Q4 2024 Earnings Summary
- Strong order pipeline with over $1 billion of orders for new locomotives and modernizations in the fourth quarter, indicating continued demand and growth potential.
- Robust international growth, with wins in Africa, Kazakhstan, Brazil, Chile, and Australia, strengthening visibility into 2026 and beyond.
- Introduction of innovative products such as modernizing the Evolution fleet with expected fuel savings of up to 7%, which is significant and can drive future growth.
- The company is projecting mid-single-digit revenue growth for 2025, which is lower than the upper single-digit or even double-digit growth they have been generating. This slowdown could indicate a loss of growth momentum and has raised concerns among investors, as evidenced by the stock being down 8% on the announcement.
- The company is experiencing softness in North American demand for their digital products, which has only been partially offset by international sales. Continued weakness in this market could negatively impact overall growth prospects for the digital segment.
- Potential tariffs from Canada, Mexico, China, and other countries are not included in the company's guidance, and any future tariffs could increase costs and negatively affect gross profit margins, posing a risk to financial performance if implemented.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Adjusted EPS | FY 2025 | $7.45 to $7.65, representing a midpoint increase of 27.5% | $8.35 to $8.75, up 13% at the midpoint | raised |
Revenue Growth | FY 2025 | mid-single-digit organic growth | average annual growth rate of mid-single digits over the next five years | no change |
EPS Growth | FY 2025 | double-digit EPS growth | double-digit EPS growth over the next five years | no change |
Cash Flow Conversion | FY 2025 | greater than 90% cash conversion | greater than 90% | no change |
Sales | FY 2025 | no prior guidance | $10.7 billion to $11 billion, representing a 5% increase at the midpoint | no prior guidance |
Margin Expansion | FY 2025 | no prior guidance | over 350 basis points of margin expansion over the next five years | no prior guidance |
Cash Flow | FY 2025 | no prior guidance | strong cash flow that will average greater than 90% cash conversion through 2029 | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Adjusted EPS | FY 2024 | $7.45 to $7.65 | ~$6.03 total (sum of Q1 1.53, Q2 1.64, Q3 1.63, Q4 1.23Under GAAP EPS), no separate “adjusted EPS” reported | Missed |
Revenue Growth | FY 2024 | Mid-single-digit | ~2.3% YOY in Q4 (from $2,526In Q4 2023 to $2,583In Q4 2024) | Missed |
EPS Growth | FY 2024 | Double-digit | ~2.5% YOY in Q4 (from $1.20In Q4 2023 to $1.23In Q4 2024) | Missed |
Cash Flow Conversion | FY 2024 | Greater than 90% | ~196% (approximated by summing Net Income Q1 2024, Q2 2024, Q3 2024, Q4 2024And comparing with operating cash flow components Q1, Q2, Q3, Q4) | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Strong international expansion and backlog | Mentioned as a key growth driver in Q1–Q3, with significant locomotive orders and 12-month backlog above $7.3B, supported by wins in Africa, South America, Kazakhstan, and elsewhere. | Still a major focus, achieving $649M in new international locomotive orders, with the 12-month backlog at $7.7B and improving quality of orders. | Consistent bullish sentiment and expansion |
Softness in the North American market | Recurrent theme in Q1–Q3, citing lower discretionary spending and weaker railcar builds, partly offset by higher services and modernization activity. | Continues, with railcar builds declining to 42,000 in 2024 and further drop expected, though modernization demand provides partial offset. | Ongoing but mitigated by modernization demand |
Revenue growth slowdown in the second half | Q1–Q3 calls indicated tempered second-half growth due to production timing, mix headwinds, and shifting of locomotive/modernization deliveries. | Clarified as a timing issue rather than real slowdown; revenue recognition affected by the cadence of mods and locals shipments. | Focus shifted from demand weakness to shipment timing |
Margin expansion through cost-saving initiatives | Emphasized in Q1–Q3 via Integration 2.0, portfolio optimization exits, and lean programs driving run-rate savings of $75M–$90M by 2025. | Introduction of Integration 3.0 aims for $100M–$125M in additional run-rate savings by 2028, with a target of >350 bps margin expansion over five years. | Deeper cost optimization and expanded targets |
Expansion of digital offerings and recurring revenue | Ongoing in Q1–Q3, focusing on higher-margin digital solutions (PTC, Trip Optimizer) and shifting to recurring revenue streams, especially in international markets. | Recurring revenue has grown to 30% of the mix with a goal of >50%, propelled by offerings like Movement Planner and automation technologies. | Accelerating push into digital and higher recurring streams |
Locomotive modernization programs | In Q1–Q3, noted as a strong services driver in North America and internationally, providing significant fuel efficiency gains. | Expected high-single-digit growth in 2025, with FDL-to-EVO upgrades offering 7% fuel savings; backlog remains robust. | Sustained momentum and expanding backlog |
Regulatory changes driving new locomotive demand | In Q1–Q3, references to EPA and CARB rules validating cleaner engine solutions, including fuel-agnostic and hydrogen possibilities. | No mention of new regulatory-driven demand in Q4. | No update provided |
Exiting $110 million in low-margin revenue | Cited in Q1–Q3 as part of portfolio optimization, removing non-strategic, low-margin product lines ($110M). | Confirmed continuation, exiting $100M from 2024 in low-margin lines to simplify operations and improve profitability. | Ongoing portfolio pruning |
Uncertainty in transit margins | Reiterated in Q1–Q3, with quarter-to-quarter variability and a push for mid-teens margins over time. | Acknowledged continued volatility driven by project mix and timing, but still aiming for margin improvements. | Persisting variability, continued focus on improvement |
Potential tariffs from Canada, Mexico, China | Not discussed in prior calls (Q1–Q3). | Mentioned as a fluid situation not factored into guidance; confident in navigating tariffs as done previously. | New consideration in Q4 |
Mid-single-digit revenue growth outlook for 2025 | Referenced broadly in Q1–Q3 as part of the long-term plan, targeting mid-single-digit organic growth and double-digit EPS growth. | Formalized guidance of 5% growth at midpoint ($10.7B–$11B), aligning with operating plans. | Reiterated official forecast |
Large order pipeline surpassing $1 billion | No mention in Q1–Q3. | Over $1B in new locomotive and modernization orders booked, including major international wins (e.g., Simandou in Africa). | Significant new development |
Shift in growth sentiment from double-digit to single-digit | Prior calls signaled mid-single-digit organic growth, but still referenced some double-digit service and EPS growth. | Management cited portfolio exits ($100M) and focus on organic guidance as factors explaining why revenue growth is now mid-single-digit. | Deliberate move toward single-digit to reflect strategic actions |
Alternative fuel capabilities | Q1–Q3 highlighted fuel-agnostic engine goals (biofuels, hydrogen), supported by near-zero or zero-emission prospects under evolving EPA guidelines. | No mention in Q4. | No Q4 update, still relevant for decarbonization strategy |
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2025 Growth Guidance
Q: Is your 2025 guidance conservative given slower growth?
A: Management asserts that the 2025 guidance reflects their operating plans, and they are committed to delivering it. They clarify that M&A is not included in the guidance and that portfolio optimization is impacting the top line by about $100 million. Coverage remains aligned with previous years, and they continue to see opportunities to increase market share. -
Margin Expansion
Q: How will you achieve margin expansion in coming years?
A: Management plans to deliver over 350 basis points of margin expansion over the next five years, starting strong in 2025. This will be driven by cost management through Integration 3.0, lean initiatives, and SG&A growing at a slower rate than revenue. Innovation will also enable pricing for value, contributing to margin growth. -
Pricing Strategy
Q: How does pricing contribute to growth and margins?
A: By delivering improved products with better fuel efficiency and reliability, management emphasizes pricing for value. Cost recovery from inflation is managed through price escalators covering over 60% of revenue. They aim to stay ahead of inflation through productivity and cost-out efforts. -
Locomotive Demand
Q: What is driving strong locomotive demand in North America?
A: High single-digit growth is expected in combined new locomotive and modernization orders for 2025. Customers are investing due to the need for improved costs, reliability, and to replace aging fleets. International growth is also strong, strengthening visibility beyond 2025. -
Digital Business Growth
Q: How is the digital business performing internationally?
A: The digital business closed the year with $1 billion in orders, one of the strongest in the last five years. International demand is robust, especially for PTC and onboard locomotive products. Recurring revenues have grown to about 30%, with a goal to reach 50% through more software services. -
M&A Exclusion in Guidance
Q: Is M&A included in your 2025 guidance?
A: Management confirms that M&A, including the Evident acquisition, is not included in the 2025 guidance. They will update guidance after the transaction closes, expected in the latter part of the second quarter, with minimal impact on EPS in the first year. -
Tariffs Impact
Q: How would tariffs affect your costs and margins?
A: While tariffs could impact costs, they are not included in the guidance. Management has successfully managed inflation and tariffs over the past five years and expects to navigate any challenges through collaboration and productivity initiatives. -
Freight Margins Outlook
Q: What's the outlook for Freight margins in 2025?
A: Freight margins are expected to improve significantly in 2025, rising from the 16.9% reported in the fourth quarter. The sequential decline was anticipated due to production scheduling, and margins are expected to increase between the fourth and first quarters. -
Revenue Growth Deceleration
Q: Why did organic revenue growth decelerate in Q4?
A: The apparent slowdown is due to expected production and delivery timing, particularly for modernizations and locomotives. Underlying business momentum remains strong, with orders up 19.7% for the year and a 5.5% comparable backlog growth, providing confidence for 2025. -
Services Seasonality
Q: Can you explain the quarter-to-quarter variation in services?
A: The core parts business, representing 80% of services, has a consistent cadence. Variations are driven by the remaining 20%, mainly modernizations, due to production scheduling. Overall growth is steady, but variations occur based on manufacturing runs. -
Transit Margin Performance
Q: What's driving Transit margins, and will they outperform?
A: Transit margins improved by 150 basis points in Q4 to 16.4%, driven by favorable mix and Integration 2.0 benefits. Continued margin improvement is expected through simplification efforts and Integration 3.0, though quarter-to-quarter variation may occur due to project timing. -
Pricing vs. Units Growth
Q: What's the breakdown of growth between pricing and units?
A: While specific numbers weren't disclosed, combined growth from new locomotives and modernizations translates into high single-digit growth for 2025. Demand is driven by customer investment returns, including operational costs and technological enhancements. -
Evolution Fleet Modernization
Q: When will Evolution fleet modernization be commercial?
A: Full commercialization is expected by the end of 2025, with the full impact seen going into 2027. The product is currently being tested, offering fuel savings of up to 7%. -
Long-Term Margin Guidance
Q: Is margin expansion front-end or back-end loaded?
A: The over 350 basis points of margin expansion planned over the next five years is more front-end loaded, with significant gains starting in 2025 through continuous improvement efforts. -
Recurring Revenue Target
Q: What's the long-term target for recurring revenue?
A: The goal is to increase recurring revenue to 50% of the digital business by expanding software services and products, up from the current 30%. -
Raw Material Imports
Q: How do tariffs from various countries impact costs?
A: Tariffs are not included in the guidance due to their fluid nature. While they could impact costs, management expects to navigate any challenges over time through productivity and collaboration, as they have done in the past. -
Digital Outlook in North America
Q: What is the outlook for digital business in North America?
A: While North America has seen softer demand due to discretionary spending reductions, positive progress is noted with recent waivers from the FRA, advancing automation and efficiency products like Trip Optimizer. -
Stock Price Concern
Q: How do you respond to concerns about stock price drop?
A: Management reiterates their commitment to the provided guidance, emphasizing that M&A is not included, and that portfolio optimization impacts the top line by about $100 million. They believe in their opportunities for growth and profitability.
Research analysts covering WESTINGHOUSE AIR BRAKE TECHNOLOGIES.