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    WESTINGHOUSE AIR BRAKE TECHNOLOGIES (WAB)

    Q1 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$148.48Last close (Apr 23, 2024)
    Post-Earnings Price$162.25Open (Apr 24, 2024)
    Price Change
    $13.77(+9.27%)
    • Anticipated increased demand for new locomotives due to regulatory changes and alternative fuel capabilities: Management expects that potential regulatory changes will encourage customers to invest in newer technology, particularly locomotives capable of using alternative fuels, which could boost demand for Wabtec's offerings.
    • Continued margin improvement opportunities in the Transit segment: The company is actively working to simplify its footprint and improve operations in the Transit business, offering significant potential to drive profitable growth and expand margins.
    • Progress ahead of plan on cost-saving initiatives: Wabtec is making substantial progress on its Integration 2.0 initiative, already achieving $120 million to $125 million towards the expected $135 million to $165 million cost savings, and is on track to realize $75 million to $90 million in run-rate savings by 2025, enhancing profitability.
    • Wabtec anticipates revenue and margin growth to slow down significantly in the second half of 2024 compared to the first half. They expect a step down in revenue growth and margin growth due to less favorable mix and production shifts.
    • The Transit segment continues to face margin pressures due to high input costs and unfavorable mix, with operational improvements still ongoing. The company expects variations in margins quarter-to-quarter and acknowledges that significant work remains to simplify the footprint and sustain margins.
    • Exiting $110 million of low-margin revenue could negatively impact top-line growth, as the majority of this revenue will be removed in 2024. While this may improve margins, it reduces overall sales growth, and some of the revenue exit will extend into next year as they work through exit strategies for different product lines.
    1. Freight Margin Outlook
      Q: Will freight margins remain high rest of the year?
      A: Management expects freight margins to be up but not to the same extent as in Q1. Factors boosting Q1 margins—like operational execution leading to increased productivity , favorable mix that will turn unfavorable in the back half , and absorption from 17.2% revenue growth in the Freight segment —won't repeat later in the year. Additionally, lapping a one-time investment added about one-third of the margin benefit. Overall, margins are building from prior guidance, but some aspects will bring them down in the back half.

    2. Impact of New Regulations
      Q: How will proposed locomotive regulations affect business?
      A: The outcome of the California Air Resources Board's proposed regulations remains fluid. Wabtec is well-positioned to support customers under all outcomes with best-in-class products offering lowest emissions and fuel consumption. The EPA's recent standards classify liquid hydrogen for internal combustion engines as zero emissions, allowing their installed base to use hydrogen and aiding in transitioning to near-zero emissions with reversible solutions.

    3. Revenue and Margin Growth Expectations
      Q: How do you view margin growth in the second half?
      A: The significant majority of revenue and profit growth will be in the first half due to locomotive and modernization deliveries being up about 30%. In the back half, deliveries will be down slightly, shifting revenue into the first half. While margins will be favorable in the first half, they will be less so in the back half due to mix and absorption factors. Overall, management expects revenue and margin growth for the year, but at a more tempered level in the second half.

    4. Capital Allocation Plans
      Q: Will you increase share buybacks or dividends?
      A: With a strong balance sheet and expected free cash flow, Wabtec will prioritize M&A if they find accretive strategic opportunities. If not, they will return excess cash to shareholders through share repurchases. They feel good about the start of the year with $175 million repurchased and are looking to return all excess cash to shareholders throughout the year.

    5. Alternative Fuels and Decarbonization
      Q: How are alternative fuels impacting demand?
      A: Customers value transitioning to products that significantly reduce carbon emissions. Wabtec's engines are prepared to use renewable diesel and biofuels, and they're progressing on incorporating hydrogen. They're delivering hybrid units and the first heavy haul battery-electric locomotive. The company is well-positioned to support customers' transitions, positively impacting order patterns and expectations.

    6. Long-term Margin Targets
      Q: Are you revising long-term margin expansion targets?
      A: Despite strong margin performance in Q1, management maintains their long-term targets of mid-single-digit revenue growth and double-digit EPS growth. They continue to see opportunities to drive profitable growth through lean initiatives, integration progress, and portfolio optimization.

    7. Cost Savings Update
      Q: What's the progress on cost savings targets?
      A: Wabtec has realized $120–$125 million of the expected $135–$165 million in cost reductions, with $22 million in run-rate savings as of 2023. They are ramping up to $75–$90 million in run-rate savings by 2025, with most projects approved and in execution. Savings are expected to escalate over the next two years.

    8. Transit Segment Growth
      Q: Is operational improvement in transit complete?
      A: There is continued opportunity to drive profitable growth in transit. While pleased with overall progress, significant work continues to simplify the footprint and improve margins. Management is committed to expanding margins and being selective in opportunities. Long-term, they expect sustainable sales growth in the range of 3% to 5%.

    9. Pricing Trends
      Q: How are pricing trends affecting margins?
      A: Pricing was up slightly in the quarter, and costs were slightly favorable, which helped provide a little margin improvement.

    10. Hydrogen Adoption Timeline
      Q: Will hydrogen locomotives be operational in 5 years?
      A: Wabtec expects hydrogen to be tested, and with government support, there could be corridors introducing hydrogen as an alternative fuel into internal combustion engines. Full utilization of hydrogen, such as with fuel cells, is further out and not expected in the near or midterm.

    11. Impact of Regulatory Changes on Backlog
      Q: Will new regulations affect modernization orders?
      A: Customer-specific choices may arise, but management does not expect cancellations. There may be more consideration towards newer technology that can utilize alternative fuels, providing customers with flexibility to transition over time.

    12. Locomotive Market Share
      Q: Why is Wabtec's fleet up when industry is down?
      A: Wabtec's investments have positioned their fleets to offer the most fuel-efficient engines, reliable performance, and digital solutions like Trip Optimizer. This leads to customers increasingly choosing Wabtec locomotives, validating their strategy and product differentiation.

    13. Revenue Discontinuation to Optimize Margins
      Q: What's the status of exiting low-margin revenue?
      A: Wabtec is moving forward with exiting approximately $110 million of low-margin revenue. The majority will be removed this year, with some shifting into next year. This action makes the midpoint of their new guidance effectively higher.

    14. Alternative Fuel Economics
      Q: What are the economics of using alternative fuels?
      A: Uptake varies globally based on availability and subsidies. Wabtec's strategy is to offer engines agnostic to fuel types, providing flexibility to customers. They support customers in transitioning with reversible technology and are developing zero-emission technologies, though widespread adoption and economics are still maturing.

    15. Second Quarter Margin Expectations
      Q: Will freight margin expansion continue in Q2?
      A: Management expects the second quarter to be strong, but not at the same level of revenue or margin growth as Q1. Growth will be present but at a tempered level, with first-half performance being stronger due to production shifts and favorable mix. Back-half growth will be more moderate.

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