the 12-month backlog, it sounds like what you're saying is the services kind of recovers in that scenario. And I'm trying to figure out how I should think about that impacting margins. I assume that would be a tailwind, but any color there would be great.

So Steve, by and large, as we look across our backlogs, the backlog typically has more profit in it today than it did yesterday. So with regards to that, yes, we see higher profitability in the backlog that we're generating today versus in the past. And that's what we wake up to do every day, and that's the value that we add to our equipment that we're able to reflect in that backlog. Again, we're going to see movement and variation in the 12-month backlog. But as we look in the first quarter, we're very pleased to see it sitting at 12.8%. When you take out currency, it's about 1 percentage point. When you take out the Dellner piece, that's about 3 points. So we're still in that 8%, 8%, 8.5% range and feel good as we look forward.

Okay. Great. And then maybe just slightly differently, you seem to be getting some good improvement in gross margins, but also making some investments, I guess, on operating expenses. And what's the outlook for that? When should we start to expect sort of more leverage on SG&A?

So let's talk a little bit about that. So during the quarter, we had a gross margin up 2.3 percentage points, and we saw SG&A as a percent of revenue up 1.2 percentage points, Steve, and that netted out at the 20 basis points that we were up. So what's driving the gross margin is our continual and significant focus on productivity, lean propagation. Certainly, Integration 3.0 has been running favorable, portfolio optimization and being more selective. So that is helping our top line across the company.

The other piece that we're seeing in gross margin is the fact that M&A is coming in at a higher level than the average. So we're getting a benefit on that in the year. And then the third piece, Steve, is what I would call acquisition mix, right? We are mixing in across the year about $800 million of revenue. And the mix -- the revenue that's coming from both Inspection Technologies and Frauscher, their margin structure is more one of higher gross margin, but also higher SG&A.

And so when we mix that in, that's driving some of that lift that we're seeing in gross margin, but it's also driving the lift that we're seeing in SG&A as a percent of revenue. I think we've got another strong quarter in the second quarter because we'll have evident in on still a year-over-year very good comparison. We purchased -- I'm sorry, Inspection Technologies at the beginning of the third quarter. And so we'll start to see that growth dissipate a little bit, and it will really just be Frauscher that will be driving it. So that's just more of a structural change in the overall P&L.

And the next question comes from Harrison Bauer with Susquehanna.

Just taking a step back, I'm curious if either Rafael or John, if you could assess maybe some of the competitive dynamics for both new and mod locomotives in both North America and internationally, particularly if there's any competitive pressures from any of your competitors and how maybe the North American rails are looking at their options as they need to pivot to potential growth in the future?

Number one, competition is very active out there. I do want to highlight that. I'm not going to go into any specific comments with regards to a specific competitor, but we are continuing to win share of wallet with our customers at large. And it's really a function of us really continue to extend this technology leadership that we have on our platforms. It's not only the technology and new products, but also the ability to continue to extend the life of some of these assets with really increased efficiency, increased safety, increased availability, and that's continuing to provide that. But it's very active in the marketplace. We're having to work hard to make sure we continue to drive our win rate up.

And maybe as a follow-up, do you think that with maybe some help of the commercialization of your EVO platform later this year that you could see some benefit to your Services revenue growth in the second half and potentially if whether or not you can grow Services revenue on a full year basis this year versus last year?

So here's the way I'd approach it. We're very happy and encouraged with what I'm seeing across our technology stack. This includes, as you described, the EVO Advantage program. We do expect that to unlock significant opportunities here in terms of modernization for us not just to continue what you saw on the modernization story, but to continue to amplify that. I think the advancement we're making on what I'll call automation and digital does include things like Zero-to-Zero, which we're on track to get approval this year. And if you connect that to the next generation of positive train control, I think we're redefining and we're expanding our addressable markets, which will further support profitable growth ahead.

The only other one I want to highlight to you here just in the sense of technology is we're making strong progress in hybrid battery electric programs. I think you've heard from us last quarter on the recent extension of the agreement we had with New York City Transit, which is opening not just new opportunities for us, that's really, I'm going to say, redefining and expanding addressable markets that we can go after. So that's a positive for the business. It will support Services, but we'll redefine the opportunities we have for the business at large.

The next question comes from Steve Barger with KeyBanc Capital Markets.

Just a couple of quick ones for me. Following up on 232, you said there was no real financial impact from the rule change. Is that because you've shifted to more local for local in terms of how you're supplying final production? Or is that just how the math works for your product mix crossing the border.

I think it's a little bit of both, Steve. I mean the mix is neutral, but we've done a lot of work on mitigating those tariffs, right? And the gross tariffs are pretty burdensome. But on a net basis, our operations folks have done a fantastic job. But on the face of that, that doesn't change -- it doesn't change dramatically with the tariff regime change. But overall, when you net the 2 together, both the mitigants as well as the change in the 232 top line or gross tariffs, we're neutral.

Got it. And then now that you've had Dellner for a couple of months, can you talk about what it brings you in terms of ability to sell Transit deals and how we should think about any margin impact on Transit over time?

So I'll start with #1 product on where they play. So very positive from that perspective. It's a function of the technology it has, the reliability it brings. And I think what we're seeing here is an opportunity to amplify on where we win share of wallet with customers here. So we're already penetrating with a couple of customers that we would have traditionally done last business. So that's a positive there. And we're on track to execute on the cost synergies. So it's really an opportunity on both ends of the spectrum to operate the business better, execute for the cost synergies, which we had planned for. On the other side, on the flip side of that, drive growth synergies, which we had not planned for in this context.

So we remain very positive about some of this. And I think we also have the opportunity to continue to expand on building on that pipeline of opportunities and converting that into orders, multiyear orders in the case of those.

And Steve, it will certainly bring up the Transit margin. Remember, we bought Dellner at higher than the company average, and the company average is higher than transits. So this will have a positive impact on Transit margins.

This concludes our question-and-answer session. I would like to turn the conference back over to Kyra Yates for any closing remarks.

Thank you, Dave, and thank you, everyone, for your participation today. We look forward to speaking with you again next quarter.

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

Good morning, everyone, and welcome to the Wabtec Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded.

At this time, I'd like to turn the floor over to Kyra Yates, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Wabtec's Fourth Quarter 2025 Earnings Call. With us today are President and CEO, Rafael Santana; CFO, John Olin; and Senior Vice President of Finance, John Mastalerz. 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 and our business today. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and presentation. We will also discuss 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, Kyra, and good morning, everyone. Before John and I get into the details of the fourth quarter, I'd like to take a moment to reflect on our performance over the past year and share my thoughts on the year ahead. 2025 was another outstanding year reflecting the strength and resilience of our business model and our ability to execute in dynamic markets.

We delivered top line growth of 7.5% and grew adjusted EPS by nearly 19%. We accomplished all of that while converting a record orders pipeline into a very strong multiyear backlog. As we move into 2026, our orders, backlog and pipeline momentum remained very strong, supported by growing demand. We also advanced our strategic priorities through acquisitions and integration initiatives, unlocking synergies and driving operational efficiencies. To these ends, we are very pleased with the businesses that we acquired in 2025, the teams that came with these businesses and the strong financial results that we have seen from day 1 of our ownership. Additionally, our efforts on integration, cost management and simplification continue to exceed our expectations.

As we exit 2025, the underlying momentum of our business gives us the confidence in delivering another strong cycle. We expect 2026 to mark our sixth consecutive year of mid- to high-teen adjusted EPS growth, positioning us to drive very significant long-term value creation. Finally, 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 value to our shareholders. And as a result of our performance in 2025 and our confidence in the future, our Board of Directors has increased our dividend by 24% and has increased our share buyback authorization to $1.2 billion. This is the strongest position our company has been in, and we're both confident and determined about the years ahead.

Let's move to Slide 5 to discuss our fourth quarter results. I'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 strong quarter. Sales were $3 billion, which was up 15% and adjusted EPS was up 25% from the year ago quarter. Total cash flow from operations for the quarter was $992 million, representing a very strong cash conversion. The 12-month backlog closed the year at $8.2 billion, up 7% from the prior year, while the multiyear backlog surpassed $27 billion, up 23%. This backlog results will drive our continued revenue and earnings momentum and provides us strong visibility and revenue coverage in 2026.

Shifting our focus to Slide 6. Let's talk about 2025 end market expectations in more details. While key metrics across our freight markets remain mixed, we are very encouraged by the overall strength of our business, the momentum we are seeing in international markets and the continuing pipeline of opportunities across geographies. In North America, carload traffic was flat in the quarter, which resulted in fewer active locomotives. However, the locomotives that were in service operated at a higher intensity compared to last year demonstrating the critical role our technology and solutions play in driving efficiency for our customers. Internationally, carloads continue to grow at a robust pace across core markets such as Latin America, Africa, India and Asia, significant investments to expand and upgrade infrastructure are supporting our international orders pipeline.

Looking at the North America rail car build. As discussed last quarter, demand for new rail cars was down compared to the prior year and landed at approximately 31,000 cars for 2025. The industry outlook for '26 is expected to be 24,000 cars, down another 22% versus 2025. Finally, moving to the transit sector. We continue to see underlying indicators for growth. Ridership levels are rising in key markets such as Europe and India, and we are seeing high backlogs at car builders alongside increased public investment for fleet expansion and renewals.

Next, let's turn to Slide 7 to discuss a few business highlights. This quarter, we converted more than $2 billion of pipeline into new locomotive and modernization orders for North American customers, an important milestone that reflects our customers' long-term commitment to invest in their fleets and further strengthen what is now in our largest multiyear backlog for North America. We are seeing some customers capitalize on strong fleet investment returns. This is not just about upgrading assets. It is about improving service levels for their customers, lowering total cost of ownership, reducing obsolescence and positioning fleets for the next generation of technology-enabled operations focused on safety, reliability and availability. We expect orders to follow this trend, reinforcing the long-term demand for Wabtec's innovative solutions.

Moving to digital. We secured $75 million in orders for PTC and kinetics in key international markets, such as Brazil and Kazakhstan. Also in the quarter, we delivered the first battery electric heavy haul locomotives to BHP, an important milestone for Wabtec in the industry. These locomotives are engineered to perform in one of the world's most demanding environments, leveraging advanced energy management technology, including regenerative braking to maximize efficiency and significantly reduce emissions. Together with BHP, we are demonstrating how cutting-edge solutions can help meet operational needs, while advancing sustainability efforts. And finally, I'm excited to bring Frauscher Sensor Technologies into Wabtec, following the closing of that acquisition at the beginning of December. This business is a market leader in train detection, wayside object control solutions and axle accounting systems.

In addition, we are pleased to share that we closed on the acquisition of Dellner Couplers yesterday. This acquisition will further strengthen our position in critical rail technologies. With that, I'd like to welcome both the future Frauscher and Dellner employees to Wabtec. All of this demonstrates the underlying strength across our businesses and a strong pipeline of opportunities, which we continue to execute on.

Moving to Slide 8. I want to briefly discuss how we are positioned to deliver strong and sustainable results. Over the past 5 years, Wabtec has built a track record of navigating challenging markets, geopolitical uncertainty, hyperinflation, tariffs and other significant disruptions and 2025 with no exception. Our success is driven by a highly committed management team and industry-leading technologies, allowing us to remain resilient and relevant to our customers and our stakeholders. Our 12-month backlog of $8.2 billion provides visibility and support for growth. This backlog has consistently grown over the past 5 years even amid a relatively flat North American rail market and a volatile macro economy. Thanks to the innovation and the high level of recurring revenues that are our products generate. Our ability to expand operating margins across the business reflects disciplined execution.

And finally, we have also demonstrated our ability to consistently generate strong cash flows with cash conversion averaging 99% over the last 6 years. Looking ahead, we are confident that our execution, combined with the strength of our business, and leading technologies will result in Wabtec being resilient through the economic cycles, delivering profitable growth and driving superior shareholder returns.

Turning to Slide 9. Before turning it over to John, I want to highlight the significant fleet renewal opportunity that remains in North America. Fleet renewal is not discretionary. It is a critical lever our customers have to improve operating ratios, enhance service for their customers and strengthen their overall competitiveness. As I mentioned last quarter, North America railroads are still operating an aged fleet. Today, more than 25% of active locomotives are over 20 years old and 25% still run on DC technology. This aging fleet creates a compelling case for continued modernization as locomotives age, failure rates and maintenance cost rise, making modernizations a highly attractive return on our customers' investment.

We have also noted the operational advantages of AC technology. For every 3 DC locomotives, customers can replace them with approximately QAC units, enabling Class 1s to reduce fleet sizes while reimproving productivity and reliability. This helps address obsolescence, reduces maintenance costs and enhance its service levels, all while providing our customers with impactful returns on their investments for modernizing their fleets. To help our customers capture these benefits on additional fleets, we are excited to launch our first-ever EVO modernization program in 2026. The Evolution Series Locomotives first introduced in 2005, are now reaching an age where modernization becomes increasingly compelling.

Our new EVO modernization builds upon our proven EVO engine platform and is designed to deliver meaningful operational impacts to optimize performance, reduce costs and advance their long-term strategic objectives. Key new technologies, such as an upgraded control system and EVO Advantage will be available as part of this EVO Mod. This product is expected to deliver greater than 20% improvement and the ability and attractive effort by replacing DC traction motors and replacing aged electronics and control systems. In addition, the new mods with EVO Advantage are expected to drive up to 7% improvement in fuel savings. Overall, we're excited about the significant value modernizations we will unlock for our customers and for our business, and we remain confident in the long-term opportunities ahead.

With that, I'll turn the call over to John to review the quarter, segment results and our overall financial performance. John?

Thanks, Rafael, and hello, everyone. Turning to Slide 10. I'll review our fourth quarter results in more detail. Overall, the quarter came in slightly ahead of our expectations for both revenue and EPS. Cash from operations significantly exceeded expectations, while operating margins were lower than planned. Operating margins were adversely impacted by higher compensation expense driven by our outstanding operating cash flow and cash conversion performance during the quarter.

Sales for the quarter were $2.97 billion, which reflects a 14.8% increase versus the prior year, with strong contributions from both the freight and transit segments. As expected, Q4 sales benefited from very strong organic growth behind strong orders and sales momentum, along with catch-up on locomotive deliveries that shifted from the second quarter due to a supplied part issue. We also delivered strong inorganic growth led by Inspection Technologies, which outperformed our acquisition plan. Excluding the impact of currency, Q4 sales were up 13.2%. For the quarter, GAAP operating income was $356 million. The increase was driven by higher sales and improved gross margin as we continue to focus on productivity and simplification. GAAP operating margin fell in the quarter due to higher restructuring and transaction costs.

Adjusted operating margin for the quarter was 17.7%, up 0.8 percentage points versus prior year. This increase was driven by improved gross margins of 2.1 percentage points, which was partially offset by operating expenses, which grew at a higher rate than revenue. GAAP earnings per diluted share was $1.18, which was down 4.1% versus the year ago quarter. During the quarter, we had net pretax charges of $55 million for restructuring, which were primarily noncash and related to our integration and portfolio optimization initiatives to further integrate and streamline Wabtec's operations as well as transaction costs related to most recent acquisitions. In the quarter, adjusted earnings per diluted share was $2.10, up 25% versus the prior year. Overall, Wabtec delivered a very strong quarter, demonstrating the underlying strength and momentum of the business.

Now turning to Slide 11, let's review our product lines in more detail. Fourth quarter consolidated sales were up 14.8%. Equipment sales were up 33.5% from last year's fourth quarter. For the year, equipment sales were up a strong 12.2%. Our services sales were down 5% as expected and as we discussed in our third quarter call. This was driven by the timing of modernization deliveries. For the full year, Services had revenue growth of 1.2% despite mod deliveries being significantly down year-over-year, which demonstrates the strength of the core services business. Component sales were up 11.1% versus last year due to growth seen in industrial products offsetting the impact from the significantly lower North America rail car build. For the year, component sales were up 2.0% despite North American rail car build being down 27%.

Digital Intelligence sales were up 74.4% from last year. This was driven by the inspection technologies and Frauscher Sensor Technology acquisitions. When excluding acquisitions, digital was down 1.0%. For the year, digital sales were up 31.0%, driven by acquisitions. In our Transit segment, sales were up 6.7%, driven by our products and services businesses. For the year, Transit was up 7.3%. Foreign currency exchange had a favorable impact on sales of 4.7 and 2.2 percentage points for the quarter and total year.

Moving to Slide 12. GAAP gross margin was 32.6%, which was up 1.7 percentage points from fourth quarter last year. Adjusted gross margin was up 2.1 percentage points during the quarter. Our team continued to execute well by driving operational productivity and lean initiatives in an effort to offset higher material costs, primarily as a result of incremental tariffs. GAAP operating margin was 12.0%, which was down 0.9 percentage points versus last year. Adjusted operating margin improved 0.8 percentage points to 17.7%. Operating margin was positively impacted by cost recovery from escalation, increased productivity, integration savings, partially offset by unfavorable mix and higher tariff costs. Adjusted SG&A expenses were higher year-over-year due largely to the SG&A expense associated with our acquisitions and higher compensation expense for our employees tied to our very favorable cash performance in the quarter and for the year.

GAAP SG&A was up an additional amount over adjusted SG&A due to restructuring expense associated with our Integration 2.0 and 3.0 and portfolio optimization costs associated with divestitures. Engineering expense was $68 million, $17 million higher than Q4 last year, primarily due to acquisitions.

Now let's take a look at the segment results on Slide 13, starting with Freight segment. As I already discussed, Freight segment sales were up a very strong 18.3%. GAAP segment operating income was $318 million, driving an operating margin of 15.0%, down 0.2 percentage points versus last year. GAAP operating income included $50 million of restructuring costs and portfolio optimization charges and was adversely impacted by purchase accounting charges resulting from our acquisitions. Adjusted operating income for the Freight segment was $470 million, up 35.1% versus the prior year. Adjusted operating margin in the Freight segment was 22.1%, up 2.7 percentage points from prior year. The increase was driven by improved gross margin, even despite mix headwinds and tariff impacts. The increase in gross margin was partially offset by an increase in our operating expenses expressed as a percentage of revenue. Finally, segment 12-month backlog was $6.02 billion. Our 12-month backlog was up 8.0% while the multiyear backlog of $22.49 billion was up 25.1%.

Turning to Slide 14. Transit segment sales were up 6.7% at $842 million. When adjusting for foreign currency, Transit sales were up 2%. GAAP operating income was $108 million. Restructuring costs related to Integration 2.0 and 3.0 and portfolio optimization were $4 million in Q4. Adjusted segment operating income was $118 million. Adjusted operating income as a percent of revenue was 14.0% down 2.4 percentage points from prior year, driven by higher operating expenses as a percent of revenue. Finally, Transit segment 12-month backlog for the quarter was $2.21 billion, our 12-month backlog was up 5.1%, while the multiyear backlog was up 14.7%.

Now let's turn to our financial position on Slide 15. Fourth quarter cash flow generation was very strong at $992 million, resulting in total year cash from operations of $1.76 billion and cash conversion of 104%. During the year, cash flow benefited from significantly higher net income and higher year-over-year down payments, partially offset by tariff headwinds. Our balance sheet and financial position continue to be very strong as evidenced by: first, our liquidity position, which ended the quarter at $3.21 billion and our net debt leverage ratio, which ended the fourth quarter at 1.9x after funding the purchase of brochure sensor technology for approximately $765 million. Our leverage ratio remained in our stated range of 2 to 2.5x after closing on the acquisition of Dellner.

During the year, we repurchased nearly $223 million of our shares and paid $173 million in dividends. As a result of our performance in 2025 and our confidence in the future, our Board of Directors approved a 24% increase in the quarterly dividend. Our board also increased our existing share repurchase authorization to $1.2 billion. We continue to allocate capital in a very disciplined way to maximize returns for our shareholders.

Moving to Slide 16. I'd like to provide an update on the progress that we've made on our integration and portfolio optimization initiatives. Starting with Integration 2.0, when we originally announced, we indicated that the Initiative would deliver an incremental $75 million to $90 million of run rate cost savings by the end of 2025. With program to date restructuring expenses of $149 million, we exited 2025 having achieved $103 million of run rate savings, with the program largely complete and ahead of original expectations. Integration 2.0 was a clear success. And importantly, we have carried that momentum forward as we execute our Integration 3.0 initiative, which we announced in early 2025. When we introduced Integration 3.0, we outlined an incremental $100 million to $125 million of run rate cost savings by the end of 2028.

I'm pleased to report that our team has delivered strong early performance. In the first year alone, we generated $49 million of run rate savings at a cost of approximately $50 million. Given this performance, we are raising our guidance. We now anticipate $115 million to $140 million of run rate savings by the end of 2028 with anticipated expenses of $125 million to $155 million.

Turning to our portfolio optimization initiative. We have continued to execute against all planned dispositions of nonstrategic product lines, actions designed to strengthen our focus, improve profitability and reduce manufacturing complexity. During 2025, we exited $72 million of low-margin nonstrategic revenue and expect to exit an additional $60 million in 2026. Overall, we remain very encouraged by the team's execution and the value of these initiatives continue to unlock across the company.

Now moving to Slide 17. Let me quickly recap the year. Overall, the team delivered a great year for all our stakeholders. We generated 7.5% revenue growth, expanded adjusted operating margins by 1.4 percentage points and increased adjusted EPS by 18.7%, while delivering very strong cash flow. The resiliency of the business, combined with disciplined execution, positions us for a solid foundation for continued profitable growth as we enter 2026.

With that, I'd like to turn the call back over to Rafael.

Thanks, John. Now let's turn to Slide 18 to discuss our 2026 outlook and guidance. We continue to see underlying demand for our products and solutions across the business. Our pipeline is very strong in both our 12-month and multiyear backlogs provide clear visibility to profitable growth ahead. Our team is fully committed to driving top line growth and margin expansion in 2026. With these factors in mind, we expect 2026 sales of between $12.2 billion to $12.5 billion, up 10.5% at the midpoint. And adjusted EPS to be between $10.05 and $10.45, which represents 14% growth at the midpoint. It is important to note that this guidance incorporates the expected impact from the Dellner acquisition.

As we discussed earlier, our cash conversion performance has been very strong and we expect that to continue. Over the past 2 years, we have delivered an average of over 110% cash conversion, which is a testament to the strength of our operating discipline. Best-in-class cash conversion has been and is expected to remain a hallmark of investing in our company. While we will continue to provide long-term cash guidance, beginning 2026, we'll no longer be providing annual cash conversion guidance. I remain confident that Wabtec is well positioned to drive profitable growth and maximize shareholder returns in 2026 and beyond.

Now let's wrap up on Slide 19. As you heard today, our team continues to execute against our value creation framework and our 5-year outlook driven by the strength of our resilient installed base, world-class team, innovative technologies and our customer-focused approach with solid underlying demand for our products and technologies and rigorous focus on continuous improvement and cost management. We feel strong about the company's future and our ability to maximize shareholder returns.

With that, I would like to thank our team for their great work this year and their continued commitment to drive top quartile performance. I'll now turn the call over to Kyra to begin the Q&A portion of our discussion. Kyra?

Thank you, Rafael. We will now move on to questions. [Operator Instructions] Operator, we are now ready for our first question.

[Operator Instructions] Our first question today comes from Angel Castillo from Morgan Stanley.

It's Oliver on for Angel. We just wanted to talk about the recent flurry of orders that you guys had announced. With those signed, does your pipeline of opportunities potentially narrow a little bit? And if not, could you talk about how that's grown across different regions and different end markets? Any color there would be super helpful.

Perfect. So no, we continue to have a very strong pipeline of opportunities. And internationally, it's very, very strong. Our teams are continuing to work very hard to convert that pipeline into orders and it speaks through really some markets where we have a strong presence, places like Australia, Brazil, East Asia, we continue to have opportunities in Africa and parts of the CIS region. Of course, we are encouraged by the momentum we saw here in North America. I think this reflects ultimately strong customer commitment to win and grow the business through improved reliability, lower operating cost, better fuel efficiency and reduced fleet op assets.

So as we look at aging fleets out there, I think that's much more pronounced in North America, and that continues to be probably the single biggest powerful tailwind we have in the company.

Got it. That's super helpful. And then just on your components business, I know your rail car deliveries are expected to be down 20%, 25% again this year. Can you talk about potential offsets there, whether it's in the industrial business or the heat transfer piece? Potentially, do you see that growing to offset some of that decline?

So as we look into 2016, every single one of our businesses, we see them driving profitable growth. With regards to the components business, I think we're very pleased with the progress there despite of the softer freight car builds. I think those teams have continued to take decisive action to adjust the cost structure to new volume levels. And what I like about what I'm seeing there, it's across the company is really the portfolio is working, right? I mean, we've made investments, what if you think about the organic place or inorganic place. In the case of freight components, some of the investments we've made in the heat exchanger business in Industrials is really paying off and that's where you see some of those offsets taking place allowing those businesses to continue to perform.

Our next question comes from Scott Group from Wolfe Research.

Rafael, can you just go through that bit about the cash conversion and the guidance change and just the rationale there?

Yes. Scott, number one, very strong cash conversion for the business as we expected. We're continuing to operate and reward our stakeholders in the business based on cash performance. So that continues to be paramount for the company.

We continue to have very strong variation. As you see it, not just quarter-to-quarter, year-to-year. It's certainly more pronounced as you go into some of the international deals and you collect cash earlier, but we expect to continue to improve cash performance in the company.

Yes, Scott. With regards to the overall guidance, we continue to shoot for above 90% in our long-term guidance. As we look at what we've done over the last 6 years, we've averaged 99% on a business that is growing its working capital quite substantially as our revenues and profits have grown very much since then. And actually, Scott, if you look at the last 2 years, we've been up 110% average cash conversion. So with that, we'll continue to stay focused. Our comp plans are all very much tied into cash, both short-term and long term. And it has become a hallmark of an investment in Wabtec. But with that, we'll continue to shoot for the 90%. But in terms of an annual guide, we're pulling the 90% this year.

Okay. I think I understand. This transition, we're starting to see with fewer mods and more new. I guess, how should we think about the net impact here? Maybe just a couple of things just do you think are sales with the Class 1 rails growing this year and then sort of the shift to more new, how do we think about the net impact to margins for that business and, I guess, bottom line with this shift?

Let me start here, Scott. First, with regards to new units in mods. So we continue to see the combination of that at a global level growing. Well, while I say that's true the globe, it's not true for North America and especially driven this year again by months. Last year, the modernizations, we had a pronounced decline. It was double digits. It's more pronounced this year. And yes, we have seen a shift towards some of the Tier 4 units. With that being said, I think we continue to see a modernization of the fleet in North America. It's one of the most powerful tailwinds we have as we continue to really invest on solutions. We just announced the EVO Advantage, and that opens up a fleet that's growing to really 10,000 units here. It's a global fleet with, call it, very compelling elements of payback tied to fuel efficiency, tied again to reliability. So I think we're continuing to invest on that, and that's going to be a very compelling piece of it. But new locomotives are certainly making more and more headlines there in terms of investment.

Our next question comes from Ken Hoexter from Bank of America.

So just given the orders, what was in the backlog and what is new when you think about those recent announcements? And then thanks for the update on the backlog. But in your outlook for EPS, can you talk about what the upside downside to the target is?

With regards to what's in the backlog, Ken, is everything that was done in the fourth quarter is certainly in the backlog. So when we talk about the $2.2 billion on our key wins sheet. That's all in log right. And when we talk about things in the pipeline, which Rafael did, they're not in the backlog yet, but as they convert, they will certainly be put in the backlog. When we look at overall guidance, Ken, we feel real good about where we're at and the range that we have there. We've got a fair amount. We've got a lot of good things happening within our business. We have some headwinds. We just talked about mods but also on the rail car build.

But with that, we've also got a fair amount of headwinds with regards to tariffs coming at us, right? We've seen in the third quarter to fourth quarter, a significant increase in the cost of tariffs as things come out of inventory and then through the P&L, we would expect to see the same type of dynamic in 2026 and in particular, the first half while we are running all our mitigants against that. So we believe we've got a very balanced plan and a good guide as we go into 2026 to manage any eventualities that come at us.

I guess my question was of all the Class 1 rails that have just put out orders, where half of those already in the backlog as of last quarter? Is it all new? And then a follow-on would be just thoughts on the first new build order from Progress Rail in a long time. Is there -- is that likely to see something you're seeing increasing competitive step back in?

For clarity, Ken, everything that we announced on the Class 1s, some of those have been announced this quarter. They are in last quarter's backlog. We signed those agreements in 2025, and so there's nothing that we've done that is not in the backlog at this point.

With regards to your second part of your question, I'm not going to comment on the specifics of a competitor order. What I'll tell you is we're very confident about the portfolio of solutions we have. In the case of Tier 4 is in specific, this is about really proven reliability, availability of over 1,000 units that we got running out there. Those are units that we've continued to really invest and to continue to further create advantages versus competitive products that are out there. So we're very confident about that portfolio when it comes to Tier 4 and when it comes to modernization as well. So you'll see us keep being -- advancing that and coupling that with really a lot of the elements of software and the digital electronics, digital intelligence business. So we're not sitting on our laurels. We've got the best products that are out there, and we're certainly investing to make them better.

Our next question comes from Jerry Revich from Wells Fargo.

Rafael, so really nice to hear the EVO class locomotives are entering the commercial phase of the rebuild cycle. Can you talk about based on customer interest and the pipeline. When do you expect to see those locomotives enter the rebuild pipeline? And separately, what are lead times like today for North America? I know you combine mods plus new. Can you just talk about the overall lead times in the facilities, if you don't mind, as well?

They are answering that space. So some of the first EVOs were delivered back in 2005. So that makes it, again, a compelling case here on that. And I think that's a positive for the overall business.

In terms of lead times, it will depend very specifically the fleets that you're looking at it. But I'd say at this point, when we look especially at 2026, then we've got the coverage we need with regards to both mods and new units. So discussions with regards to new programs would really, for most of it sit towards '27 and beyond, which is, by the way, where most of really the orders that have been announced, it really suits on '27 and beyond from that perspective, Jerry.

Super. And then obviously, very active M&A environment for you folks over the past couple of years, and I know it's early on Dellner in particular, but I'm wondering if we could just talk about how your expectations for the performance of the businesses have evolved since you've announced the acquisitions and anything interesting in terms of opportunities that you're seeing as you're integrating the assets?

Jerry, a couple of comments. We just had our Board meeting last week. And we actually reviewed the acquisition since '19, and we're ahead of Performa great IRRs on those. With regards to specifically the 3 announced last year, have a pro forma, really strong performance from that perspective. I think some of my comments, I mean, it's good to see -- let me take just the case of [indiscernible]. We've got 3 new product introductions happening on that business on each one of their product lines.

And that, coupled with, I'll call it, just the global reach we have, we're seeing strong interest on that. We've got one of the products. It's on the RVI on the remote visual inspection. The other ones on the MDT side with ultrasonic and the auto one on the AI piece of that, strong demand. We're having to really make sure we continue to invest in the supply chain to support that. So positive dynamics. It's great to see the teams we've brought on board and good progress. Our early days, first 6 months here for that Frauscher we just announced, but good momentum.

Our next question comes from Steve Barger from KeyBanc.

This is Christian Zyla for Steve Barger. With orders and backlog so strong, can you just talk about how that impacts your near-term and long-term visibility? Your 12-month backlog is nearing annual levels and our total backlog is about 2 years worth of sales now. So do you guys just have better than usual visibility into 2027? And are customers giving you longer road maps or more information about the modernization efforts long term?

So near term, I'd say, if you look at the coverage we have for '26, it's really consistent with the coverage we had a year ago. And of course, that's not including the acquisitions that we did because those have shorter lead times. So the coverage there is last but very consistent from that perspective. When you look at '27 and beyond, it's stronger debt coverage. And with that, I mean we have also a very strong pipeline. So that gives us really a good opportunity here to convert more orders and really add into that coverage for '27 and beyond.

Got it. And then there just seems to be a pickup in new builds for locomotives and mod activity along with maybe an inflection in over-the-road freight. Like do you see those as indicators to overall freight improvement? Just what are your thoughts on kind of how that inflection is playing out?

I think you've got to separate a little bit here, North America from international in some of that regard. We're continuing to see strong demand internationally. I think we've been quite specific about fleets growing out of base of 5%. So that continues to be very robust. Megawatt hours, which is really fleets are running harder as well. So that's quite a positive.

When you look at North America, the dynamic short term, 26, we're actually going down when you look at the elements of both modernizations and new units. So I think it's very important to keep that in mind. And by the way, when you think about our search business, overall, while the core of service is really strong, the numbers are coming down and it's a function of really modernizations driving that. The core service business continues to be very strong. It's one that is expected to continue to outperform the growth average of the company over time. The fleets are running harder in North America. So megawatt hours are tracking the right direction. But we've got lower dynamics going to the modernization, which is, I'll call, pulling some of those numbers down. But I think it's very important to emphasize that the underlying trajectory of the core growth of service remains solid, strong and above mid-single digits as we look into '26 and beyond.

Our next question comes from Brady Lierz from Stephens.

Yes. Great. Rafael, I just wanted to follow up on some of the EVO mod commentary from earlier. Is there any way you can help us think about the size of the EVO opportunity compared to the over 2,500 mods you've already completed? And just do any of your recently announced mod orders with the Class 1s include this new EVO modernization product? Or are they all still [ FTL ]?

So we would expect first programs on EVO to start this year, meaning, to progress with customers there. I think that opens a significant opportunity. I mean that fleet is growing to be close to 10,000 units globally. So that's an important installed base that we have with really a very strong track record on that product. I think the biggest opportunity really immediately continues to be this aging fleet. We talk about -- when you think about the active fleet, over 25% of the units are still DC traction, just an enormous opportunity here for significant payback for customers. And as I mentioned before, we see that as one of the most powerful tailwinds for the company in that regard. And those units are also over 25% over 20 years of age. So at down point in cycle. So we continue to see opportunities for that to continue to happen, and it's more pronounced in North America.

Okay. Great. That's helpful color. Maybe just as a quick follow-up. John, SG&A was up a pretty meaningful amount sequentially and year-over-year. Could you just help us understand what drove the increase? I know in your remarks, you mentioned higher incentive comp. Was that really the majority of the driver? Just any color there would be helpful.

Yes. So there's 2 things, Brady, that drove it, is one is just the acquisitions, right? Now we've got the SG&A for evident in Frauscher in those numbers. But in addition to that, is the comp accrual that we had in the fourth quarter was much higher than what we had anticipated.

So as we talked about cash a little bit earlier, right, cash is a hallmark of our investment in our company, and we take it very seriously. And we do have it in our comp programs, both our bonus and our long term. As we got to the -- through third quarter, we are about 57% cash conversion. We were expecting more in the a 90% range on the year. But the team knows how important it is, and they did a fantastic job of bringing in working capital, and we finished the year with an incredible cash conversion in the fourth quarter, almost 300% and $992 million of absolute cash. So with that, it comes with a compensation accrual. And it doesn't come with additional earnings on that, right? So that pushed our SG&A up as a percent of revenue. And -- but we feel really good about the overall dynamics of our margin in the fourth quarter.

When you look at the driver of margin, our gross margin was really strong up 2.1 percentage points, and that includes a fair amount of headwinds with regards to mix. Remember, you saw that evident -- I'm sorry, equipment at a lower margin is growing at 33.5% versus services, a higher margin being down that 5, and that's a flip flop between new and mods we've been talking about. And then in addition, tariffs grew quite a bit from third quarter to fourth quarter. Remember, we've talked about it takes 2 to 4 quarters to get through our inventory, and we're at that spot. We're about a year-end to tariffs, and we're starting to really see it come out of inventory onto our P&L. And we'll see that as we move into 2026 as well, Brady.

Our next question comes from [ Harrison Bauer ] from Susquehanna.

You guys mentioned the largest multiyear North American backlog, which is great. Do you see the need to make any investments in your North American capacity to ramp total new locomotive and mod production as you look further out or maybe just a production lines? And then do you [indiscernible] ramps in investment in your capacity you might have to make in North America?

We have the capacity in North America, and we continue to invest on the quality of that capacity. So we continue to improve productivity and so forth. So we feel very positive from that perspective. I think with regards to the dynamics of North America, I mean CapEx is actually down if you think about Class 1s into 2026, which reflects a bit to some of the dynamics I just described on the combination of mods and new units being down for this year versus last year. With that being said, we're sitting on a very significant opportunity here that really provides very significant payback for our customers so they can win with their customers, they can grow volumes and on very proven programs that will ultimately reduce the total cost of ownership. It will improve fuel efficiency. It will drive reliability and service levels. So I think that continues to be a significant opportunity that customers are going to be evaluating in North America.

And maybe just as a follow-up on tariffs. I understood that the guidance assumes tariffs and effect of the latest. But could you maybe provide what you saw as maybe the realized tariff impact in 2025? And then maybe bridge to what your guidance implies for 2026 and what that incremental year-over-year tariff impact might be.

Yes. If you're referring to an absolute number, we're not providing an absolute number. We want our stakeholders to focus on the actions that we're taking to mitigate and certainly on the growth trajectory of our overall business. What I can say is that just as we had expected, right now, it's a significant number, but also we've been at this for a year in terms of our mitigants and how we're going to minimize those tariffs. And we've talked about in the past, a 4-pronged approach, which we continue to employ which is one, getting all the exemptions that we're entitled to. The second is on the supply chain, right, is are we sourcing these parts and products from the right places today given the new landscape.

Now that takes more time. Those things some kind of -- can take up to a couple of years to requalify suppliers and those types of things, but that is in the mix. And the third one certainly is sharing the cost with our customers. And when we take those 3, those are not enough to mitigate all the tariffs that we have coming at us in particular in 2026. And that kind of leaves us with that fourth lever, right, which is an overall proactive approach to how we're managing our company's cost. But in aggregate, we feel that we'll mitigate those costs. And quarter-to-quarter, we're going to feel more headwinds in the first half of '26 then in the back half with regards to tariffs, and that's where we expect them to peak.

Our next question comes from Ben Mohr from Citigroup.

Rafael, John and Kyra. The -- I'm just trying to understand the lower sales on -- for your service on significantly lower North American mods. And maybe if I can ask it this way, last year, you gave your cadence of services versus equipment revenue on the lumpiness first half versus second half. Can you give a similar kind of view on cadence of that for 2026 and then also kind of driving impact on freight operating margins first half versus second half?

Yes, absolutely. What we're seeing in the fourth quarter with equipment up 33.5% and services down 5. It's what we had been talking about most of last year. In the first half of last year, we saw services growing at a faster rate and actually equipment was down we knew that was going to flip in the back half. And it's just a matter of timing of our runs between mods and new locos, but it played out exactly the quarter. And with that, we had a mix headwind.

But let's turn our attention to next year. And broaden the question out a little bit from just services, but let's talk about overall cadence of our earnings. When we look at the midpoint of our guidance that we just came out with, we're at 10.5% year-over-year growth on volumes. I think the way to think about that is that about half of that is driven by inorganic growth, right? That's the 3 acquisitions that are coming at us and partially offset by portfolio optimization, which continues to serve the company very well. And then to think about the other part of it, about mid-single-digit organic growth.

So on an absolute basis, we're looking at more revenue in the second half than the first half, not a lot, but certainly, it will be bigger in the second half. And when we turn and look at growth of our revenues first half to second half, we would expect our growth in the first half to be significantly higher than the second half, and that's going to be driven by 2 things. The first thing is, number one, is the acquisitions, right? In the first half of 2026, we will have revenue from our 3 acquisitions, Inspection Technologies, Frauscher and Dellner across most -- all of the first half and has got nothing to compare against in the year-ago half. As we get into the back half, we are going to have a comparable and that will be with evident.

The second thing that's going to affect the timing of our growth between half is we would expect to do more combined mods and locos in the first half than the second half, okay? As we move on and we look at the second part of our guidance, which is EPS is up 14.25%. While we do not give operating margin as a guidance, we do expect it to be up in 2026, and that's what you'll find when you do the math. As we talk about that operating margin and we look at the first half, we would expect the first half to have modest growth in overall operating margin. And we would expect the second half to have more significant growth in operating margin. And there's 3 reasons for this. Number one, as we look at the first half being just modestly higher, it's going to be affected by the year-over-year [ comps]. In 2025, our first half was up 1.8 percentage points of operating margin and the back half was up 1%. So that dynamic is going to play out as we move through 2026.

The second area is, again, going back to what we talked about on tariffs, right? Tariffs are going to peak in 2025 in the -- I'm sorry, in 2026 in the first half and it will virtually have nothing to compare to on a year-ago basis. While tariffs were there, it was mainly going into inventory. And so we're going to have some headwinds on the first half. Our mitigants have come in more equally over the year. in that respect. And then the third thing is our incredible focus on managing our costs through Integration 2.0, regular product -- 3.0 regular productivity and portfolio optimization. Those will build over the year, and we'll deliver more benefit in the second half than the first half.

Amazing. Maybe for Rafael, switching to sort of more of a longer-term outlook. Your freight backlog has been averaged at about $18 billion for several years now, and it's been great to see the jump to $21 billion from the Kazakh order last quarter and then the $23 billion today, which is fantastic. How is your view for the outlook given all the puts and takes from international and U.S. opportunities in the pipeline? Should we see that step back down to $18 billion for the longer term going back to the last several years average? Or can we see incremental step-up and staying above the $21 billion or even the $23 billion going beyond?

We are very pleased with the progress, especially in regards to the pipeline. I mean, despite of the record order intake, that pipeline continues to be very strong and it's international. It's really a very significant part of it that's driven by international. But there's some other parts of the business you're doing very well. If you think about mining in specific, we're continuing to see a strong demand for ultra-class trucks, which we happen to be very well positioned to work on that as well. And I think we're very happy to see how the portfolio is working. I made some earlier comments on areas that we're seeing softer demand. But the investments we've made, and I mentioned on both fronts on organic some of the investments we made on PTC 2.0, that's allowing a lot of the international orders for our digital intelligence business. So that's a very important part of it.

But also in areas like inorganic. We talked about the drop in the freight car manufacturing side of it, and we're seeing the opportunity for parts of the business like in the heat exchanger in the industrials to really offset some of those pressures. So I think we're going moving forward towards with that portfolio. With that, some parts of that portfolio might not have now sell the same dynamics if you think about the elements of especially backlog. But it's a stronger portfolio. So the progress with the acquisitions, it's clear. We're moving in the right direction here ahead of pro forma. And I think most important here is the quality of the backlog. The margins, as you look at individual products and individual elements of that, we have higher margins. And the other piece, which we can't underscore enough is the amount of really activity, the teams got going on right now in terms of simplifying, taking cost out.

It's really an element of record cost out those teams are going to be driving. And it's encouraging to see that momentum across the portfolio. With that, I think we're very confident and committed to deliver on what, I guess, we've highlighted here as another cycle of meaningful profitable growth.

Our next question comes from Tami Zakaria from JPMorgan.

We would think the Transit segment probably doesn't have a lot of tariff impact. So if you could provide some color on how to think about seasonality for that segment as it relates to last year.

Let me just start here. We remain very much on track to expand full year margins again, and that's supported by a lot of the elements of integration 3.0, the portfolio optimization we continue to do and the fact that team continues to be very selective on the order intake. And over our strategic plan, we expect transit margins to move into the high teens. That's very much the direction. We're very pleased with the overall progress we're continuing to make. But John?

And specific seasonality, Tami. We talked a little bit earlier this year in second quarter and third quarter that the team in transit was trying to better level load some of their production. And what they did was they brought forward some of the volumes. So we saw a greater organic growth in the second and the third quarter than the fourth. And we garnered some of those manufacturing efficiencies in Q2 and Q3, a little bit to the detriment of the fourth quarter.

And having said that, as we look into 2026, we would expect a pretty balanced view of volume growth and margin growth over that year. Now there's always variations quarter-to-quarter, we saw a variation certainly in our fourth quarter for both transit and the full company here in '25 with regards to the extraordinary cash performance that we had. So we'll always see those things. But I think we'll see a more balanced delivery out of transit in 2026.

That's very helpful. And quickly on the incremental $50 million savings that you talked about, is it mostly accruing to the Transit segment or Freight or pretty much split between the two?

Yes. When we look at the integration as we did 2.0, Transit is a little bit over shared. So yes, I think, Tami, we're closer to the kind of the 50-50 between the 2 segments, even though the Transit segment is a smaller part of overall revenue.

And ladies and gentlemen, that will conclude today's question-and-answer session. At this time, I'd like to turn the conference call back over to Kyra for any closing remarks.

Thank you, Jamie, and thank you, everyone, for your participation today. We look forward to speaking with you again next quarter.

And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

Good day, and welcome to the Wabtec Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Ms. Kyra Yates, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Wabtec's Third Quarter 2025 Earnings Call. With us today are President and CEO, Rafael Santana; CFO, John Olin; and Senior Vice President of Finance, John Mastalerz. 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 and our business today.

For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics. I will now turn the call over to Rafael.

Thanks, Kyra, and good morning, everyone. Let's move to Slide 4. I'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 a very strong quarter, absence by continued growth in our backlog, sales, margin and earnings.

Sales in the third quarter were $2.9 billion which was up 8% versus prior year. Revenue growth was driven by both the freight and transit segments, including the acquisition of Inspection Technologies, which we closed at the beginning of the third quarter. And adjusted EPS was up 16%, driven by increased sales and margin expansion.

The cash flow from operations for the quarter was $367 million. The 12-month backlog was $8.3 billion, representing an increase of 8.4%, while the multiyear backlog achieved an all-time high. These results demonstrate sustained revenue and earnings momentum and provide enhanced visibility for the fourth quarter and into the future. Shifting our focus to Slide 5.

Let's talk about our 2025 end market expectations in more detail. While key metrics across our freight business remain mixed, we are encouraged by the underlying momentum of our business and the continued strength of our pipeline of opportunities across the globe. Despite the strong momentum that we're experiencing we're continuing to exercise caution to navigate a volatile and uncertain economic landscape as we move into the final quarter of the year.

North America traffic was up 1.4% in the quarter. Despite this traffic growth, Wabtec active locomotive fleets were down slightly when compared to last year's third quarter. however, up sequentially. During the quarter, Wabtec outperformed the industry in terms of share of active locomotives running. Looking at the North America railcar builds. Last quarter, we discussed the industry outlook for 2025, which was for approximately 29,000 cars to be delivered and which has again been reduced by the industry sources to approximately 28,000 cars.

This forecast represents a 34% reduction from last year's car build. Internationally, activity is strong across core markets such as Asia, India, Brazil and CIS. Significant investments to expand and upgrade infrastructure are supporting a robust international locomotive backlog and orders pipeline. In mining, an aging fleet continues to support activity to refresh and to 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 fleet expansion and renewals.

Next, let's turn to Slide 6 to discuss a few business highlights. International demand for our products and services remain strong, highlighted in the quarter by the $4.2 billion order secured with Kazakhstan's National Railway, the largest single rail water in history. This historic agreement embodies KTC's visionary approach for the country's rail network as the primary link between Europe and Asia, which is supporting the growth momentum that we're continuing to see in the region.

By delivering advanced locomotives and long-term service solutions, Wabtec is a proud partner in Kazakhstan's progress, helping to unlock the region's enormous potential and developing the engineering competencies in the country's rail industry.

Moving to mining. We secured $125 million for ultra class strike systems. In transit, we secured $140 million break orders driven by increased activity in India. Also in the quarter, the first 4 Simandou locomotives arise in Guinea. This event marked the first quarter of heavy haul locomotives assembled and exported at our best cost facility, the Morora-India locomotive plant.

This milestone is attributed to a global team that design and build this locomotives specifically tailored to meet the customer demand of the largest untapped iron ore reserve in the world. All of this demonstrates the underlying strength across our businesses and the strong pipeline of opportunities, which we continue to execute on.

Moving to Slide 7. Before turning it over to John, I want to take a few minutes here to highlight the Transit segment's attractive value creation framework. Transit sustained orders growth is supported by unprecedented backlogs at car builders, rising passenger growth in key markets like Europe and India, and ongoing public investment in rail infrastructure around the world.

Similar to the car builders, our transit backlog has been growing and along with the consistent growth we are experiencing increased quality and margin expansion with our backlog, reflecting our commitment to deliver value and innovation. The team also remains focused on enhancing competitiveness and driving innovation.

Through our integration initiatives, we are streamlining operations and achieving significant cost efficiencies all while maintaining excellence in execution of our orders. We target leadership positions in segments where we offer clear differentiation, which positions us for long-term success. This is not only an organic story, our ongoing efforts in portfolio optimization, alongside accretive bolt-on acquisitions are further strengthening our business and expanding our capabilities.

This disciplined strategy is delivering tangible financial results. We are executing on our commitments with our value creation framework, driving both top line growth and margin expansion. Year-to-date, our revenue is up 7.5% and our operating margins have grown to the mid-teens. Given this momentum, we are confident that we will continue to expand our margins into the high teens of our planning horizon.

And with that, I'll turn the call over to John to review the quarter segment results and our overall financial performance. John?

Thanks, Rafael, and hello, everyone. Turning to Slide 8, I will review our third quarter results in more detail. Our third quarter played out largely as we plan with revenue with slightly better-than-expected operating margins. As we discussed in our last quarter call, we expect the second half new locomotive deliveries to provide robust growth while being partially offset by lower mod production in the second half.

This is exactly how the third quarter played out and we expect the fourth quarter's revenue cadence to be similar to the third quarter but at a higher growth rate in the fourth quarter. Sales for the third quarter were $2.89 billion, which reflects an 8.4% increase versus the prior year. Sales growth in the quarter was driven by both the Freight segment, including inspection technologies and Transit segment.

Our operating margin expansion came in slightly better than expected. For the quarter, GAAP operating income was $491 million. The increase versus prior year was driven by higher sales, improved gross margin and proactive cost management. Adjusted operating margin in Q3 was 21.0% up 1.3 percentage points versus the prior year. This increase was driven by improved gross margins of 2.3 percentage points, which were partially offset by operating expenses, which grew at a higher rate than revenue.

GAAP earnings per diluted share was $1.81, which was up an 11.0% versus the year ago quarter. During the quarter, we had net pretax charges of $6 million for restructuring, which were primarily related to our integration and portfolio optimization initiatives as well as $33 million of charges related to M&A activity.

In the quarter, adjusted earnings per diluted share was $2.32, up 16.8% versus the prior year. Overall, Wabtec delivered a very strong quarter, demonstrating the underlying strength of the business. Now turning to Slide 9, let's review our product lines in more detail. Third quarter consolidated sales were up 8.4%. Our quarter results were driven by growth in our equipment, digital and transit businesses, partially offset by our service business.

Services revenue was down 11.6% from last year's third quarter. This decline was planned and driven by the timing of modernization deliveries, which we expected to be down in the second half. As mentioned earlier, we expect services revenue to be down again in Q4 as a result of lower mod deliveries on a year-over-year basis. Services lower mod deliveries is expected to be offset by significant growth in new locomotive deliveries.

Equipment sales were up 32% from last year's third quarter. This robust sales growth was driven by higher year-over-year new locomotive deliveries as well as the partial catch-up of delivering the new locomotives that were delayed from last quarter. We also expect this double-digit growth rate to continue in the fourth quarter as well.

Component sales were up 1.1% versus last year due to growth seen in industrial products offsetting the impact from significantly lower North American railcar build and lower revenue associated with our portfolio optimization initiative. Digital Intelligence sales were up 45.6% from last year. This was driven by the Inspection Technologies acquisition. When excluding Inspection Technologies, Digital continues to see growth internationally with continued softness in the North America market.

In our Transit segment, sales were up 8.2% in the quarter, driven by our products and services businesses. Foreign currency exchange had a favorable impact on sales of 3.0 percentage points. As a key to our value creation strategy, we have been focused on optimizing our portfolio by divesting and exiting low-margin nonstrategic businesses. We believe portfolio transformation will lead to improved growth resiliency.

When we adjust the third quarter's revenue for these divestitures and exits that we have executed. Our revenues are up roughly an additional 0.5 percentage point of growth to 8.9%.

Moving to Slide 10. GAAP gross margin was 34.7%, which was up 1.7 percentage points from third quarter last year. Adjusted gross margin was also up 2.3 percentage points during the quarter. In addition to higher sales, gross margin benefited from cost recovery through contract escalation and the addition of inspection technologies, while mix was a headwind in the Freight segment as expected.

Raw materials were unfavorable due to higher material costs, largely due to increased tariffs. Foreign currency exchange was a benefit to revenue in the quarter as well as gross profit and a marginal impact on operating margin. During the quarter, we also benefited from favorable manufacturing costs.

Turning to Slide 11. For the third quarter, GAAP operating margin was 17.0%, which was up 0.7 percentage points versus last year. Adjusted operating margin improved 1.3 percentage points to 21.0%. The GAAP and adjusted SG&A expenses were higher versus prior year. Both GAAP and adjusted SG&A expenses were impacted by the addition of inspection technologies while GAAP SG&A also experienced increased transaction costs related to the acquisition.

Engineering expense was $59 million, which was up $9 million versus last year as a result of the addition of inspection technologies. We are committed to allocating engineering resources toward existing business opportunities with high returns, and we prioritize strategic investments that position us as an industry leader in fuel efficiency and digital technologies. These advancements are designed to enhance our customers' productivity, capacity 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 up 8.4% during the quarter. GAAP segment operating income was $414 million, driving an operating margin of 19.8%, down 0.4 percentage points versus last year. GAAP earnings were adversely impacted by purchase accounting charges resulting from our acquisition of inspection Technologies.

Adjusted operating income for the Freight segment was $513 million, up 9.9% versus the prior year. Adjusted operating margin in the Freight segment was 24.5%, up 0.4 percentage points from prior year. The increase was driven by improved gross margin behind contract escalation and the addition of inspection technologies, partially offset by unfavorable mix between services and equipment businesses.

Finally, segment 12-month backlog was $6.09 billion. Our 12-month backlog was up 9.5% on a constant currency basis. While the multiyear backlog reached a record level of $20.91 billion, was up 18.4% on a constant currency basis.

Turning to Slide 13. Transit segment sales were up 8.2% at $793 million. When adjusting for foreign currency, transit sales were up 5.2%. GAAP operating income was $115 million. Restructuring costs related to integration and portfolio optimization were $3 million in Q3. Adjusted segment operating income was $123 million. Adjusted operating income as a percent of revenue was 15.5%, up 2.7 percentage points. The increase was driven by higher adjusted gross margin behind integration and portfolio optimization efforts as well as strong operational execution.

Over the past couple of quarters, the Transit team has focused on more appropriately balancing production across the year. And as such, we do not expect the typical lift that we have seen in the fourth quarter. We expect fourth quarter adjusted margins to be relatively flat versus prior year. Additionally, we expect adjusted margins to expand to the mid-teens on a full year basis.

Finally, Transit segment 12-month backlog for the quarter was $2.18 billion, which was up 3.9% on a constant currency basis. The multiyear backlog was up 1.8% on a constant currency basis. Now let's turn to our financial position on Slide 14. We Third quarter operating cash flow generation was $367 million, which was lower on a year-over-year basis, resulting from higher tariffs and increased working capital. We continue to expect greater than 90% cash conversion for the full year.

Our balance sheet and financial position continued to be strong as evidenced by First, our liquidity position, which ended the quarter at $2.75 billion, and our net debt leverage ratio, which ended the third quarter at 2.0x after the funding of the purchase of inspection technologies for approximately $1.8 billion. We expect our leverage ratio to remain in our stated range of 2 to 2.5x upon closing of both the Delmar and Fraser sensor technology acquisitions, which we believe will close within the next couple of quarters. We continue to allocate capital in a disciplined and balanced way to maximize return for our shareholders.

With that, I'd like to turn the call back over to Rafael to talk about our 2025 financial guidance.

Thanks, John. Now let's turn to Slide 15 to discuss our 2025 outlook guidance. As you heard today, our team delivered a very strong quarter, while continuing to navigate through a challenging environment. Our global pipeline remains strong, and our 12-month and multiyear backlogs provide visibility for profitable growth ahead. We remain encouraged by the pipeline of opportunities that remains ahead of us.

Our team's commitment to product innovation, disciplined cost management and partnership with our customers has been instrumental in driving our ongoing success. As we move to the fourth quarter, in light of our strong third quarter results and our ongoing underlying momentum, we are raising our full year adjusted EPS guidance.

We now expect adjusted EPS to be between $8.85 to $9.05, up 18% at the midpoint. Looking ahead, I'm confident that Wabtec is well positioned to drive profitable growth to close out 2025 and beyond. Now let's wrap up on Slide 16. 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.

As we move into the final quarter of the year, we remain focused on our commitment to creating value for our stakeholders and maintaining the momentum we have generated. Our team's dedication positions us to continue driving Wabtec's success even in a dynamic and uncertain economic environment. With that, I want to thank you for your time this morning, and I'll now turn the call over to Kyra to begin the Q&A portion of our discussion. Kyra?

[Operator Instructions] Operator, we are now ready for our first question.

[Operator Instructions] First question is from Angel Castillo of Morgan Stanley.

Congrats on another strong quarter here. Just wanted to touch on one of the primary concerns that we sometimes hear from investors. I think -- so this year, your organic growth has been in the low single digits versus your algorithm of kind of mid-single digits here.

So Rafael, can you just talk about maybe why you don't share this concern by unpacking kind of 2 key things that I think are important here. So just first, maybe can you give us more color on the strong pipeline of opportunities that you talked about? And just kind of what that tells you about the magnitude or the pace of kind of ultimately orders that you anticipate, particularly in North America freight?

And then two, your backlog itself already seems to imply a reacceleration inorganic growth, I think, next year toward kind of high single-digits range. So is that correct? And any preliminary thoughts you can share on just kind of organic growth expectations for 2026 and just kind of the shape across your businesses?

I only hear -- or else you speak here, I mean, you've got to look into the pipeline dynamics, and it continues to be strong. I think one of the elements is the 12-month backlog. The growth in the 12-month backlog has outpaced the growth we saw last year. And with that, we have a stronger coverage right now this year than we had a year ago.

So that's a positive right there and stronger coverage as we look into 2026. I think the other element is the total backlog, which even though it reached an all-time high in the third quarter, our pipeline of opportunities remain strong, and we actually expect further growth moving to the fourth quarter. And the reason for that is really tied to -- I'll start first. I mean, we're bullish across some key international markets. Casten continues to see strong demand, and that's driven not just by volume growth.

I mean, you've got new rail lines, you've got fleet renewal. And we're seeing similar momentum what if you look across CIS countries in East Asia. You take, for instance, Brazil, we're saying the same things on fleet renewal in iron ore we are seeing volume growth in agriculture, which remains strong. In Africa, we continue to see opportunities to expand the revenues in the continent.

In mining, demand for ultra class is another bright spot, and it's right where we play. On transit, you see we continue to grow profitably, and we're continuing to enhance the competitiveness of the business. So all in all, I think there's the elements of the pipeline, which continues to be strong. our total active fleet is running harder, and we're continuing to expand our fleet around the world.

We now expect combined volumes for both new locomotives and mods to keep growing as we head into 2026 and backlog numbers supported. I think you continue to see international outpace North America. And I think with that, they're both positive.

That's very helpful. And maybe just a quick follow-up on the services side. Can you just dump back what core services versus maybe the mods are in kind of second half '25? And as you look at -- I think you just mentioned for 2026, you expect margins and equipment to grow or locomotives to grow next year. Do you expect mods to grow within that as well next year? .

So the variation you see there on the results in the quarter for searches exactly tied to mods. And we expect that to continue to vary, and it's going to be really a function here of where CapEx is allocated, it's more towards new or some elements of modernizations. You asked about the core services. We continue to see that growth in the 5% to 7% range as we look forward. And I think we continue to have the fundamentals that drive that, which is ultimately connected to the age of the fleet, the innovation that allow customers to have a return on those investments. and we're continuing to win share of wallet with customers.

Even when fleets are down, we see us less down the overall market. So I think the dynamics in the -- fleet time dynamics don't change. International continues to expand in the North America market, the fleets continue to run hard.

Next question is from Ken Hoexter, Bank of America.

And great job on the quarter and the 8.5% growth in sales and backlog. So I guess, similar questions. I just want to focus on that backlog and thoughts what we have in this upcoming I guess, 12-month process. So how should we think about the 2 upcoming acquisitions and then organic growth after that is maybe talk about your near-term backlog a little bit or kind of your view on organic growth there?

I'll start, and I'll let John comment on the specifics here. But as I said, as we stand here today, we've got stronger coverage for '26 than we did a year ago coming to '25. So that's a positive. I think we're seeing stronger momentum. You asked about acquisitions in that regard, evidences really more of a flow business. So minimum really impact in terms of the total backlog. But with that, let me pass it on to John.

Ken, with regards to the acquisitions, when we look at evident, obviously, we built in. The first quarter has -- the first quarter of our ownership, the third quarter has progressed on track. Volumes are right where we expected them to be. And we're seeing in the first quarter of ownership both accretive margin to the overall company as well as slightly accretive EPS. So things are checking there really well through one quarter of ownership.

We've got 2 more to go, as you know, Ken, with regards to Fraser, we'd expect by the end of the year. And Deller, sometime prior to the -- or within the first half of 2026. Neither of those are in our guidance today. And we will include those when we close on them, and that will provide, obviously, inorganic growth as we move into 2026.

And we also expect those 2 to be accretive from a margin standpoint as well as slightly accretive from EPS. But everything is tracking well on the 3 acquisitions.

And then for my follow-up, you talked about the shift to build versus mods, you telegraphed that well. Obviously, we're not seeing maybe as much of the margin impact, John. You kind of mentioned that in your prepared remarks. Was that more a cost offset in the cost programs?

Was it something else in terms of better margin on pricing that you can walk us through? I think you noted more muted margin expectation for fourth quarter. I don't know if that was just for freight or overall. So I don't know if you want to dig into the margin though.

A couple of things, Ken. Number one is, as we certainly felt the impact of unfavorable mix in the third quarter. We had a lot of other things going well, which we had anticipated overall from our expectations, we came in slightly favorable in terms of margin in the third quarter, but largely on track. And again, that was running by -- driven by running the business very well. Operational excellence was very strong in the quarter.

We had some favorable timing with regard to price escalation and then the integration programs are dropping a fair amount of favorability. So that was offset by that unfavorable mix. As we look to the fourth quarter, very similar as we talked about last quarter, Ken, is we expect margins to expand -- the margin growth to expand in the fourth quarter from what we've seen in the third quarter.

Now on an absolute basis, as you know, margins will be down on absolute basis on our fourth quarter is seasonally lower, largely because of fewer production days and the absorption that goes along with that. So again, we're tracking to where we expected for the fourth quarter. We've raised guidance a little bit this period, and that was part of the fact that we're coming in a little bit favorable on margins in the third quarter. We'd expect that to carry forward.

Next question is from Bascome Major with Susquehanna.

Rafael and John, the release and the deck, talk a bit about tariff pressure on cash flow as it seems to be flowing into inventory. Can you talk about where we are on your net offset? And just as that flows into the P&L over the coming quarters. How should we think about the impact on both the top line gross profit and ultimately, the bottom line of the business?

Sure, Bascome. So let's kind of talk about the cadence of the tariffs coming in. When our product comes across the border, the tariff is owed right. So that hits cash first, and we're certainly seeing pressure on overall cash as that increased expense comes through. Now what that does is that gets inventoried and flows through our regular inventory and have been a long cycle product as we are or a fair amount of our products are. It typically is going to take 2 to 4 quarters for that to come through the P&L.

So in the third quarter, we are seeing the financial impact of tariffs and certainly have seen the cash impact. Now that's the kind of the gross impact, right? And then the net impact is couched with what we're doing to offset those tariffs or to mitigate them. And we've talked Bascome in the past and worth repeating, I think, today is there's a 4-pronged approach that we're and spending a lot of time on and working very hard at all facets.

The first one is to get all the exemptions that we're entitled to. And I think the best example of that Bascome is the USMCA. And this is for Canada and Mexico tariffs and qualifying our products. I think our team has done an extraordinary job of getting off and getting that done, and we got a very high percentage that qualify there.

The second area is on the supply chain, right? We can move products around, not always easy, not always cheap. But we're looking at those opportunities in given the shifting landscape of tariffs should we be sourcing in other jurisdictions. And that's going and that will continue to go on as we move through the next several quarters.

The third area is sharing costs with our customers. And so we've been doing a fair amount of that as well. And the fourth area, Bascome, I'd call it kind of a wraparound is we are taking the entire enterprise and making sure that we make our commitments and we're being incredibly prudent on the spending that we do and very cost focused on everything across the company to, again, assure that we can do our best to cover the tariffs that are coming at us.

And just to clarify something from earlier. Rafael, you said new locos and mods, you expect units to be up again next year. Was that a North America comment or a global comment? And as you roll out the new mod product, I think later next year in North America, do you think that mix kind of shifts more balanced back into mods as that grows?

It was a comment with regards to total. So if you look at the combination of mods and new units. And with that, I mean, the stronger variation we see between those dynamics between new and mods is in North America in that regard. But the dynamics are positive as we look at the total and the backlog pertinent supports it from both a 12-month backlog and special as some of those products have longer lead times. .

Next question is from Rob Wertheimer, Melius Research.

So there's a lot that went well in the quarter. To me, I guess the gross margin was maybe the most impressive. And I know you touched on it. John just mentioned some of the contract issues in your prepared remarks. But seemed like you had some headwinds on mix and material. I wonder if you could just expand on what went right in gross margin.

And then is that escalation contract escalation a steady thing that continues over the years? Was there a lumpiness to it? Maybe just comment on that.

Yes. In terms of the escalation, it is exactly what it means is it's recovering our costs. So there's no net benefit. But the timing of it does have an impact, Rob, right? These are typically annual escalators. And so there's differences sometimes when the costs hit and when we recover that money, there's typically a lag. But we saw a little bit of positive there.

The other thing that you're seeing in gross margin is a favorable mix as we bring on inspection technologies in. Inspection Technologies comes at a significantly higher gross margin than the rest. So we're seeing a little bit of a mix favorability with inspection technologies.

But again, the biggest piece of all of this, Rob, is just -- the company is running well. Everyone is in the company is focused on cost and the momentum that we've got is we continue to see, and it's coming out of the first and second quarter, seeing it in the third quarter, and we'd expect that to continue into the fourth quarter into 2026.

Next question is from Scott Group, Wolfe Research.

So John, I thought that last answer on tariff was really helpful. I just -- I had a follow-up. When you think about the gross impact of tariffs in the timing issues, what quarter would you say is like the peak gross impact of tariff? And then given all the mitigation efforts, is the quarter of like the biggest like net impact any different? Meaning is the net impact sooner or later, if you understand what I'm trying to figure out.

Yes, I do, Scott. I don't think we're that precise to start with. But I think the highest gross and the highest net would be the very similar. And certainly, the gross part of the tariffs is a driver of the movement, right? And it's hard to tell exactly what quarter that's going to be because it's how everything is flowing through inventories. But we're focused on doing everything we can to mitigate them. And the entire company is working hard at doing that.

Maybe just to ask, like a little differently. Like do you think we've seen the biggest impact yet? Or I know like last quarter, you said like you think the net impact of tariff after mitigation is sort of immaterial. Do you still feel that way?

No, I don't think we've seen the largest gross or net impact on tariffs. I think that's still in front of us over the next couple of quarters.

And that's why we're continuing to work a lot of our cost-out plans, a lot of the elements in terms of supplier mitigation, as John described. And make no mistake, pricing is a key element of that, too.

Makes sense. If I could just ask one last one. You've done such a good job getting these transit margins better. Like where do you think those can go over the next couple of years? I know you've got long-term margin guidance for the consolidated business. Should we think about similar sort of upside in terms of a couple of hundred basis points more to go in transit. Is that the right way to think about it? .

We see it as continuous improvement. You go back 4, 5 years ago, we had given really a direction of having to meet teens. We're now heading to high teens, and I think it's really not just a function of running the business better, which we'll continue to do it. The other piece is also how you continue to rethink the portfolio.

And as John has highlighted, we've exited also some businesses. We turn in the process of acquiring better businesses into that portfolio. So we look at it as continuous improvement, we look at it as an evolution of the portfolio.

Next question is from Saree Boroditsky, Jefferies. .

This is James on for Sari. So you gave a great color on international pipeline, but you also kind of talked about a strong pipeline in North America. So can you kind of talk about what you're seeing in terms of like customer activity or the trends or any key drivers in the North America pipeline?

Yes. So I think -- well, I'm not going to make any comments with regards to specific customers. But what I'll tell you is the view that the fundamentals of the fleet, they remain the same. I mean customers are running aged fleets. If you look at the fleet running in North America right now, over 25% of that fleet is over 20 years old. And that's excluding the 2,000 modernizations we've done since 2015.

So that's a significant element. The other one is if you think about the fleet ups running, also a similar amount of over 25% are still DC locomotives. And you know you can replace here for every 3 locomotives, you could have 2 AC running. So the assess of modernizing units to AC, upgrading control systems, that actually allows the Class 1s to cut fleet sizes. It not just addresses things like obsolescence, it improves asset productivity, it improves reliability.

And if you think about services, it lowers maintenance costs. So the way we look at it, I mean, I don't see fleet renewal it's not discretionary. I think it's actually a key lever for how they improve their operating ratio, how they improve quality in terms of the service and the overall competitiveness. So I think we see this very much aligned and those dynamics have not changed.

Great. That's a great color. And I guess kind of -- on the international side, it's great to see like $4.2 billion like Kazakhstan contract win. Like, can you kind of talk about what exactly is included in that contract? And when do you expect it to kind of begin to convert into revenue?

So I'll let John go into the specifics of each contract. But the way we look at it, very much -- this is providing us coverage for a region that continues to grow. And it's not just an element of volume that's grown. There's new projects and new lines that will accelerate that growth order. There are elements of just fleet renewal, fleet continues to age in that context. So I think those are all positive.

And then most importantly, we also have the service agreements where we ultimately support those fleets from an availability and reliability perspective.

Yes. And Jason, the Contra the deal with Kazakhstan is made up of several contracts. One is for locomotives for 300 locomotives over a 10-year period of time. The other contracts are for the service, as Rafael had just mentioned. So what we've done is re-up the service for all the existing extended it for all the existing locomotives that we're currently servicing there. We've also added a new service contract for all those 300 that will be coming in. And those will average over a 15-year period of time.

Next question is from Brady Lierz Stephen.

Rafael, recently, we've seen a change in FRA leadership. And I wondered if you could give us an update on the regulatory environment. Are you seeing any increased momentum or desire from your customers to implement kind of some of these advanced technologies, Wabtec has worked to develop? I think of 0 to 0 as a great example. Is that something we could see implemented here in '25 or '26? Or is there more kind of wood to chop on the regulatory front?

I think yes, we are. It's good to see that momentum, and you point it absolutely right. I think 0 to 0 is the first one, but we've got other digital tools that we've been working with customers, and it's great to see the new leadership with the new incoming administrator, and I think the support is there to focus on really advancing what I'll call both rail safety and supporting innovation there.

So dynamics are positive, and that certainly will contribute to the digital business here as we gained momentum in North America.

Maybe just as a quick follow-up. You've had a full quarter with inspection technologies now. Can you just talk about how integration has gone so far and maybe any customer feedback -- are you seeing kind of signs of cross-selling momentum? Or is it a little too early for that?

I think it's been a positive. I mean it's early days, still, but it's a positive. I think we've described how well, we knew some of the leadership team and the leadership team knew some of us. So I think it's been a good process and fluid in a lot of ways. There's a lot what the teams are working on right now. but it's good to see the first quarter the first results, which are really, I'll call, very much aligned a bit ahead, but aligned to what we thought.

And I think it's a testament to the quality of really the acquisitions we've looked into it and the quality of the leadership teams that are involved in this.

Next question is from Ben Moore, Citi Group.

Congrats on a great quarter. Going back to the gross margin discussion, very strong beat there above consensus and year-over-year. Appreciate your color on the contract escalation and adding inspection technologies and mix was a along with the unfavorable materials on the higher tariffs.

But can we maybe hone in on how pricing is trending as part of that gross margin growth you're working together with your customers on kind of sharing the tariffs would love to hear any color you could share on how pricing is trending?

Yes. Ben, we are working all of those 4 levers. Certainly, pricing is one of them. And with that, in the third quarter, we are seeing a marginal amount of pricing that's included in the revenue side. And again, it's still work to be done ahead of us. But I would not say that's a core driver of what we're seeing in the third quarter, but pricing is certainly included in the results.

Really appreciate that. Maybe as a next one, you raised your EPS guide with a hold on your revenue guide implying more opportunity on the cost side. The guide slide in your presentation mentioned adjusted operating margin up, but the implied 4Q EPS would be at $0.208 below consensus at $2.012. Is that due to below the line items?

Number one, Ben, and typically don't comment on consensus. What we've talked about is we -- what we've said and versus what we've said, we feel better about the fourth quarter and have raised our consensus by $0.10. And with that, we would expect -- when you look at kind of the implied fourth quarter, we expect a very strong fourth quarter.

As a matter of fact, when you look at what's implied is a midpoint of 15% in terms of revenue growth, and we'll see very strong organic growth during that period of time. And on the bottom line, we're looking at about a lease about 24% on EPS growth.

I really appreciate that. Maybe if I could squeeze in just one last one. With the UPS proposed merger progressing, can you comment on your experience with CPKC as they merged in 2023 and increase their locomotives and active service in their first year combined winning volume from truck? And how might your experience with the potential UPS or BNCSX be similar as they potentially increase their locomotives and active service as they grow volume from truck in their first year combined?

Well, a couple of comments. First, I'm not going to comment on any specific mergers here, but we continue to see this as a significant opportunity for, what I'll call, increased carloads and rail volumes over time, which would be a positive for us. So I'll start there first. I think what's most important is, as you look into any consolidation, I think the sense that temporarily, you could see fleet reductions and pacing of near-term investments.

I think that misses that bigger picture view, which is the one I gave you on the fleet dynamics, which is both associated with the age of the fleet, it's associated with the fact that you still have a lot of DC locomotives and customers can actually gain from those investments.

And as I said before, I don't see fleet renewal as discretionary. It's actually a core lower. Ultimately, I mean, you're bringing those units that are 25 years of age or older and they're running hard I mean it becomes highly costly to maintain those units. And that's what really triggers the elements of modernizing and sometimes really having to shift more towards the acquisition of new.

Next question is from Tami Zakaria, JP Morgan. .

I wanted to touch on the Components segment. It's great to see it inflected to growth in the third quarter. Should we expect this growth to accelerate in the fourth quarter and maybe build momentum in 2026? Or asked another way, how should we think about components growth on a normalized basis, if you could comment?

I think, a couple of things. I mean as you look into the year, I'd say our businesses are largely really tracking to plan in terms of growth I think the notable exception has been the railcar build, which is really roughly what, $100 million impact for us versus last year, which was kind of expected, but it gotten worse since the beginning of the year.

So I think that's one of the elements to keep in mind. In the overall business, we continue to be pleased with the progress. I think the team has continued to take action here. to adjust operations to new volume realities. We're doing very well internationally on that business, and the team is finding opportunities here to continue to grow in that.

And I think the other element of the components businesses, the dynamics you see on industrial. They are positive, and that's really a function of demand that comes from -- especially the heat exchanger business. And that's both for mining. If you look at the L&M acquisition, we did, but it's also from power generation with more demand for heat exchangers in that context, and that's, to a large extent, AI driven.

Understood. If I may ask one more. The Kazakhstan deal, very impressive, definitely boosted the backlog, total backlog. I'm just curious, the 300 locomotives under that contract, is that also over the next 15 years? Or could the delivery of those could be more front-end loaded?

I think the way we look at the contracts and the way it has played out even with the previous agreement, it provides us more coverage to support. So the previous agreement, we ended up exhausting it a lot sooner, and it's really a function of the continued growth you see in Kazakhstan, which is threefold. One is the volume growth from the existing lines. You've got new lines and new projects that are being built.

And you've got some locomotives, they're quite old. I mean some of the first locomotives, we work in Kazakhstan they're like only 2,000, those were modernizations and they've really exhausted their life. So it's really threefold what we've seen the dynamics, and it's a market we continue to expect acceleration into it.

Tami, the 300 are for 10 years. So now again, as Rafael had mentioned, the last contract ended prior to its natural end because they exhausted those. But right now, this is kind of think of it as a base load over the next 10 years.

Next question is from Steve Barter, KeyBanc Capital Markets.

Just a follow-up on Kazakhstan. Did that deal for the new locomotives include the full suite of digital products upfront and with subscriptions in the service part? And then can you just give us an update on digital penetration for international more broadly?

Yes. So it does not include the digital products. So that's actually an opportunity we have, but to capitalize on it. It goes from, I'll call some very much proven products such as TO and well, 0 to 0 and so forth. But I mean, we also continue to have opportunities with PTC, and those are some of the things that are being discussed. I think what's most exciting here is the fact that growth remains there besides Kazakhstan.

We're seeing that in the CIS countries. We've got a lot of support from what I call governments here to make sure that we land those fleets in other countries around the region. So that's a positive. And on the digital electronics, as per your question, I think we continue to see opportunity here to expand penetration on that. And that touches both onboard electronics, which speaks for TL, Smart HPT, 0 to 0, but PTC is also -- continues to be a bright spot in terms of how railroads look at improving safety of their operations around the world in a cost-effective way.

Yes. That's good detail. And just -- I know it's early to talk about fracture and Delnare there, but just high level, does the technology side of those deals integrate to your existing software and service stack easily do you think? Or just trying to get a sense of how fast you can kind of get that going for cross-selling?

It does. It integrates very well. And I think we've got really, I think, the element of scale to help those businesses get further momentum which would really spell growth into various markets that we're present. So we see the opportunity here not just to deliver on the cost synergies, which is really what we based the acquisition on. I think there is really momentum to be gaining here in terms of growth and share gain, share of wallet gain with customers in the overall market. .

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Yates for any closing remarks.

Thank you, Alicia, and thank you, everyone, for your participation today. We look forward to speaking with you again next quarter.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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