WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORP Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Past Year Performance: Wabtec delivered a strong year with top line growth of 7%, operating margin expansion of 190 basis points, cash conversion of 117%, and adjusted EPS growth of 28%.
• 2025 Outlook: The company expects mid-single digit revenue growth and margin expansion in 2025, aiming for the fifth consecutive year of double-digit EPS growth. A new five-year long-term guidance was announced, focusing on mid-single digit organic revenue growth, over 350 basis points of margin expansion, and double-digit EPS growth through 2029.
• Fourth Quarter Highlights: Fourth quarter sales were $2.58 billion (up 2.3% versus the prior year). Adjusted EPS was $1.68, up 9.1% versus the prior year. The company converted over $1 billion of pipeline in new locomotive and modernization orders. Strong international orders included $649 million in new locomotives and over $1 billion for the Simandou project in Africa. Digital Intelligence signed significant orders, and Transit won signaling contracts over $100 million.
• Integration 2.0 and Portfolio Optimization: Restructuring expenses for Integration 2.0 were $146 million, achieving $87 million in run rate savings by the end of 2024, with an expected $97 million by 2025. The portfolio optimization initiative exited non-strategic product lines, incurring $56 million in expenses versus the expected $85 million.

Segment Performance

• Freight Segment: Fourth quarter sales were largely flat. GAAP segment operating income was $273 million, with an operating margin of 15.2% (up 1.6 percentage points from the prior year). Adjusted operating income for the Freight segment was $348 million, up 0.9% versus the prior year, and adjusted operating margin was 19.4% (up 0.1 percentage points). The twelve-month backlog was $5.58 billion, up 5.4% on a constant currency basis, while the multi-year backlog of $18 billion was up 3.2%.
• Transit Segment: Sales were up 7.1% at $789 million. When adjusting for foreign currency, transit sales were up 7.5%. GAAP operating income was $103 million. Adjusted segment operating income was $130 million, with an adjusted operating income as a percent of revenue of 16.4% (up 1.5 percentage points). The twelve-month backlog for the Transit segment was $2.1 billion, up 5.6% on a constant currency basis, while the multi-year backlog was up 5%.
• Services Sales: Down 15.9% in the fourth quarter, but up 3.6% for the full year.
• Equipment Sales: Up 41.8% in the fourth quarter compared to the prior year's fourth quarter, and up 17.5% for the full year.
• Component Sales: Up 4.8% versus the prior year due to higher international Freight Car sales and Industrial Products growth, partially offset by lower North American Railcar build.
• Digital Intelligence Sales: Down 1.4% from the prior year due to North America softness, but offset by international sales of PTC, next generation onboard products, and digital mining products.

Guidance

• 2025 Outlook: Wabtec expects 2025 sales to be between $10.7 billion and $11 billion (up 5% midpoint from 2024) and adjusted EPS to be between $8.35 and $8.75 (up 13% midpoint). Cash flow conversion is expected to be greater than 90%.
• Five-Year Plan: The company aims for mid-single digit organic revenue growth, over 350 basis points of margin expansion, and double-digit EPS growth through 2029. Integration 3.0 is expected to deliver between $100 million and $125 million of additional run rate savings by 2028.

Risks

• Geopolitical and Economic Disruptions: Geopolitical issues, hyperinflation, and other significant disruptions could impact the business.
• Tariffs on Raw Materials: Tariffs on imported raw materials could affect the cost of goods sold (COGS) and gross profit.
• Order Cadence Variability: Variability in order cadence and mix of products could lead to quarterly results variability.

Question and Answer

• Q: Strategic question on long-term framework and pricing power A: Rafael and John discussed margin expansion, cost management through Integration 3.0 and portfolio optimization, innovation driving pricing for value, and the strong backlog providing visibility for profitable growth.
• Q: North America locomotive demand A: Rafael and John noted high single-digit growth in mods and new locomotives, with investment in technology like the EVO platform driving fuel efficiency improvements.
• Q: Digital Intelligence demand A: Rafael mentioned stronger international demand for Digital Intelligence products, offsetting North America softness, with growth in PTC, next-gen onboard, and digital mining products.
• Q: Margin performance in transit A: John and Rafael discussed Q4 margin strength in transit due to favorable mix and Integration 2.0 savings, with future cadence expected to benefit from continued simplification and focus.
• Q: Long-term guidance and margin improvement A: John explained that margin improvement is front-loaded, driven by continuous improvement processes and operationalization of cost-saving initiatives.
• Q: Impact of tariffs on raw materials A: John mentioned that the company has successfully navigated tariff challenges in the past and is committed to managing such impacts through collaboration and positive outcomes.
• Q: Stock reaction to guidance A: Rafael addressed that M&A is not included in the current guidance, and portfolio optimization is driving top-line impact, with the company committed to delivering on the provided guidance.