Q3 2024 Earnings Summary
- Strong International Growth and Backlog: Wabtec is experiencing continued international growth with projects in key markets like Africa, Kazakhstan, South America, and Australia, with discussions for locomotive deliveries extending into 2028, indicating sustained demand and a robust pipeline.
- Expansion of Digital Offerings and Recurring Revenue: The company is expanding its digital portfolio internationally, moving from one-time sales to more recurring revenues in products like PTC, Trip Optimizer, and kinetics solutions, driving efficiency and productivity gains.
- Strategic Focus on High Recurring Revenue Streams and M&A: Wabtec is focusing on maximizing returns through opportunistic M&A in digital areas and near-in adjacencies like mining, preferring high recurring revenue streams and digital services, supported by a strong pipeline of opportunities.
- Softness in the North American market may impact growth prospects, as Wabtec continues to see a softer market domestically, relying more on international momentum to drive growth.
- Expected double-digit decline in Q4 services revenue due to the timing reversal of modernizations and overhauls, which could negatively affect overall financial performance.
- Potential plateauing of the North American locomotive replacement cycle, with some customers stretching out or reducing locomotive capital expenditures, indicating that future growth may be more dependent on international markets, which could carry additional risks.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Adjusted EPS | FY 2024 | $7.20 to $7.50 | $7.45 to $7.65 | raised |
Revenue Growth | FY 2024 | mid single-digit | mid single-digit | no change |
EPS Growth | FY 2024 | double-digit | double-digit | no change |
Cash Flow Conversion | FY 2024 |
|
| no change |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Strong backlog and pipeline | Q2: 12-month backlog at $7.3B, total $22B. Q1: 12-month backlog $7.7B, total $22B. Q4: 12-month backlog $7.5B, total $22B. | 12-month backlog at $7.6B (+7.5% YoY), total multi-year $22B, emphasizing a robust international pipeline. | Consistently strong across periods, with international momentum sustaining growth. |
Freight segment margins | Q2: GAAP 20.4%, adjusted 24.1%. Q1: GAAP 20.2%, adjusted 24.1%. Q4: GAAP 13.7%, adjusted 19.3%. | GAAP operating margin 20.2%, adjusted 24.1%, up 2.9pts YoY, supported by favorable mix and cost savings. | Steady improvement YoY, benefiting from integration savings and better mix. |
Service revenue decline in Q4 | Not highlighted in Q2 , Q1, or Q4 calls. | Expects a double-digit decline in Service in Q4 due to shift in production timing. | New mention in Q3 reflecting a planned timing issue rather than demand weakness. |
Softer North American market | Q2: Softness from lower discretionary OpEx, offset by international demand. Q1: Mixed NA performance. Q4: Muted carloads, slight drop in active fleet. | North America remains soft, especially in the digital business, while international grows. | Ongoing softness in NA, but no major shift in sentiment; international offsets. |
Digital solutions and intelligence | Q2: Up 2.1% YoY, offset by NA softness. Q1: Down 5.9%. Q4: Down 6.7% in NA, new railcar telematics initiative launched. | Sales up 12.7% YoY, driven by international expansions and shift to recurring revenues. | Improving YoY growth in Q3, shifting from prior declines, international focus grows. |
Decarbonization and emissions regs | Q2: Ongoing investments in hydrogen, biofuels, Tier 4 locomotives, uncertain customer response. Q1: Emphasis on battery-electric pilots, hydrogen blending. Q4: More battery-electric pilots, hydrogen testing. | EPA classification of liquid hydrogen as near-zero validates fuel-agnostic strategy. | Consistently emphasized; growing focus on alternative fuels and supporting regulations. |
Locomotive and modernization | Q2: Large Tier 4 locomotive orders, modernization in Pakistan. Q1: Higher deliveries vs. prior year. Q4: Timing shift between Q3–Q4 but overall up. | Q3 locomotive deliveries down, but Q4 will see double-digit Equipment growth as deliveries shift. | Consistently robust; Q3–Q4 shifts reflect planned scheduling. |
Transit segment backlog changes | Q2: 12-month backlog $1.83B (down 5%). Q1: 12-month backlog $2.04B (up 3.3%). Q4: $2.01B (+8% YoY). | 12-month backlog reached $2.04B, up 10.8% YoY. | Returns to YoY growth after previous dip; selective ordering still a factor. |
EVO product launch | Q2: Targeting end of 2024 launch, ~5% fuel efficiency gains. Q1 & Q4: No updates. | No new mention in Q3. | No Q3 update; was previously slated for commercialization by year-end 2024. |
M&A and share buybacks capacity | Q2: Actively pursuing M&A, prioritizing higher ROIC, also repurchases. Q1: Expects FCF for M&A first, then buybacks. Q4: New $1B buyback authorization, $308M in acquisitions. | Robust M&A pipeline, spent $599M on buybacks in Q3, year-to-date $1.1B. | Consistent priority on M&A; buybacks used when no suitable targets found. |
Railcar telematics market entry | Q4: Launched telematics platform for 1.6M freight cars, a multibillion-dollar opportunity. Q1 & Q2: Not mentioned. | Not mentioned in Q3. | New topic in Q4, no updates in Q3. |
International locomotive orders | Q2: Orders for Pakistan, Brazil, Africa. Q1: Major deals in Africa ($270M) plus service orders. Q4: Strong pipeline in Latin America, Australia, Africa, Kazakhstan. | $405M deal in Kazakhstan (part of $2B MOU), strongest pipeline in five years. | Consistently robust growth, driven by infrastructure investments and modernization. |
EPS and margin growth outlook | Q2: EPS $7.20–$7.50, margin expansion slows in back half. Q1: EPS $7.00–$7.40, strong Q1 margins. Q4: EPS midpoint $6.70, ~13% growth. | Raised EPS to $7.45–$7.65; margins up YoY but Q4 will see a mix headwind. | Consistent double-digit EPS growth guidance; margin expansion remains positive. |
Slower second half growth impact | Q2: Moderated 2H due to mix changes, lower absorption. Q1: Slower 2H growth vs. strong 1H. Q4: 1H 2024 > 2H 2024. | Q4 growth more modest vs. Q3, with services down, equipment up. | Ongoing caution about back-half growth; production/ mix driving the fluctuation. |
Regulatory uncertainty in the U.S. | Q2: Uncertain leadership at EPA, no major shift in customer behavior yet. Q1: Proposed CARB regs fluid. Q4: CARB petition for in-use locomotives still pending, no guidance impact. | EPA naming liquid hydrogen zero-emissions validates Wabtec’s fuel-agnostic approach. | Remains fluid, but Wabtec sees policy developments reinforcing their alt-fuel strategy. |
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2025 Growth Outlook
Q: What's your preliminary guidance for 2025?
A: It's early to provide guidance, but our fundamentals are strong. We're finishing 2024 with all businesses growing. Year-to-date orders are up double digits, and profitability is up across the board. We expect to continue driving mid-single-digit organic growth and delivering double-digit EPS growth through our planning horizon. -
Freight Margins Sustainability
Q: How sustainable are current Freight margins?
A: Freight margins were strong at 24%, up 1.8 percentage points, driven by favorable mix and cost improvements. We benefited from higher-margin services and overhauls. While we expect mix pressure in Q4 due to a shift in production, overall margins should remain higher year-over-year but slightly down sequentially. Productivity and cost actions are supporting margins. -
Integration 2.0 Savings
Q: What's the progress on Integration 2.0 savings?
A: We're ahead of expectations on Integration 2.0 savings. After $22 million in savings last year, we're targeting a midpoint of $82.5 million, leaving a ramp of $60 million over 2024 and 2025. We're getting more savings earlier, contributing to raising our guidance. Most of the spending is behind us, with $140 million spent to date, at the low end of our range. -
International Orders and Margins
Q: How are international orders impacting margins?
A: International growth is strong, positively impacting revenue and margins. Margins vary by country and contract; some international business has higher margins than North America, some lower. We're seeing growth in markets like Africa, Kazakhstan, South America, and Australia, with deliveries over 2025 and 2026. We're pleased with the profitability from international markets. -
Capital Allocation and M&A
Q: What's your approach to M&A and capital allocation?
A: Our capital allocation strategy focuses on profitable organic growth and M&A. We have the strongest M&A pipeline we've had, targeting opportunities with high recurring revenue, bolt-ons, digital, and service-related businesses. If returns are strong, we'll act quickly; if not, we'll continue returning value to shareholders through share repurchases, as we did with $600 million repurchased this quarter. -
Transit Backlog and Margins
Q: What's the outlook for Transit backlog and margins?
A: We're pleased with progress in Transit. Backlog grew despite focusing on higher-margin projects. We're driving simplification and improving margins, now in the mid-teens and expected to continue expanding. While quarterly variations may occur due to mix and project timing, we expect profit growth and sustained margin improvement. The profitability of the backlog has increased. -
Locomotive CapEx Reductions
Q: Are North American customers reducing locomotive CapEx?
A: We're seeing mixed dynamics in North America, with continued demand for new locomotives and modernizations. While some customers may adjust CapEx plans, railroads are investing in reliability, efficiency, and cost improvements, not necessarily for carload growth. We're positive about innovation opportunities to help customers improve operating ratios and service levels. -
Working Capital Management
Q: What's driving improvements in receivables and cash flow?
A: Cash flow is strong, with $1.1 billion year-to-date, up over 100% versus last year. Receivables are up 6.5%, while revenue is up 9.1%, reflecting good working capital management. We utilized $95 million in securitizations this quarter, benefiting cash flow. We're effectively managing receivables to match company growth. -
Regulatory Outlook (EPA Regulations)
Q: How are EPA regulations impacting your strategy?
A: EPA definitions validate our strategy of making engines fuel-agnostic, capable of running on alternative fuels like hydrogen and biofuels. Liquid hydrogen internal combustion engines are classified as near-zero or zero emissions. This supports our commitment to providing best-in-class products to help customers achieve decarbonization goals across regions. -
Digital Business Performance
Q: What's the outlook for the Digital business internationally?
A: We're seeing growth in our Digital business, especially internationally, with products like PTC and KinetiX gaining momentum. We're transforming the business toward more recurring revenues rather than one-time sales. While North America remains softer, international markets are adopting our digital solutions faster, driven by regulations and efficiency needs.