Earnings Call Transcript - WAB Q2 2024

Operator, Operator

Good morning, everyone, and welcome to the Wabtec Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded. At this time, I'd like to turn the floor over to Kyra Yates, Vice President of Investor Relations. Ma'am, please go ahead.

Kyra Yates, Vice President of Investor Relations

Thank you, operator. Good morning, everyone, and welcome to Wabtec's second quarter 2024 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.

Rafael Santana, CEO

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 another strong quarter, evidenced by robust sales and earnings per share growth. Sales were $2.6 billion, which was up nearly 10% versus prior year. Revenue growth was driven by strong performance from the Freight segment. And adjusted EPS was up 39% from the year-ago quarter, driven by increased sales and margin expansion. Total cash flow from operations for the quarter was $235 million. The 12-month backlog was $7.3 billion, and the multi-year backlog was $22 billion. Overall, the Wabtec team delivered a strong second quarter. With the first half behind us, we are focused on executing against our second-half deliverables. Looking forward, I'm encouraged by the underlying strength and momentum across the business. Shifting our focus to Slide 5, let's talk about 2024 and market expectations in more detail. While key metrics across our Freight business remain mixed, we are encouraged by the strength of our business, the strength of our international markets, and our robust pipeline of opportunities across geographies. North American car loads were up 2.1% in the quarter. Despite this car load growth, the industry's active locomotive fleet was down when compared to last year's second quarter, while Wabtec's active fleet was higher. Looking at the North American railcar builds. Last quarter we discussed the industry outlook for 2024 to be about 36,000 cars to be delivered, which has now been raised by industry sources back to the original forecast of 38,000 cars. This is still down, however, from the 45,000 in the previous year. Internationally, we continue to see that significant investments to expand and upgrade infrastructure are supporting a robust international orders pipeline. In mining, commodity prices and an aging fleet are continuing to support activity to refresh and upgrade the truck fleet. Finally, moving to the Transit sector, the megatrends of urbanization and decarbonization remain in place, driving the need for clean, safe and efficient transportation solutions around the globe. Next, let's turn to Slide 6 to discuss a few business highlights. In North America, we secured a multiyear order for greater than $600 million. This is one of our largest orders for new Tier 4 locomotives ever. It demonstrates customer demand for a best-in-class solution to improve productivity, reduce fuel usage, improve reliability, and to significantly reduce emissions. I would also like to share with you a key international services order, a 10-year agreement in Brazil for which Wabtec will manage the servicing of Vale's locomotives fleet to increase availability, reliability, and safety. In Pakistan, we recently won a strategic order for 15 modernizations for Pakistan Railway. This is a great example of the opportunities that we have to modernize locomotives in our international markets. And finally, our Transit segment announced that our Green Friction braking solution is ready to begin commercial fleet operations in the Greater Paris metropolitan area. This innovative solution will improve air quality in the transit's authority tunnels and underground network by reducing particle emissions from braking by up to 90%. All of this demonstrates the underlying strength across our business, the team's relentless focus on execution and the strong pipeline of opportunities we continue to deliver on. Wabtec is well-positioned to continue to capture profitable growth with innovative and scalable technologies that address our customers' needs. With that, I'll turn the call over to John to review the quarter, segment results and our overall financial performance.

John Olin, CFO

Thanks, Rafael. And hello, everyone. Turning to Slide 7, I will review our second quarter results in more detail. Our second quarter results played out largely as we expected. We expected both revenue and earnings growth to be overshadowed versus our full-year growth expectations, but slightly tempered from our first quarter results. The primary driver of our first half results growing faster than our expected second half results is due to a shift in the combined production of our new locomotives and mods to the first half of this year from the second half, in an effort to more evenly load our manufacturing production across the four quarters. It is also important to note that we expect our second half revenue and margin to grow, but at a more tempered pace than we experienced in the first half. Within the second half, we do expect to grow revenue and earnings year-over-year in each quarter. However, we expect the third quarter's growth to be greater than the fourth quarter's growth. Sales for the second quarter were $2.64 billion, which reflects a 9.8% increase versus the prior year. Sales growth in the quarter was driven by the Freight segment, especially by equipment and components. For the quarter, GAAP operating income was $430 million, driven by higher sales, improved gross margin, and an unrelenting focus on continuous improvement in productivity. Adjusted operating margin in Q2 was 19.3%, up 2.9 percentage points versus the prior year. This increase was driven by improved gross margin of 2.9 percentage points. GAAP earnings per diluted share were $1.64, which was up 54.7% versus the second quarter a year ago. During the quarter, we had net pre-tax charges of $6 million for restructuring, which were primarily related to our Integration 2.0 and our portfolio optimization initiative to further integrate and streamline Wabtec's operations. As you may recall, Integration 2.0 is expected to drive $75 million to $90 million of run-rate savings by 2025. Our portfolio optimization initiative will eliminate roughly $110 million of low-margin non-strategic revenue while reducing manufacturing complexity. In the quarter, adjusted earnings per diluted share was $1.96, up 39.0% versus prior year. Overall, Wabtec delivered another strong quarter, demonstrating the underlying strength of the business.

Rafael Santana, CEO

Thanks, John. Now let's turn to Slide 14 to discuss our 2024 full-year guidance. As you heard today, our team delivered a very strong second quarter, which was slightly ahead of our expectations. Consequently, we are increasing our previous adjusted EPS guidance. We now expect adjusted EPS to be in the range of $7.20 to $7.50 at the midpoint, up 24.2%. Our revenue and cash flow conversion guidance remain unchanged. Looking ahead, I'm confident that Wabtec is well-positioned to drive profitable growth into 2024 and beyond.

Kyra Yates, Vice President of Investor Relations

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, Operator

Our first question today comes from Daniel Imbro from Stephens. Please go ahead with your question.

Daniel Imbro, Analyst

Good morning, everybody. Thanks for taking our questions. Rafael, maybe I'll start on the new locomotive side. I think you mentioned in your remarks that the $600-plus-million order, one of the bigger Tier 4 orders you've had in a while. It's coming over multiple years from the slides. Any color you can provide just on how many years that contract is, when it should start up as we think about modeling it? And then to clarify, was that included in the 2Q backlog or was that assigned July quarter-to-date?

Rafael Santana, CEO

No, that was not included in the previous backlog, so it's in the second Q backlog. The second piece is this is an order that will largely be executed between '25 and '26. And the other piece is I think it just speaks to the strength of our pipeline of opportunities. We continue to see good momentum there internationally and that expands really across different geographies. We continue to see it mixed in North America, but with opportunities here. We have a number of sizable opportunities that are being worked in the current pipeline. The current total backlog is healthy, and overall it's positive. We're progressing, and we're continuing to grow and our pipeline supports it.

Daniel Imbro, Analyst

Great. Really encouraging. And for my follow-up, John, maybe just something on the guide, if we can dig into it a little bit. I think you're expecting, you said, revenue and earnings growth in the back half. I think the previous assumptions had been that margins would moderate through the year, but it looks like sequential revenue is relatively flat. So can you talk about maybe what's changing on the cost side? Are costs increasing to drive that sequential deleverage on the margin piece on the operating margin? Is there some conservatism in that? How are you thinking about the operating margin outlook for the back half of the year after a strong first half?

John Olin, CFO

Thanks, Daniel. And certainly, the last couple of quarters, we've talked about how our halves are going to unfold, and they're certainly unfolding the way we expected. And Daniel, that is with the first half having significantly higher year-over-year growth for both revenue and margin growth. Revenue was up 11.7% and margin up 3.2 percentage points. With that, we've also talked about the back half being up and growing in both those measures, but at a more tempered level. And the reason for that is due to factors affecting the first half growth that will not be predominant in the second half. So let's talk about a couple of those things. One is mix, and we talked about this on the last call. Our first half mix is a good tailwind for us, and we expect that to turn into a slight headwind in the second half. So that's one of the reasons. The other is really around absorption, right? With the growth that we have in the first half, again, being up almost 12%, we are getting much more absorption on a year-over-year basis in the first half versus the second half. So again, that won't be there. There are some common things in there; Integration 2.0 benefits both halves at a similar rate. We've got some one-time benefits both in the first half and the second half. But the main factors are really on mix and absorption in the second half.

Daniel Imbro, Analyst

Great. Appreciate all the color. Best of luck.

Rafael Santana, CEO

Thank you, Daniel.

Operator, Operator

Our next question comes from Angel Castillo from Morgan Stanley. Please go ahead with your question.

Angel Castillo, Analyst

Hi, thanks for taking my question. Just a quick one on the kind of revenue. You've kind of touched on it, but you didn't change that guidance and it sounds like there's some mixed factors, some getting better. You talked about car loads and railcar deliveries, but just if you could unpack that a little bit more and maybe the thinking around keeping that unchanged versus the EPS guide?

Rafael Santana, CEO

Angel, we are tracking right on our revenue plan. We adjusted that in the first quarter, brought it up a bit largely for some of the things that we're seeing in the parking arena. That's right on track. Everything is tracking well. And I would kind of look at what we did in terms of EPS as fine-tuning the quarter. We brought it up $0.15 at the midpoint. Again, revenue is on track, but we did see a little bit of favorability in mix in the first half and the tax rate came in a little bit favorable. About half that $0.15 is in the actuals in the second quarter and a little bit of favorability that we're expecting in the back half, and that is due to the same two reasons. Mix is going to be a little bit more favorable than we expected; however, still a headwind to the half. And then the tax rate is favorable. We've also re-guided on the tax rate, bringing it down from 25% to 24.5%. But we are seven months into this and we feel very good about our overall guidance and how the back half is going to unfold in line with what we've talked about the last couple of quarters.

Angel Castillo, Analyst

That's very helpful. Thank you. And then just given the level of conviction and optimism on how things are unfolding, your first half cash flow has been very robust and you have guided to continued expectation for greater than 90%. And I think second-half typically sees better cash generation. So could you talk about just your thought process? You talked about disciplined balanced capital allocation, but it seems like your cash flow generation should be quite robust and allow for perhaps a little bit more aggressive deployment of capital. So, if you could just kind of touch on that and your expectations for cash flow in the second half.

John Olin, CFO

Well, Angel, thanks for pointing out the very strong first half. Yeah, the first half was up $469 million on a year-over-year basis. What we're seeing there is really a comparison against last year where working capital was still rising due to supply disruptions. We had inventory building related to a potential strike at the time. In the back half of last year, we brought that inventory down significantly. The team did an excellent job managing it back down after the supply disruptions. What we're seeing in the first half is really lapping that higher working capital, so we're seeing significant strength there. Overall, we are expecting to achieve our guidance of over 90% cash conversion and we’re looking to continue to deploy that; we've talked about in the past that we will favor M&A, and with the excess cash, we'll buy back shares.

Angel Castillo, Analyst

Could you maybe expand a little bit on the M&A front in the pipeline and what you're seeing?

Rafael Santana, CEO

Let me take on that. I mean, we're continuing to be really looking at M&A. The pipeline is as robust as it's ever been. We're going to be opportunistic here. What's going to drive decision-making is really making sure that we drive higher ROIC for the business and faster profitable growth. But we're going to be opportunistic here. As we continue to see opportunities to return value to shareholders through share buybacks, we'll do so. We feel we're very well-positioned to drive long-term profitable growth.

Angel Castillo, Analyst

Thank you very much.

Operator, Operator

Our next question comes from Bascome Majors from Susquehanna. Please go ahead with your question.

Bascome Majors, Analyst

Thanks for taking my questions. Just wanted to start internationally. Can you expand some on the 15 mod orders you talked about from Pakistan Railway? What's the scale of that business? Where are you doing those modifications? And is there an opportunity to see either the installed base or breadth of geography that you can cover from those facilities to expand to something more like you see in North America over time? Thank you.

Rafael Santana, CEO

Yes. We see a strong pipeline of opportunity internationally. When we talked about Pakistan, I think one of the things that we've discussed is the opportunity to continue to modernize the fleets that are out there. We often emphasize the age of the fleet, and we have continued to invest in significant innovation that allows customers to significantly reduce fuel by upgrading those engines. They can improve both reliability and availability of those units. When you think about modernizations, we largely have a kit that’s shipped and we ultimately work with the customers on doing some of that internationally. We have several of our locations around the world that are very much equipped to do this, whether it’s in Brazil, Australia, or Kazakhstan. We’ll leverage those as we work through. What’s exciting about the international opportunities is that they are not concentrated in one single location. We're seeing our business being very competitive. If customers are looking for reliable, efficient power, if they're looking for value, we are winning those business orders. We highlighted in the first half of this year a significant order for us in West Africa, which will be executed in '26 and '27. Overall, I think there are good dynamics internationally, and we've seen that business grow between 4% and 5% over the last five years, and we continue to see good dynamics there.

Bascome Majors, Analyst

Thank you for that. And to follow-up domestically, can you talk a little bit about the inquiry levels and discussions with your North American rail customers and specifically, how they're operating within regulatory uncertainty, both with who's going to be in the leadership in Washington and who's going to be in the leadership at the EPA come next year, and if it's just realistic for us to expect to not see extensions of some of the large multiyear orders that you've got in both the mod and new locomotive backlog until after we get into 2025 with a bit more certainty there? Thank you.

Rafael Santana, CEO

We continue to see it mixed in North America. It's very customer-specific. So it really varies depending on different levels of what I'll call fleet redundancy some customers might have or not. I think you see that reflected in the significant order we got in the second quarter. It really comes down to how customers see value and returns from investment in modernizing their fleets. What I'm happy to see is the innovation we're driving in the business. A lot of the growth you saw over the last few years has been tied to the modernizations, largely connected to the 7FDL fleet, and we’re doing the same for the EVO engine. At the end of this year, we're launching the EVO product, which will drive another five-plus percent in fuel efficiency improvements for that fleet. We see similar points on Tier 4. Those elements continue to drive customers to invest to lower their costs, improve their serviceability, and operate fleets more efficiently.

Bascome Majors, Analyst

Thank you.

Operator, Operator

Our next question comes from Saree Boroditsky from Jefferies. Please go ahead with your question.

Unidentified Analyst, Analyst

Good morning. This is James on for Saree. Thanks for taking the questions.

Rafael Santana, CEO

Good morning.

Unidentified Analyst, Analyst

I just wanted to follow-up on the Tier 4 locomotive orders in North America. What was the driver behind the customer ordering new locos versus modernization? I believe Class 1s are generally fine with the number of locos they have, so I just wanted to understand like the conversation that you had with the customer and why they decided to go with the new locos. Thanks.

Rafael Santana, CEO

I think it's very much tied to value. It's how customers see an opportunity here to improve both cost of operations and the improved reliability and availability. Think about the speed in their network and the service levels that they're able to sustain. With this specific fleet of Tier 4s, also the capability of utilizing alternative fuels. That fleet is ready to incorporate biofuels, and potentially a mix with hydrogen and other alternatives. Additionally, I must highlight that obsolescence is significant with older fleets, particularly concerning electronics and the challenges in maintaining those fleets over time. These factors align with customer investments aimed at reducing costs, enhancing serviceability, and improving operational efficiency.

Unidentified Analyst, Analyst

Great. Thanks for the color. And as a follow-up, I want to touch on the digital side. North America has remained weak for a while, while international has continued to show strength. Can you talk about when you expect North America to recover and the drivers behind the weakness here?

Rafael Santana, CEO

Some of what you saw in the quarter is tied to higher demand for onboard locomotive products. We also observed robust demand on digital mining technologies. Those were somewhat offset by lower sales in the North American market. I think in the second quarter, you saw a slight increase in revenues at 2.1%. Nevertheless, moving forward, we are seeing continuing demand from international markets, especially pertaining to PTC and onboard products. However, softer demand remains in the U.S., mainly driven by discretionary operating expenses. Our teams are focused on driving order convertibility with recurring revenues and we feel positive about the growth prospects for '24.

Unidentified Analyst, Analyst

Great. Thank you.

Operator, Operator

Our next question comes from Scott Group from Wolfe Research. Please go ahead with your question.

Scott Group, Analyst

Hey, thanks. Good morning. One more on the guidance. So I totally get the first half, second half comps. I just want to look a little bit more on an absolute basis. So op margins were 19.5% in the first half. If we're looking at the model right and guidance right, it suggests that margins could go below 18% in the second half. I thought the message was more about smoothing mods and deliveries. So why aren't the margins smoother? Ultimately, I'm trying to figure out, is there upside to the implied margin in the back half of the year?

John Olin, CFO

Yes, Scott, it's the same thing we've talked about. It's mix driving margins in the first half and pulling down in the second half. Also, the first-half margin of 19.3% was aided by a fair amount of absorption that won't be present in the back half.

Scott Group, Analyst

That makes sense. And maybe just one follow-up, is price a bigger factor now than it's been in the past? We've seen good Freight margins. Is price-cost a bigger tailwind than historically, and is that a sustainable driver of further margin improvement?

Rafael Santana, CEO

We view price as tied to the differentiation and innovation we bring to the business, ultimately leading to value for our customers. By delivering value, we ensure profitability for ourselves. We anticipate we'll drive value for our customers, which should allow us to maintain profitable growth moving forward.

Scott Group, Analyst

Okay. Thank you, guys. Appreciate it.

John Olin, CFO

Thanks, Scott.

Rafael Santana, CEO

Thank you.

Operator, Operator

Our next question comes from Jerry Revich from Goldman Sachs. Please go ahead with your question.

Jerry Revich, Analyst

Yes, hi. Good morning, everyone. I'm wondering if you could just comment on the conversations that you've had with your customers since the Chevron case and any impact on how they're thinking about potential changes at the EPA and CARB. Can you just talk about what the flows have been since that ruling, if you don't mind?

Rafael Santana, CEO

Based on that ruling, we can expect that federal agencies will receive less deference to their regulations, while still acting within the authority granted by Congress. As courts take a more prominent role, I think there will be implications for regulations pertaining to rail. I see potential outcomes varying, particularly regarding the two-person crew mandate and CARB emissions regulation. However, I can't say we've seen any significant change in customer behavior resulting from these developments.

Jerry Revich, Analyst

Got it. And then, outstanding margin performance, particularly in Freight. I'm wondering if you can just expand on the mix benefits that you alluded to. Seeing such margin performance with service as a percent of total declining year-over-year really stood out, so I'm wondering what parts of that business drove favorable mix? From an efficiency standpoint, are you folks back at pre-COVID levels of labor hours per unit or however you measure it?

John Olin, CFO

With regards to the mix, Jerry, there are really three big drivers. And it's not only the second quarter; it's for the first half as well. A lot of the favorability we see in the first half won't be there or could be a headwind in the second half. One area is our equipment group. While equipment is a little lower than our overall margin average, we've had significant favorability. I’ll take you back to an international order that was low-margin; that led to significant mix favorability. The second is our mining business, which has been strong; however, the production schedule indicates we are doing more OEM work in the second half. Lastly, the components group saw growth in the first half due to higher international sales, which are of higher margin.

Jerry Revich, Analyst

Got it. Thank you, John. And I apologize. The efficiency part of the question, are you folks back at pre-COVID levels of efficiency at this point?

John Olin, CFO

Overall, yes. I wouldn't focus solely on pre-COVID levels; we have moved past the ramifications of supply disruptions and the Erie strike. Our operations are running exceptionally well. The operations team has done a commendable job of driving productivity which is evident in our performance.

Rafael Santana, CEO

Thank you.

Operator, Operator

Our next question comes from Ken Hoexter from Bank of America. Please go ahead with your question.

Ken Hoexter, Analyst

Hey, great. Good morning. Rafael, John, I guess just a quick one to clarify that North American order. Did you mention that was a Class 1 railroad? Just to clarify that. Looking at the margin expectation slide, you've got North American locomotive still down, railcar deliveries below historical average, but Wabtec's share is going up. What are your thoughts on the sustainability of that share gain? I know there were lawsuits a while back that targeted that. Can you just provide an update on those status and implications?

Rafael Santana, CEO

The only information I can confirm about that order is that it was indeed a North American order. John?

John Olin, CFO

Regarding the market share and railcar, a lot of the share gain we achieved last year was attributed to the supply disruptions that were present. We took a significant inventory position as a result, and that paid off well. We did see a portion of that share gain stick, which we attribute to the value of our products and our service support. We're seeing that benefit again this year.

Rafael Santana, CEO

On your question regarding the Chevron precedent, we are having meaningful conversations with customers about their future fleet needs. However, we haven't observed any notable changes in our discussions as a result of the CARB regulatory process or the two-person crew mandate.

Ken Hoexter, Analyst

Thank you.

Operator, Operator

Our final question comes from Rob Wertheimer from Melius Research. Please go ahead with your questions.

Rob Wertheimer, Analyst

Thanks, and good morning, everybody. My question pertains to the front half and back half. John, you mentioned a couple of differences in the mix between the front and back half, which were helpful. Are you executing fewer mods in the back half than the front half? Is there any room for fill-in in revenue still in Q4?

John Olin, CFO

With regard to mods, I'm broadening the view to the combined production of locos and mods. In the first half, that was up significantly. In the back half, it is flat to down slightly. So, that shift will be driving revenue and absorption factors. However, more for the back half, we expect both mods and locos combined to remain flat or slightly negative. And yes, we expect the back half overall to exhibit revenue growth but in moderation compared to the first half. Within those quarters in the second half, we would anticipate the third quarter to be slightly stronger compared to the fourth quarter.

Rob Wertheimer, Analyst

Okay, perfect. Sorry to be pedantic there. Thank you. Lastly, your Transit team is getting lonely! They're having great margin progress, a couple of good quarters there as well. Can you provide your commentary on the end markets, particularly around price versus inflation, and just your outlook on margin direction in Transit?

Rafael Santana, CEO

The dynamics remain sound in that segment. We anticipate growth around 3% to 5%. Our teams will maintain strong discipline in terms of order intake, which should positively reflect on improved margins in the backlog, something we see today. Overall, I'm optimistic; while it won't be a smooth ride, we should see good progress supported by our fundamentals.

John Olin, CFO

Commenting on the 12-month backlog, it has been down this quarter and somewhat in the first quarter as well, primarily related to our focus on selective orders to improve long-term profitability in the Transit business. We expect this selectiveness to yield a higher level of profitability moving forward. But the underlying fundamental strength in Transit remains.

Rob Wertheimer, Analyst

Thank you.

Operator, Operator

And our next question comes from Steve Barger from KeyBanc Capital Markets. Please go ahead with your question.

Steve Barger, Analyst

Thanks. Good morning.

Rafael Santana, CEO

Good morning.

Steve Barger, Analyst

Going back to digital, can you talk about how you define addressable market size in North America versus international and what the penetration rate is for each? I’m trying to gauge the relative forward opportunities for those products.

Rafael Santana, CEO

We are, of course, much more highly penetrated in North America. If you consider the bulk of our products, while internationally we still have significant opportunities. Some products like Trip Optimizer have a long way to go in markets like Kazakhstan. There’s ongoing demand for PTC, which will be similar in international scenarios. It is interesting that, with innovations like Zero-to-Zero, we can move faster into international markets due to different regulatory dynamics.

Steve Barger, Analyst

So it’s listed, for rounding, an $800 million business. Is that a multibillion dollar opportunity internationally or how do you think about market size?

Rafael Santana, CEO

It is indeed a multibillion dollar opportunity; the size is significant. What’s crucial to consider is while the opportunity is large, timing for securing those orders can vary.

John Olin, CFO

In the last few years, Transit margins in the fourth quarter have seen a sizable step-up versus the previous three quarters. Do you expect that same dynamic this year?

Rafael Santana, CEO

We're anticipating profitable growth in that area. We see strong fundamentals supporting our margin efforts. The team has been proactive in targeting mid-teen margins and we expect that momentum to continue.

Steve Barger, Analyst

Got it. And just, John, if I look at the last three years, what has caused that margin step-up? Is it budget flush at customers or what has led to that historically?

John Olin, CFO

There are a couple of reasons; for instance, increased aftermarket sales in the fourth quarter align with customer fiscal budgets and spending periods. SG&A typically has patterns of spending in the fourth quarter. But the most substantial factor is the favorable product mix.

Steve Barger, Analyst

Okay, thanks.

Rafael Santana, CEO

Thank you.

Kyra Yates, Vice President of Investor Relations

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

Operator, Operator

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