Good morning and welcome to the Wabtec quarterly earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Kristine Kubacki, Vice President of Investor Relations. Please go ahead.

Thank you Operator. Good morning everyone and welcome to Wabtec’s third quarter 2020 earnings call. With us today are President and CEO, Rafael Santana, CFO Pat Dugan, and Senior VP of Finance, John Mastalerz. Today’s slide presentation, along with our earnings release and financial disclosures, were posted on our website earlier today and can be accessed on the Investor Relations tab on Wabteccorp.com. Some statements we’re making are forward-looking and based on the 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. Now I will turn the call over to Rafael.

Thanks Kristine, and good morning everyone. We appreciate you joining us today. I hope you and your families remain healthy and safe. Turning to Slide 3, while we continue to see the impact of COVID globally, a gradual recovery across the global freight and transit rail market is continuing. North America freight volumes and equipment utilization sequentially improved in the third quarter and transit ridership is also slowly resuming. These directional trends along with the focused performance of our teams are reflected in our third quarter results. Total sales for the quarter were $1.9 billion, driven largely by international freight markets and a recovery in transit but offset by global disruption due to the COVID pandemic. Total adjusted operating income was $293 million, impacted primarily by the drop in freight sales but somewhat offset by a more than 20% increase in transit segment income. Adjusted operating margin was 15.7% driven by cost actions and execution on our synergies, as well as margin improvement in transit, which was up 270 basis points for the quarter due to synergies, improved productivity and better project execution. In third quarter, we had solid cash conversion with cash flow from operations of $230 million driven by good working capital management. This allowed us to further strengthen the balance sheet by reducing debt by over $200 million in the quarter. Our liquidity position remains strong at $1.9 billion. Total multi-year backlog was over $21 billion despite current market conditions. Finally, we ended up the quarter with adjusted EPS of $0.95, further reinforcing that our teams are continuing to take the necessary steps to control what we can, protect the long term growth of the company, and deliver shareholder value. In the area of synergies, we are accelerating our progress and we are on track to deliver…

Thanks Rafael, and good morning everyone. Turning to Slide 4, sales for the third quarter were $1.9 billion, which reflects a 7% decrease versus the prior year. The decline in year-over-year sales was mainly due to the ongoing disruption across our freight and transit segments caused by COVID-19. For the quarter, operating income was $207 million and adjusted operating income was $293 million, which was down 12% year over year mainly driven by lower sales and disruption in our operations as a result of the pandemic, offset somewhat by variable cost actions and the continued realization of synergies. In the third quarter, adjusted operating income excluded pre-tax expenses of $87 million, of which $70 million was for non-cash amortization and $16 million of restructuring and transaction costs. Please see Appendix D in our press release for the reconciliation of these details. Now looking at some of the detailed line items, adjusted SG&A declined 4% year over year to $241 million, which is excluding $12 million of the restructuring and transaction expenses I just discussed. SG&A expenses benefited from structural cost actions across the business and the realization of synergies. As expected, we did see a resumption of certain discretionary and compensation expenses that we eliminated during the depths of the pandemic. For the full year, we expect adjusted SG&A to be around $900 million. Engineering expenses decreased to $37 million or down 38% from last year. This was largely due to the lower volume outlook as well as some changes in project timing. Amortization expenses were $70 million. For 2020, we expect non-cash amortization expense to be about $285 million and depreciation expense to be about $180 million. In the third quarter, we had GAAP earnings per diluted share of $0.67 and adjusted earnings per diluted share of $0.95. The…

Thanks Pat. Looking ahead, we are seeing a gradual recovery across most freight and transit end markets as global economic activity and commuter travel improves. In North America, rail volumes increased dramatically from the second quarter due to a broad recovery in agricultural, intermodal, [indiscernible] and automotive volumes. Locomotive parkings, after peaking to a record high in the second quarter, have improved but are still more than 20% higher than pre-COVID levels. As railroads enter into recovery and we accelerate technology improvements, we expect demand for reliability and productivity to be even greater, putting us in a position of strength for modernizations, overhauls, and parts demand. In terms of North America rail car builds, rail cars are slowly moving out of storage; however, more than 25% of the North American rail car fleet still remains in storage. Builders are taking continued steps to slow production lines. The industry forecast currently indicates that the rail car build for 2020 will be less than 30,000 cars. Internationally, where economies have started to open, we continue to see encouraging signs. In Brazil, demand remains steady with greater dependency on agriculture products following a record harvest. In Australia, rail activity has shown good momentum following the COVID lockdown. In Kazakhstan, year-to-date car volumes are up driven by growth in volumes from China. In India after long lockdowns, activity has recently improved with the gradual reopening of the region. Overall, we have a strong order pipeline internationally in places like Brazil, Russia, CIS, Africa and Australia, and we expect revenue growth in several of these markets throughout 2021. In mining, end markets remain stable and we remain optimistic that the mining market conditions are improving. Transitioning to the transit sector, ridership is continuing to recover from historic lows, particularly in Europe and Asia, and in…

Thank you Rafael. We will now move onto questions. Before we do, 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 re-join the queue. With that, Operator, we are now ready to take our first question.

[Operator instructions] Your first question comes from Allison Poliniak from Wells Fargo. Please go ahead.

Good morning. Could we talk to transit a little bit? I think the performance in that segment was quite a bit more resilient than folk, including myself, would have thought. Given the backdrop of COVID, it sounds like Europe and Asia are starting to recovery quite a bit faster. Is there a way to quantify the headwind that you’re seeing from North America, and how do you think that segment evolves in terms of the future, just with COVID and the concerns folks will never get back on commuter rail again?

Let me start first with the following. We’re working of course very closely with our customers. I think while transit authorities around the globe, they are seeing operating budgets constrained, I think there is really strong support in terms of government stimulus for them to navigate through this. At this point, we haven’t seen any project cancellations, but we continue to work with customers and I think the dynamics at this point, they remain a positive. I think there’s still going to be volatility in terms of some of the measures that you see taking place in places like Europe, but we don’t feel that that’s going to go back to what I’ll call the worst trough levels of COVID, so overall positive trends. A couple other comments here. If you think about transit, I think it’s been slower in the U.S. versus other markets. I call out that the U.S. market represents only 15% of what we do in the transit market, so I think that’s also an important element. With that, I think I’m really proud to see how the team has embraced change. They are driving improvement. We see that coming into our order backlog. I think I’ve said it before and the trend continues, our backlog today has got margins that are 100% at least higher than they were a year ago. We’ve seen improved execution, and I think we’re moving in the right direction with that business, so we’re committed to continue to improve margins over time.

Great, and just a question on margins within freight. If I recall, the equipment margins could be a little bit lower just in terms of the mix. Can you help quantify if there’s a way to do that in mix impact from the product dynamics in the quarter within freight, in terms of would it have been better, I guess, if the equipment weren’t so strong?

You’ve got it. Margins were primarily impacted by mix, and Allison, just very straightforward, right - when I’ve got equipment growing at 35% in the quarter and at the same time, I’ve got services which is a much larger business with digital electronics - I mean, services was down 19% with digital electronics at 13%. That’s really what drove that. We can have those variations just based on mix. We remain focused on improving margins. I think we’re taking a lot of the right actions in different areas. We’re delivering on synergies. We’ve been taking action on SG&A and indirect costs, and we’re going to continue to move in that direction.

Great, thanks. I’ll pass it along.

Thank you. Your next question comes from Justin Long from Stephens. Please go ahead.

Thanks and good morning. I wanted to start with a question on the North American freight aftermarket business. I’m curious how that trended sequentially in the third quarter and your expectations going forward, and maybe within that business it would be helpful to hear about the cadence of mods Q2 to Q3, and maybe even Q3 to Q4 as well, just because I know that can move things around a good bit.

Okay, so let me take a step back, first with the second quarter on services, because I think it’s important just to understand. Think of car loads in the second quarter were down close to 20%. We saw on the other side our revenues came down about 9%. Now when you come into the third quarter, so there’s clearly a lag there, when you’re coming to the third quarter, while car loads were down, I think 7.5%, we’ve seen volume improvement of about 1%. Here’s some things to keep in mind. I think there is naturally a lag there. What I’ll tell you, what we’re seeing from a services perspective, there’s clearly a pick-up in terms of, I’ll call it recovery. It started first in our international markets and we saw fleets getting parts, and I think we’re seeing volumes continue to move in the right direction. There was a lag into North America but we’ve also seen that improving, as I think continuing to move forward. It’s a shorter cycle business, but the trends that I’m looking at right now, they’re positive for the services business. You asked specifically on mods. I think there is--there’s pent-up demand being created in terms of fleets that didn’t run, so overhauls that have pushed to the right, potential investments in the fleet that have not been done in the course of the last couple years that have also pushed to the right, and that pent-up demand is going to come, so we do expect growth in mods moving forward. I’ll step away from providing you any specifics in quarter over quarter because we can have variation on that, but I think there’s positive dynamics there in the services business.

Okay, thanks. Secondly, I wanted to ask about your thoughts on buybacks, just given where the valuation metrics for the stock are today. As you think about closing that valuation gap to the market and peers, were there any major takeaways from the investor perception study that you recently completed? Just curious if there are any actions that you’re planning to take after completing that exercise.

Let me start with the last part - yes, we have done that study, really great turnout. I think the amount of feedback was great, very specific, very candid answers, so we’re continuing to work on that. With that, a couple things in mind. Number one, I think there is an element of providing what I’ll call a little more details in terms of some of our segments, which we’re going to work with you to make sure that we look into those as we go into next year. On capital allocation, what I would like to tell you is, number one, we are committed to drive organic growth and continue the R&D investments that really drive differentiation and innovation for our customers - that’s top of mind. Of course, we are looking and reprioritizing as we look at the current environment, and very committed there. We’re also confident about our ability to drive cash and to reduce debt. Just think about just the last 12 months - we have paid down $490 million of debt and at the same time, we were driving over $190 million of both stock buybacks and dividends. Right now and as I look at it, our current stock price presents significant opportunity to return value to shareholders. We currently have a share repurchase authorization for $400 million, and we are intensifying buybacks. That’s the focus now.

Great, very helpful. I appreciate the time.

Thank you. Your next question is from Chris Wetherbee from Citigroup. Please go ahead.

Thanks, good morning guys.

Good morning, Chris.

I was wondering about the return of resources in the freight segment as we see volumes continue to improve in 4Q and potentially first half of next year and beyond. Specifically on the headcount side, what are the learnings that you’ve had from this downturn? Is there the ability to hold off on bringing folks back to try to drive stronger sequential incremental margins than what we saw just initially here in the third quarter?

The answer is yes. Number one, I think if you look at our headcount numbers, we’ve reduced 3% quarter-over-quarter, 13% versus a year ago. I think there’s a lot of learnings that came from just the COVID period. We’ve looked at different areas, and I’ve got to tell you there is an opportunity here to win even more productivity for certain areas of the company if you work remotely. There’s some other ones that’s not the case, but we do see the opportunity to drive increased leverage, and we will be growing margins as a result of volume growth [indiscernible].

Okay, that’s helpful. Maybe a bigger picture question on synergies. I think you talked about achieving full run rate out sometime during 2022. Can you talk about some of the puts and takes that might influence that timing a little bit? Maybe forgetting about the macro to some degree, I think, with what’s in your control, are there any potential drivers that could maybe pull that forward a little bit? What could they be, and what’s the risk to pushing that out a little bit?

I’ll tell you what’s pushing that out a little bit right now, and it’s just a function of volume. But with the guidance of what we’ve provided with the $150 million for the year, we’re committed to that and we’re going to deliver on that. We’re tracking to that, we have not broken down that on the quarter , but we’re tracking to be north of $150 million for the year, and we will deliver the $250 million before end of next year, so moving in that direction. What I’ll say is of course volume conditions improve, it can only help us there.

Okay, got it. Thanks for the time, appreciate it.

Thank you.

Thank you. Your next question is from Rob Wertheimer from Melius Research. Please go ahead.

Hi and good morning everybody. My question is just on transit. You had another quarter of good progress on margin, and I wonder if you would just give a general update on what workflows are left to come. You’ve rolled off some of the unprofitable business. Could you just give us an update on your strategy for continued improvement there? Thanks.

Yes, I’ll say this is ongoing work, right? You have a backlog that you’ve got to work through. I think the comments I would make is I think for more than a year now, we have been really disciplined about the quality of that backlog and the orders we take, so the specific terms and conditions that come with those orders, and that’s where I say that we’ve got over 100 basis points of margin improvement on that backlog, so it’s a continuation. I think execution is a lot better. I think we’ve got improvement in terms of on-time delivery. The team has really embraced the principles of lean across our operations. We’re going through a significant exercise on making sure that we’ve got what I’ll call a more--just a more efficient footprint. Without mentioning the business here, I run sometimes into businesses where you have eight locations, different groups of engineers in each one of those locations, designing things to a lot of times different spec, sometimes to support similar customers. We have the opportunity here to have what I’ll call centers of excellence when it comes down to engineering. We have some of those established in places like India, so we have the opportunity to significantly reduce costs, and we really don’t need those eight sites. I can do with that maybe four or five, and I think that’s something that we’re going to continue to pursue. We’re being very disciplined about it, but we’re going to continue to drive margins up, so we’re committed to the framework that we’ve highlighted before, which is over 100 basis points on average per year. I think we see the opportunity to do better this year, and we’re not going to be pushing for anything less than another 100 next year.

That’s very helpful, thank you. I’m sorry for the clarification, but how much is left on federal contracts and backlog that will flow through to positive margin at this point? Thank you.

I think the one contract that we’ve been more open about it was the U.K. project. That runs off fundamentally by the end of this year, so there’s very minimal left, I think, for the first quarter of next year. But there’s a backlog of contracts and we’ll continue to work. I think the importance is we’re committed to drive margin improvement with all the levers we have. Pat, I don’t know if you want to comment on it?

No, I just think it’s worth mentioning that we’re still a run rate of about $25 million of revenue each quarter, and it’s flat year over year and quarter over quarter, and it’s at a margin that’s right around breakeven, so there’s no element of that that has made this margin better than in other quarters. This is really--the margin improvement has come from the things that Rafael talked about - cost actions, efficiencies, synergies, all those items and things that we outlined earlier and are executing on now.

So the headcount reductions are really cutting across the business. This is not in one specific area.

Thanks Rafael, thanks Pat.

Thank you. Your next question is from Courtney Yakavonis from Morgan Stanley. Please go ahead.

Hi, thanks for the question. If you can just maybe comment high level at your thoughts for freight in 2021 - you know, I think the cadence of OE versus your services and your digital business went a little bit differently than we would have expected this quarter, but it sounds like there’s some pent-up demand and you’re expecting growth in mods going forward. You talked about orders shifting to the right in digital electronics, so do you think that there is pent-up demand there? Then you had obviously mentioned a mining contract or a multi-year order. Is that going to start to flow through next year? Help us think about how locos are shaping up, thanks.

Let me give you a sense of our end markets. Of course I’m not going to get into the elements here of giving guidance into 2021, but the way I look at our end markets, let me just start with maybe the transit piece of it. I think we’re continuing to see positive signs of recovery. If you look at our backlog right now, it’s larger than it was a year ago and I think we’re continuing to see good trends there. The second piece would clearly come down to really, I’ll call it the freight side. I think we’re positive on services. As I mentioned before, I think we’ve seen the pick-up on services from the trough levels in the second quarter start first in the international markets, then we saw that--a little bit of a lag, but then it came into North America, and I think we see positive trends there. I think there’s of course--there is a shorter nature of the cycle of that business, so things tend to pick up faster. Now when you go to the equipment side, I think we’re kind of seeing similar dynamics, meaning if you think about the pipeline of opportunity that we were working versus six months ago, we see significant improvement. It started once again in the international markets. I think there is positive signs on some of this pipeline actually converting into the fourth quarter, which means even a possibility specifically in one of those markets to already deliver, so bringing revenues into 2021. But we’ve got to see that taking, I’ll call a broader impact across international markets. I think ultimately you’re going to see that happening in North America, but there is of course a lag there, and when you look at our equipment business, there…

Thanks, and then just on freight margins for the fourth quarter, I think you’ve historically talked about a 20% to 25% decremental margin framework in freight. Obviously it was a little higher this quarter given the mix, but would you expect it, given that you’re expecting OE to be down year-over-year in the fourth quarter, to go back to that framework or potentially be a little bit better as the mix improves?

Again staying away from commenting on mix and specifics on the quarter, what I’ll say is we’re confident with the guidance we’ve provided, and we’re committed to hit that guidance. With that, I think there’s also an element of cash flows, and I think we’re seeing all of our teams working through that. There’s of course headwinds into the quarter, but we feel strong about the guidance we’re providing at this point.

Thank you.

Thank you. Your next question comes from Jerry Revich from Goldman Sachs. Please go ahead.

Yes hi, good morning everyone. Rafael, I was pleasantly surprised by the bookings trend in freight - you know, really strong book to bill, even as you had really strong deliveries in the quarter. Could you just expand on your prepared remarks in terms of where you’re seeing pockets of strength from orders, and I think you alluded to a building international locomotive project pipeline as well, would you mind just expanding on those two areas, please?

When I talk about pipeline of opportunities and option to convert those into orders, I think we’re seeing some positive signs in places like Latin America, and we have the opportunity here to convert some of those orders already in the fourth quarter - the team feels strong about it. We’re seeing similar trends in places like Kazakhstan, and there’s picked up activity in some other markets which I’d rather not open up at this point. We’re certainly--we face strong competition wherever we go, and we want to make sure that we continue to progress in that direction.

Okay, thank you, and the bookings in the quarter, can you just expand on what drove such a strong bookings quarter in a really tough environment?

I think a piece of it was the order that we announced on New York City Transit - that was certainly a significant element of that. It’s a big opportunity for us here to continue to expand on electrification of our market, so this battery electric locomotive, we see this as a great solution for our customers. There has been a great degree of interest, and we’re moving into what I’ll call the phase two of that with a couple different customers, so we expect that to continue. The other piece I’ll mention to you is mining. I think mining has demonstrated resilience and even as we go forward here, I think there is really an element of resilience, especially when you look at iron ore, copper and some specific commodities, so that’s also another resilient part of the business.

Okay, thank you. Can you talk about how the productivity ramp has gone on the facilities in India, in particular are you getting the productivity that you were targeting?

Two things - there has been significant improvement in productivity and efficiency. I look at the last two years, we’ve significantly improved the profitability of the contract that we are executing, so it’s a positive there. When you talk about last quarter, I mean, of course it’s been very disruptive. Between COVID hit, between monsoon season, I can’t say things have been necessarily easy, but I think the team has continued to progress. We have delivered more than 130 locomotives at this point, and I’d say the team is very much committed to deliver the minimum 100 locomotives per year, so we feel positive about the dynamics. But very tough dynamics in the course of the last 90-plus days.

Okay, appreciate the discussion. Thanks.

Thank you. Your next question is from Scott Group from Wolfe Research. Please go ahead.

Hey, thanks. Morning guys. Rafael, can you just talk directionally how you see the loco and rail car markets for next year, directionally just sort of up or down or flattish, and then I’m wondering can you talk at all about some of the things you’re doing with electric or alternative locos on the freight side?

Yes, so a couple things. On the freight car side, I think you all look at the same reports we do. I think for this year, the number for freight cars is probably around 30,000. As you look into next year, there is an expectation for that to drop down to potentially mid-20s. I guess the question here is, there’s potentially some stimulus incentive that could improve those numbers, but right now we’d be thinking about numbers around 25,000 to 30,000, depending on how that plays out. When I think about locomotives, I think you’ve got to break out the elements of North American and international. I think international, we continue to see a robust pipeline and good opportunities here for us. I think North America, as I had mentioned, there’s a lag here so keep in mind the longer cycle nature of these orders in order to be fulfilled. Those are maybe--I think--hopefully that answers part of your question. I think mining, which is another element here, I think we see mining resilience at this point. Oh, and on electrification, which you asked about it. We see the opportunity here to enter into some areas of electrification with differentiation, which would mean driving value for both our customers and for ourselves. I’ll talk to you more about it in the first quarter of next year, but that’s an exciting area that will also help us, I think, accelerate growth in the business. I think there’s an element of pent-up demand that I talked to you about. There’s an element of, for me, accelerating technology into our fleets, which will ultimately accelerate the investments, so you have more reliable and more efficient fleets, and there’s an element here of stepping into new areas, so we’re really working hard to build on the right set of dynamics to drive growth. On mods, we do see positive trends going to next year.

Okay, helpful. Then just lastly, one of the opportunities with the GE deal was, I think, improving the content per loco on the legacy Wabtec side. Can you just give us an update on where we stand on that front? Are we seeing that yet? Is that still to come? Any thoughts there, thank you.

I think we’ve seen a little bit, but it’s--I mean, in the scheme of things, I could call it immaterial. I think what’s been important is we see an element of--the opportunity is real. It takes sometimes a little bit longer just in terms of customers wanting to test it before they fully adopt it, but we’re doing that across the board. I think broader than that, we’ve seen the fact that we’re so penetrated in so many different regions, we see now teams [indiscernible] of different products that before we couldn’t even think about selling. We’re selling our heat exchanger business here in the U.S. - we’ve never been able to reach the kind of businesses we’re getting on in Russia. We just signed about a $5 million deal - while it’s small, it just give you the sense of how we can really take these products into a broader sense. We’re educating our teams through it. I think there is a sense of really having a broader product portfolio that we can win share out there, and the fact that we’re improving now profitability in transit, it also allows us to be a lot more aggressive on going after market share in some areas and drive profitable growth, so just stronger team together.

Okay, thank you guys.

Thank you. Your next question comes from Matt Elkott from Cowen. Please go ahead.

Good morning, thank you. Rafael, I think you highlighted some pockets of revenue growth opportunities for next year, but did you say if you guys expect to grow revenue, total revenue next year?

A couple things. We’re not giving guidance into next year. I think what I provided was just a perspective on how do I see the recovery taking place. I think there’s an element of our business which is tied to services with shorter cycles, and we’re seeing the recovery there, so with shorter cycle you’re able to deliver most of the time in what I call less than six months. There’s an element of equipment which is longer cycle, and I’d say a lot of cases you’re looking at deliveries above 12 months, and I think the signs we’re seeing of order recovery, we started to see that, as I described to you with the pipeline, that started first internationally, and we do expect some of those conversions to already start here in the fourth quarter, but North America has been lagging behind.

Got it, that’s helpful. Then maybe switching over to the transit side, that New York City Transit hybrid locomotive order is very encouraging, but can you help us understand how this is happening at a time when, if this was actually the MTA, I think they’re expecting a deficit of $16 billion through 2024 if there is not federal emergency funding. Is this order basically contingent upon a blue wave scenario next week?

A couple things - number one, we’re not going to comment on any specific customers and customer orders or transactions, but I would say transit authorities around the globe, they are really seeing operating budget constraints. We haven’t seen, as I told you before, project cancellations at this point. I think there is significant opportunity for those transit authorities to also drive what I’ll call a shift to green, and we’re seeing significant investments on that and that helps a lot of these elements. That’s maybe where I’ll finish.

Got it, and you did mention that you’re having more of these conversations with different customers around the world, about the transit hybrid locomotive?

I think there’s huge interest on it. There’s clearly an opportunity to already apply some of these in some specific routes, so we’ve got--well, we’re going to start a pilot here very soon in California, and we’ve started some of the elements of what I’ll call the next phase, and I think there’s some real interest. If you think about the elements of fuel efficiency that could be gained from this significantly, and due to all the dynamics you see in the automotive industry, we’re seeing really significant progress in terms of just the power density on those batteries, life continues to improve, and cost continues to come down, and that’s really accelerating some of the opportunity here that we see.

Okay, and then you mentioned California, which kind of reminded me of something that’s probably much, much longer term, and it’s probably contingent on energy, more aggressive energy policies. But I think California a few years ago were talking about tier 5 locomotive - this is on the freight side. Do you think if we have a more aggressive push to implement green policies in the U.S., do you think we could start talking about the next generation of locomotives sometime in the next five years?

Well, a couple comments there. Number one, let’s just talk about from tier 4 and how much has been adopted and how much has become a significant part of the install base. I think if I look at it, I think it’s still under--it’s maybe 1,200 units of tier 4 installed, and if you consider the install base, it’s minimal at this point. So before we jump into the next wave, I think it’s important to look at what is available out there and make sure that, I think, ultimately you’re taking advantage of the products that have been developed. Now when it comes down to tier 5, I think battery electric, as I described to you, can really potentially drive even more benefits than simply thinking about whatever tier 5 would mean, so we’re talking here 15% to 30%-plus reduction on fuel on routes, and that’s massive. That’s probably not been obtained through any of the other programs that have been done in the past, so that’s why we look at battery electric as really a leap forward.

Great, thank you very much.

Thank you. Your next question is from Saree Boroditsky from Jefferies. Please go ahead. Saree, your line is now live. Please go ahead.

Hi, sorry. I was on mute. Could you just talk about the margin profile on international locomotives, and as you target international locomotive growth, would you expect to see any margin headwinds? Then for my follow-up question, could you just provide the impact on the contract adjustment on freight margins in the quarter, and how should we think about that impact going into 2021 as the Egypt contract rolls off? Thank you.

Okay Saree, so in the quarter, the impact of that below market intangible is $12.5 million, so lower than previous quarters, and we expect for the full year that, as we’ve talked, that it’s about flat year over year. Then from a profile standpoint, we definitely see that coming down. The specific accounting that you’re referring to is--those locomotive units will have been falling off and we’ll see the number decline into next year.

But let me be very specific - as we go into next year, we’re going to see that number to be less than 50 and it’s going to be limited to the India contract, so I just want to remove any sense that there is a lack of profitability associated with international contracts.

Thank you, and could you provide any color on what is the margin profile on international locomotives, and maybe how the India contract differs from the contracts that you’re looking to gain going forward?

Yes Saree, so the margin on international projects for locomotives is good. It’s obviously higher. This specific accounting item that you’re asking was just really related to two new markets, new markets where costs were incurred as part of localization of initial engineering that’s non-recurring, and very typical with brand new, new product development and business development opportunities. But on a go forward basis, we have pockets of international projects where the profitability level is really good. It can be higher than average, it can be--it’s not really appropriate to look at it as international projects are less profitable in locomotives than the average. It really comes down to how long we’ve been established and have been operating in those locations.

Let me give you more color here. When you look at countries that we’ve had an established presence, that’s been mature with a product that’s also been mature, good profitability, and I can speak of places like Brazil, I can speak of places like Kazakhstan, I can speak of places like Australia, of course the U.S. market now, and as you go into new markets, as Pat described, which was the case of India, investing on a brand-new platform, so you’re designing a product for the first time, you’re investing in infrastructure, and that’s where you’ll see those be on the lower end side. Even in Africa, we went through that in the beginning, and today it’s a mature market. We have established a mature presence there, so that’s maybe the way to think about it.

And these decisions to enter into these markets, really it’s because they’re a strategic opportunity, so you get yourself established, you have a long lived contract with opportunity for lean activities and variable cost productivity improvements, and so when you get in and the initial cost is behind you, you end up with add-on orders and additional units that really enjoy a good margin.

And ultimately an install base that’s going to be there for the next 30 years, that you’re going to be serving on the aftermarket side.

I appreciate the color, guys. Thank you for clearing that up.

Thank you.

Thank you. The next question is from [indiscernible] from Bank of America. Please go ahead.

Hi, good morning. You’ve touched on the demand side quite a bit, but I just wanted to see if we could dig in to that a little bit more. You mentioned strength in Latin America, Kazakhstan, some other regions. Maybe you could give us an indication of is that enough to support the backlog, growth in the backlog, or should we expect this kind of secular decline in the backlog until we see a pick-up in demand from North America? Maybe if you could just give us a little more color on the magnitude of the demand that you’re seeing and where there are pockets of strength.

I’ll just take your question being very focused on the locomotive side. We are like at trough levels here on the locomotive side, and by the time you get pretty close to zero, I tend to think things go up, so the question for me here is more on the pacing, so it’s more on the pace of recovery. That’s where I started with the elements of the international. I think we see a robust pipeline versus what we saw six months ago, and we’re starting to see some good indications of potentially converting that. North America is lagging behind.

Okay, that’s helpful. Makes sense. Can’t go below zero, that’s for sure.

Exactly.

On the transit side, maybe if you would give a little more color. You had mentioned that municipal budgets and transit authorities are seeing some pressure. Maybe if you could give some color on how that’s changing the nature of the discussions with those organizations. Are they looking for more price concessions or that sort of thing? How do you see contracts evolving in that space, given that budget pressure that they’re facing?

We had a meeting just two days ago with one of those authorities in Europe, and what I’ll tell you right now is they are maintaining their budgets at this point, but of course there is a lot of volatility as he would have described it in terms of what happens here on this wave 2. But they are committed to keep the fleets running at this point and they did not at this point pin down to any project cancellations, so just trying to give you a perspective of one customer. Of course, we’re working with various customers, very closely, so I think it’s something to continue to watch. I think the commitment to have trains running and operating, I think it’s there. Could we have a risk that if this thing delays further, that at a certain point there’s delay in projects, I guess that could be a possibility. I wouldn’t be speculating at this time, so right now I think the trends, and even as you’re looking to some of the industry reports, those point out to [indiscernible]. I think we’ve got some good indications there at this point.

That’s great color. Thanks for the time.

Thank you. That does conclude our question and answer session. I would like to turn the conference back over to Ms. Kubacki for any closing remarks.

Thank you Rachel. Thank you everyone for participating today. We look forward to catching up with you next quarter. Thank you.

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