WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Business Performance: Delivered a solid quarter with sales of $2.7 billion, up nearly 4.5% vs prior year. Adjusted EPS up nearly 18% driven by sales growth and margin expansion. Total cash flow from operations was $542 million. 12-month backlog was $7.6 billion, up 7.5%, and total multiyear backlog was $22 billion.
• Market Outlook: Freight business had mixed key metrics but underlying momentum, international markets strong with robust infrastructure investment, mining activity supported by commodity prices and aging fleet. Transit sector had increasing ridership, fleet expansion/renewals, and push on decarbonization/sustainable solutions.
• Business Highlights: Announced strategic MOU with KTZ for over $2 billion, finalized $405 million multiyear new locomotive order with KTZ; secured long-term parts agreement with Class 1 railroad for over $300 million; signed $70 million contract with Siemens Mobility for passenger info systems; expanded service contract with Indian Railways for another $30 million.
• Financials: Third quarter sales $2.66 billion, up 4.4% vs prior year. GAAP operating income $433 million. Adjusted operating margin 19.7%, up 1.8 percentage points. GAAP earnings per diluted share $1.63, up 22.6% vs year ago. Adjusted earnings per diluted share $2, up 17.6% vs prior year

Segment Performance

• Freight Segment: Sales were up 2.6% during the quarter. GAAP operating income was $390 million with an operating margin of 20.2%, up 2.9 percentage points versus the prior year. Adjusted operating income was $467 million, up 17.6% versus the prior year, with an adjusted operating margin of 24.1%, up 2.9 percentage points. The 12-month backlog was $5.59 billion, up 6.4% from the same period a year ago, and the multiyear backlog was $17.76 billion, up 1.1% from the prior year.
• Transit Segment: Sales were up 9.6% at $733 million. When adjusting for foreign currency, Transit sales were up 8.4%. GAAP operating income was $79 million, with restructuring costs related to Integration 2.0 being $8 million in Q3. Adjusted segment operating income was $93 million, with an adjusted operating income as a percent of revenue of 12.8%, up 0.3 percentage points. The 12-month backlog for the quarter was $2.04 billion, up 10.8% versus a year ago

Guidance

• Adjusted EPS expected to be in the range of $7.45 to $7.65, at the midpoint up 27.5% from prior expectations. Revenue and cash flow conversion guidance remain unchanged. Expect to drive mid single-digit organic growth while delivering double-digit EPS growth through the planning horizon

Risks

• No specific detailed risks extensively discussed in the transcript, but generally, operational risks related to production timing, market mix fluctuations, and external factors impacting business performance could be potential areas

Question and Answer

• Q: Angel Castillo with Morgan Stanley asked about preliminary thoughts on 2025 based on backlog, price, volume, margins; and color on Integration 2.0 run-rate vs target A: Rafael Santana said it's early to provide 2025 guidance, fundamentals strong, finishing 2024 with all businesses growing, orders up double-digit, and expects mid-single-digit organic growth and double-digit EPS growth. On Integration 2.0, on track and exceeding expectations, with over-delivery in Q3 and expecting compounding into Q4
• Q: Saree Boroditsky with Jefferies asked about freight margins upside surprise, mix contribution, sustainability at Freight margins, and Transit backlog margins A: John Olin said freight margin upside was from mix (overhauls, mining aftermarket) and cost (productivity, Integration 2.0). Transit backlog has profitable growth, with backlog profitability up and teams driving margin improvement
• Q: Ken Hoexter with Bank of America asked about international vs North American gross margins and service revenue down double-digit A: John Olin said international margins vary by country and contract, pleased with international growth. Service revenue down double-digit in Q4 is due to reversal of production timing between mods and new locos, as mods fall in service group and new locos in equipment group
• Q: Daniel Imbro with Stephens Inc. asked about acceleration of international markets, asset balance sheet, and M&A targets A: Rafael Santana said international markets have strong growth driven by customer experience with fleets, innovation, and digital opportunities. On balance sheet, cash conversion drove buybacks, and M&A is opportunistic focusing on recurring revenue streams, bolt-ons, digital service related
• Q: Bascome Majors with Susquehanna asked about North American locomotive replacement cycle A: Rafael Santana said North America has mixed demand, customers invest for improved costs, reliability, efficiency, and innovation is key for return on investment
• Q: Jerry Revich with Goldman Sachs asked about receivables and margin expansion plans A: John Olin said receivables on year-to-date basis up, but adjusting for securitization, they match revenue growth. Rafael Santana said significant momentum for margin expansion with teams driving business simplification and continuous improvement
• Q: Robert Wertheimer with Melius Research asked about backlog and pipeline A: John Olin said $405 million KTZ order is in backlog. Rafael Santana said finishing 2024 with all businesses growing, orders up double-digit, pipeline strong, especially in international markets
• Q: Steve Barger with KeyBanc Capital Markets asked about M&A strategy, digital business A: John Olin said focus on digital, near-in adjacencies, bolt-ons. Rafael Santana said focus on maximizing returns, opportunistic with recurring revenue streams, digital service related, and seeing momentum in international digital business