Q1 2024 Westinghouse Air Brake Technologies Corporation Earnings Call
Operator: Good morning, and welcome to the Wabtec First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode.
Good morning, and welcome to the Wap Tech first quarter 'twenty 'twenty four earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star.
Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Kyra Yates, Vice President of Investor Relations. Please go ahead.
Our key followed by zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to Kai really Yates Vice President of Investor Relations. Please go ahead.
Kai Yates: Thank you operator, good morning, everyone and welcome to lab Techs first quarter 2024 earnings call with US today are president and CEO Rafael Santana CFO, John Olin and senior Vice President of Finance, John Masterless, Today's slide presentation, along with our earnings release and financial disclosures were posed.
Kyra Yates: Thank you, Operator. Good morning, everyone, and welcome to Wabtec's first quarter 2024 earnings call. With us today are President and CEO Rafael Santana, CFO John Olin, and Senior Vice President of Finance John Mastelers. Today's slide presentation, along with our earnings release and financial disclosures, was posted to our website earlier today and can be accessed on the Investor Relations tab on wabteccorp.com. Some statements we are making are forward-looking and based on our best view of the world and our business today.
Kai Yates: Good to our website earlier today and can be accessed on the Investor Relations tab on the webcast Corp dotcom.
Kai Yates: Some statements, we're making are forward looking and based on our best view of the world and our business today for more detailed risks uncertainties and assumptions relating to our forward looking statements. Please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and.
Kyra Yates: For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics. I will now turn the call over to Rafael.
Kai Yates: A reconciliation tables carefully as you consider these metrics I will now turn the call over to Rafael.
Rafael Santana: Thanks, Kyra, and good morning, everyone. Let's move to slide four. I'll start with an update on our business, my perspectives on the quarter, and progress against our long-term value creation framework, and then John will cover the financials. Last quarter, when we matched, we talked about the strong momentum that we had when we exited 2023. Well, that momentum continues.
Rafael Santana: Thanks, Scott and good morning, everyone, let's move to slide four I'll start with an update on our business my perspectives on the quarter and progress against our long term value creation framework and then John will cover the financials.
Rafael Santana: Last quarter, when we match, we talked about the strong momentum that we had when we exit 2023, well that momentum continues.
Rafael Santana: Sales were $2.5 billion, which was up 13.8% versus the prior year. Revenue growth was driven by strong performance, largely from the freight segment, and Adjusted EPS was up 47.7% from the year-ago quarter, driven by increased sales and margin expansion. Total cash flow from operations for the quarter was $334 million.
Rafael Santana: Sales were $2 5 billion, which was up 13, 8% versus prior year revenue growth was driven by strong performance largely from the freight segment.
Rafael Santana: And adjusted EPS was up 47, 7% from the year ago quarter, driven by increased sales and margin expansion.
Rafael Santana: Cash flow from operations for the quarter was $334 million.
Rafael Santana: The 12 month backlog was $7 7 billion up 11% signifying could change momentum and visibility across the business.
Rafael Santana: The 12-month backlog was $7.7 billion, up 11%, signifying continued momentum and visibility across the business. In total, the multi-year backlog was $22 billion. Overall, we had a strong start to the year. The underlying strength and momentum across the business is evident. We remain confident in our ability to execute, to deliver for our customers, and to continue to make progress against our long-term growth strategy. Moving our focus to slide five.
Rafael Santana: Total multiyear backlog was 22 1 billion.
Rafael Santana: Overall, we had a strong start to the year, the underlying strength and momentum across the business is out of that.
Rafael Santana: We remain confident in our ability to execute to deliver for our customers and to continue to make progress against our long term growth strategies.
Rafael Santana: Shifting our focus to slide five.
Rafael Santana: Let's talk about 2024 and market expectations in more detail. While key metrics across our freight business remain mixed, we are encouraged by the strength of our business, the strength of our international markets, and our robust pipeline of opportunities across geography. North America carloads were up 1.8% in the quarter.
Rafael Santana: Let's talk about 2024 and market expectations in more details.
Rafael Santana: While key metrics across our freight business remain mixed we are encouraged by the strength of our business.
Rafael Santana: <unk> of our international markets.
Rafael Santana: Our robust pipeline of opportunities across geographies.
Rafael Santana: North American carloads were up one 8% in the quarter. Despite carload growth the industry's active locomotive fleet was down when compared to last year's first quarter, while <unk> active fleet was higher.
Rafael Santana: Despite this carload growth, the industry's active locomotive fleet was down when compared to last year's first quarter, while WAPTAC's active fleet was higher. As we look forward, we continue to see significant opportunities across the globe in demand for new locomotives, modernizations, and digital technologies as our customers invest in solutions that continue to drive reliability, productivity, safety, and fuel efficiency. Looking at North American rail car builds, last quarter we discussed the industry outlook for 2024 as being about 38,000 cars to be delivered, which has now been lowered by industry sources to reflect an expected 36,000 cars. Internationally, activity is strong across most of our core markets.
Rafael Santana: As we look forward, we continue to see significant opportunities across the globe in demand for new locomotives Modernizations and digital technologies as our customers invest in solutions that continue to drive reliability productivity safety and fuel efficiency.
Rafael Santana: Looking at the North American railcar belts last quarter, we discussed the industry outlook for 2024 to be about 38000 cars to be delivered.
Rafael Santana: Which has now been lowered by the industry sources to reflect an expected 36000 cars.
Rafael Santana: Internationally activity is strong across most of our core markets.
Rafael Santana: Significant investments to expand and upgrade infrastructure are supporting a robust international order pipeline. In mining, commodity prices and an aging fleet are supporting activity to refresh and upgrade the truck fleet. Finally, moving to the transit sector, the megatrends of urbanization and decarbonization remain in place, driving the need for clean, safe, and efficient transportation solutions around the world. Now, let's turn to slide six to discuss a few business highlights. Late in Q1, we signed a $270 million strategic order for new locomotives with a large mining customer in Africa. This, coupled with a recent service order in the region for $64 million, highlights the significant opportunity that we believe exists in Africa.
Significant investments to expand and upgrade infrastructure are supporting a robust international orders pipeline.
Rafael Santana: In mining commodity prices and an aging fleet are supporting activity to refresh and upgrade the truck fleet.
Rafael Santana: Finally, moving to the transit sector, the Mega trends of urbanization and de carbonization remain in place.
Driving the need for clean safe and efficient transportation solutions around the globe.
Rafael Santana: Next let's.
Rafael Santana: Let's turn to slide six to discuss a few business highlights.
Rafael Santana: Late in Q1, we signed a $270 million strategic quarter for new locomotives with a large mining customer in Africa.
Rafael Santana: This coupled with our recent service ordering the region for $64 million highlights the significant opportunity that we believe exists in Africa.
Rafael Santana: We've been mining we're seeing continued strength in the business in particular after market and the team have signed orders totaling over $250 million in the quarter.
Rafael Santana: Within mining, we're seeing continued strength in the business, in particular the aftermarket, and the team has signed orders totaling over $250 million in the quarter. In Indonesia, we won a long-term parts agreement with PTK. And finally, our Maintenance Away Team launched its Shuttle-Ago Commander NXT, the next generation of rail car movers. The new model was specifically designed for the needs of customers to optimize tractive effort, reduce wheel slipping, and extend tire life.
Rafael Santana: In Indonesia, we won a long term parts agreement with PTK.
Rafael Santana: And finally, our maintenance of way team launched its shuttle commander NXT. The next generation of railcar movers.
Rafael Santana: The new model was specifically designed for the needs of the customers to optimize tractive effort reduce will slipping and extend tire life.
Rafael Santana: All of this demonstrates the continued momentum across the business the team's relentless focus on execution.
Rafael Santana: All of this demonstrates the continued momentum across the business, the team's relentless focus on execution, and the strong pipeline of opportunities we continue to deliver on. WCAG is well positioned to capture profitable growth with innovative and scalable technologies that address our customers' most pressing needs. Moving to slide seven.
Rafael Santana: Our strong pipeline of opportunities we continue to deliver on.
Rafael Santana: <unk> is well positioned to capture profitable growth with innovative and scalable technologies that address our customers' most pressing needs.
Speaker Change: Moving to slide seven before turning it over to John I want to briefly discussed our progress that we're.
Rafael Santana: Before turning it over to John, I want to briefly discuss the progress that we're making on one of our company's key strategies, which is to lead the decarbonization of rail. Our highly capable team, our installed base of locomotives, and our advanced locomotive technologies put WAPTEC in a unique position to lead the industry on fuel efficiency and reduce carbon emissions. With this in mind, we're driving progress on two fronts.
Speaker Change: We are making against one of our company's key strategies, which is to lead the deep carbonization of rail.
Speaker Change: Our highly capable team our installed base of locomotives in our advanced locomotive technologies, but swap deck in a unique position to lead the industry on fuel efficiency and to reduce carbon emissions.
Speaker Change: With this in mind, we're driving progress on two fronts.
Rafael Santana: The first is to enable our customers to transition to near zero emissions using their current installed base of locomotives. Our focus here leverages our customers' existing fleets and wayside infrastructure. Our customers can improve fuel efficiency and carbon emissions by up to 18% through replacing the older fleets with our Tier 4 and modernized locomotives, along with realizing improved durability, haulage ability, reliability, and fuel efficiency. We're also enabling our existing locomotive portfolio to be capable of reductions of up to 60% in carbon through the use of bio and renewable fuels, and when further mixed with hydrogen in the locomotive's internal combustion engine, up to 80% total carbon
Speaker Change: First is to enable our customers to transition to a near zero emissions using your current installed base of locomotives.
Speaker Change: Our focus here leverages, our customer's existing fleets and waste site infrastructure.
Speaker Change: Our customers are going to improve fuel efficiency and carbon emission by up to 18% through replacing the older fleets with our tier four and modernized locomotives along with realizing improved durability haulage ability reliability and fuel efficiency.
Speaker Change: We're also enabling our existing locomotive portfolio to be capable of reductions.
Speaker Change: Up to 60% in carbon through the use of bile and renewable fuels.
Speaker Change: And when farther mixed with hydrogen and the locomotives internal combustion engine up to 80% total carbon reduction.
Speaker Change: In addition, we believe we have a competitive advantage given the fact that our locomotives are more fuel efficient and our four stroke engine architecture facilitates the use of hydrogen in our internal combustion engines.
Rafael Santana: In addition, we believe we have a competitive advantage given the fact that our locomotives are more fuel-efficient, and our four-stroke engine architecture facilitates the use of hydrogen in our internal combustion engine. And the best part of this approach is that it provides significant optionality for our customers.
Speaker Change: The best part of this approach is that it provides significant optionality for our customers and.
Rafael Santana: And this approach is completely reversible back to diesel if supplies of alternative fuels are not available or not economical. On our second path to decarbonization, we're developing zero-emissions technology and equipment. As you're aware, we recently introduced the world's first heavy haul battery electric locomotive to a mining customer in Australia. Given the customer's application, they plan to operate this locomotive relying on regenerative braking to charge the batteries. And later this month, we will ship our first battery hybrid locomotive.
Speaker Change: <unk> approach is completely reversible back to diesel if supplies of alternative fuels are not available or not economical.
Speaker Change: On our second path to Decarbonization, we're developing zero emissions technology and equipment.
Speaker Change: As you are aware, we recently introduced the world's first heavy haul battery electric locomotive to a mining customer in Australia.
Speaker Change: Given the customer's application they plan to operate as locomotive relying on regenerative breaking to charge the batteries.
Speaker Change: And later this month, we will ship our first battery hybrid locomotive.
Speaker Change: Finally, we are investing and partnering with government agencies to develop heavy haul locomotives powered by hydrogen fuel cells.
Rafael Santana: Finally, we are investing in partnering with government agencies to develop heavy haul locomotives powered by hydrogen fuel cells. However, we believe that the commercialization of hydrogen fuel cells for heavy haul locomotives is farther down the road. Consequently, we are pacing our investments with our customers' readiness to adopt the technology.
We believe that the commercialization of hydrogen fuel cells for heavy haul locomotives is farther down the road. Consequently, we are pacing our investments with our customers' readiness to adopt the technology.
John A. Olin: With that, I'll turn the call over to John to reveal the quarter's segment results and our overall financial performance. John? Thanks, Rafael, and hello, everyone.
Speaker Change: With that I'll turn the call over to John to review the quarter segment results and our overall financial performance, John Thanks, Raphael and Hello, everyone.
John A. Olin: and Hello everyone. Turning to slide eight, I will review our first quarter results in more detail. In the first quarter, we continued to see the underlying momentum that we experienced as we exited last year. As expected, both revenue growth and operating margin growth were overshared in Q1 versus our expectations for full-year growth. As we discussed in the last quarter call, we expected both revenue and margin growth to be higher in the first half versus the second half. While we continue to expect growth in the second half, we expect it to be at a much more tempered pace than in the first half.
John: Turning to slide eight I will review, our first quarter results in more detail.
John: In the first quarter, we continued to see the underlying momentum that we experienced as we exited last year as expected both revenue growth and operating margin growth where over shared in Q1 versus our expectations for full year growth.
John: As we discussed in the last quarter call, we expected both revenue and margin growth to be higher in the first half versus the second half while we continue to expect growth in the second half we expect it to be at a much more tempered pace than the first half.
John A. Olin: Sales for the first quarter were $2.5 billion, which reflects a 13.8% increase versus the prior year. Sales growth in the quarter was driven by the freight segment, especially in our equipment and services groups. For the quarter, GAAP operating income was $412 million, driven by higher sales, improved gross margin, and focused cost management. Adjusted operating margin in Q1 was 19.8%, up 3.4 percentage points versus the prior year. This increase was driven by an improved gross margin of 2.4 percentage points and by operating expenses, which grew at a slower rate than revenue, increasing our Q1 margin by an additional 1.0 percentage point.
John: Sales for the first quarter were $2 5 billion, which reflects a 13, 8% increase versus the prior year sales growth in the quarter was driven by the freight segment, especially in our equipment and services groups.
John: For the quarter GAAP operating income was $412 million driven by higher sales improved gross margin and focused cost management adjusted operating margin in Q1 was 19, 8% up three four percentage points versus the prior year.
John: This increase was driven by improved gross margin of two four percentage points.
John: And driven by operating expenses, which grew at a slower rate than revenue, increasing our Q1 margin by an additional one eight percentage points.
John A. Olin: GAAP earnings per diluted share were $1.53, which was up 64.5% versus the first quarter a year ago. During the quarter, we had pre-tax charges of $10 million for restructuring, which were primarily related to our Integration 2.0 and our Portfolio Optimization Initiative to further integrate and streamline web tech's operations.
John: GAAP earnings per diluted share were $1 53, which was up 64, 5% versus the first quarter a year ago during.
John: During the quarter, we had pretax charges of $10 million for restructuring, which were primarily related to our integration to <unk> and our portfolio optimization initiative to further integrate and streamline web Tex operations.
John A. Olin: As you may recall, Integration 2.0 is expected to drive $75 to $90 million of run rate savings by 2025, and our Portfolio Optimization Initiative will eliminate roughly $110 million of low-margin, non-strategic revenue while reducing manufacturing complexity. In the quarter, adjusted earnings per diluted share was $1.89, up 47.7% versus the prior year. Overall, Wabtec delivered another solid quarter, demonstrating the underlying strength of the business. Turning to slide nine, let's review our product lines in more detail.
As you May recall integration to <unk> is expected to drive $75 million to $90 million of run rate savings by 2025, and our portfolio optimization initiative will eliminate roughly $110 million of low margin non strategic revenue, while reducing manufacturing complexity.
John: In the quarter adjusted earnings per diluted share was $1 89 up 47, 7% versus prior year.
John: Overall, <unk> delivered another solid quarter, demonstrating the underlying strength of the business.
John: Turning to slide nine let's review our product lines in more detail first quarter consolidated sales were up 13, 8%.
John A. Olin: First quarter consolidated sales were up 13.8%, and equipment sales were up 30.2% from last year's first quarter, driven by robust sales of mining equipment and higher deliveries of new locomotives. Component sales were up 13.6% versus last year, driven by increased sales of industrial products, higher international sales, and the acquisition of L&M in late Q2 of 2023, partially offset by lower North American rail car bills. Digital intelligence sales were down 5.9% from last year, as we continue to experience lower revenues in our North American market.
Equipment sales were up 32% from last year's first quarter, driven by robust sales of mining equipment and higher deliveries of new locomotives.
John: <unk> sales were up 13, 6% versus last year, driven by increased sales of industrial products higher international sales and the acquisition of <unk> in late Q2 of 2023, partially offset by lower North American railcar build.
John: Digital intelligence sales were down five 9% from last year, where we continued to experience lower revenues in our North American market.
John A. Olin: But we do see growth in our next generation onboard locomotive products and digital mining. Our services sales grew 17.3%. Services growth was driven by significantly higher year-over-year deliveries of mods, increased overhauls, and parts sales. Our customers continue to recognize the superior performance, reliability, and availability of our fleet. Across our transit segment, sales increased 5.5% behind growth in our products and services business. The momentum in the transit segment remains positive as secular drivers such as urbanization and decarbonization accelerate the need for investments in sustainable infrastructure. Now moving to slide 10.
John: But we do see growth in our next generation onboard locomotive products and digital mining.
Our services sales grew 17, 3% services growth was driven by significantly higher year over year deliveries of mods increased overhauls and part sales.
John: Our customers continue to recognize the superior performance reliability and availability of our fleet.
John: Across our transit segment sales increased five 5% behind growth in our products and services businesses.
John: The momentum in the transit segment remains positive at secular drivers such as urbanization and de carbonization accelerate the need for investments in sustainable infrastructure.
John: Now moving to slide 10.
John A. Olin: Both gap and adjusted gross margin were up 2.4 percentage points during the quarter. In addition to higher sales, gross margin benefited from improved pricing and favorable mix between segments; mix within the freight segment was also favorable despite significantly higher new local and mod deliveries in the quarter. During the quarter, we also benefited from favorable fixed cost absorption and benefits from integration 2.0, as well as comparing against higher next-generation digital development costs in the first quarter of 2023. Our team continues to execute well to mitigate the impact of continued cost pressures by driving operational productivity and lean initiatives. Turning to slide 11.
John: GAAP and adjusted gross margin were up two four percentage points during the quarter.
John: In addition to higher sales gross margin benefited from improved pricing and favorable mix between segments.
John: Mixed within the freight segment was also favorable despite significantly higher new local and <unk> deliveries in the quarter.
John: During the quarter, we also benefited from favorable fixed cost absorption and benefits from integration to <unk> as well as comparing against higher next generation digital development costs in the first quarter of 2023.
John: Our team continues to execute well to mitigate the impact of continued cost pressures by driving operational productivity and lean initiatives.
John: Turning to slide 11 for.
John A. Olin: For the first quarter, GAAP operating margin was 16.5 percent, which was up 3.9 percentage points versus last year. Adjusted operating margin improved 3.4 percentage points to 19.8%. Gap in adjusted SG&A expenses was down as a percentage of revenues as we leveraged higher sales with a strong focus on managing costs. Engineering expense was $48 million, modestly lower than Q1 last year. We continue to invest engineering resources in current business opportunities, but more importantly, we are investing in our future as an industry leader in decarbonization and digital technologies that improve our customers' productivity, capacity utilization, and safety. Now, let's take a look at the segment results on slide 12, starting with the brake segment.
John: For the first quarter GAAP operating margin was 16, 5%, which was up three nine percentage points versus last year.
John: Adjusted operating margin improved three four percentage points to 19, 8%.
John: GAAP and adjusted SG&A expenses were down as a percentage of revenues as we leveraged higher sales with a strong focus on managing costs.
John: Engineering expense was $48 million modestly lower than Q1 last year.
John: We continue to invest engineering resources and current business opportunities, but more importantly, we are investing in our future as an industry leader in de carbonization in digital technologies that improve our customers' productivity capacity utilization and safety.
John: Now, let's take a look at the segment results on slide 12, starting with the freight segment.
John: As I already discussed freight segment sales were up 17, 2% during the quarter.
John A. Olin: As I already discussed, freight segment sales were up 17.2% during the quarter. Gap segment operating income was $368 million, for an operating margin of 20.2%, up 5.7 percentage points versus last year. GAAP operating income includes $3 million of restructuring costs primarily related to integration 2.0 and portfolio optimization costs. Adjusted operating income for the freight segment was $439 million, up 48.3% versus the prior year. Adjusted operating margin in the freight segment was 24.1 percent, up 5.1 percentage points from the prior year.
John: GAAP segment operating income was $368 million for an operating margin of 22% up five seven percentage points versus last year.
GAAP operating income includes $3 million of restructuring costs, primarily related to integration to <unk> and portfolio optimization costs.
John: Adjusted operating income for the freight segment was $439 million up 48, 3% versus the prior year.
John: Adjusted operating margin in the freight segment was 24, 1% up five one percentage points from prior year. The increase was driven by improved gross margin behind strong operational execution favorable mix improved pricing integration to <unk> savings and as we lap last year's investment in our next generation.
John A. Olin: The increase was driven by improved gross margin behind strong operational execution, favorable mix, improved pricing, integration 2.0 savings, and, as we lapped last year's investment and our next-generation digital development costs, at the same time, SG&A and engineering expenses were lower as a percentage of revenue. Finally, Segment 12-month backlog was $5.67 billion, up 14.5% from the same period a year ago. The multi-year backlog was $17.9 billion, down 2.3% from the prior year. Both our 12-month and multi-year backlogs demonstrate good visibility in 24 and beyond. Turning to slide 13.
John: <unk> digital development costs at the same time, SG&A and engineering expenses were lower as a percentage of revenue.
John: Finally segment 12 month backlog was $5 $67 billion.
John: Up 14, 5% from the same period a year ago.
John: The multiyear backlog was $17 9 billion down.
Down two 3% from the prior year.
John: Both our 12 month and multi year backlogs demonstrate good visibility in 'twenty four and beyond.
John: Turning to slide 13.
John A. Olin: Transit segment sales were up 5.5% to $673 million. However, when adjusting for foreign currency, transit sales were up 4.9%. Gap operating income was $74 million, and the structuring costs related to Integration 2.0 were $7 million in Q1. Adjusted Segment Operating Income was $86 million. Adjusted operating margin as a percent of revenue was 12.7%, down 0.2 percentage points from last year, driven by unfavorable mix and higher input costs, partially offset by integration 2.0 savings. Finally, the Transit Segment 12-month backlog for the quarter was $2.04 billion, up 3.3% versus a year ago. The multi-year backlog was also up 4.2% to $4.19 billion.
John: <unk> segment sales were up five 5% to $673 million.
John: When adjusting for foreign currency transit sales were up four 9%.
John: GAAP operating income was $74 million restructuring.
John: Restructuring costs related to integration to <unk> were $7 million in Q1.
John: Adjusted segment operating income was $86 million adjusted operating margin as a percent of revenue was 12, 7% down 0.2 percentage points from last year, driven by unfavorable mix and higher input costs, partially offset by integration two point or savings.
John: Finally transit segment 12 month backlog for the quarter was $2 4 billion up three 3% versus a year ago.
John: Multi year backlog was also up four 2% to $4 one $9 billion.
Rafael Santana: Now, let's turn to our financial position on slide 14. First quarter cash flow was $334 million. During the quarter, cash flow benefited from higher earnings, improved working capital, and increased securitization funding. We continue to expect greater than 90% cash conversion for the full year. Our balance sheet and financial position continue to be strong. We ended the quarter with liquidity of $2.13 billion. And our net debt leverage ratio was 1.7 times at the end of the first quarter, which was favorable versus the same quarter a year ago at 2.3 times debt leverage.
John: Now, let's turn to our financial position on Slide 14 first quarter cash flow was $334 million during the quarter cash flow benefited from higher earnings improved working capital and increased securitization funding.
John: We continue to expect greater than 90% cash conversion for the full year.
John: Our balance sheet and financial position continued to be strong we ended the quarter with liquidity of $2, one 3 billion.
John: And our net debt leverage ratio was one seven times at the end of the first quarter, which was favorable versus the same quarter a year ago at two three times debt leverage.
Rafael Santana: We continue to allocate capital in a disciplined and balanced way to maximize returns for our shareholders. During the quarter, we repurchased $175 million of our shares and paid $36 million in dividends, which was recently increased by our Board of Directors, up 17.6% per share versus the prior year. With that, I'd like to turn the call back over to Rafael to talk about our 2024 financial guidance.
John: We continue to allocate capital in a disciplined and balanced way to maximize returns for our shareholders.
John: During the quarter, we repurchased $175 million of our shares and paid $36 million in dividends, which was recently increased by our board of directors up 17, 6% per share versus prior year.
John: With that I'd like to turn the call back over to Rafael to talk about our 2024 financial guidance.
Rafael Santana: Thanks, John now lets turn to slide 15 to discuss our 2024 updated full year guidance.
Rafael Santana: Thanks, John. Now, let's turn to slide 15 to discuss our 2024 updated full-year guidance. As you've heard today, our team delivered a very strong start to the year. We believe that underlying customer demand for our products and solutions continues across our business. Our order pipeline and 12-month backlog continue to be strong, providing visibility for profitable growth ahead. With these factors in mind, we are increasing our previous guidance. We now expect 2024 sales of $1.4 billion at the midpoint, up 7.5% from last year, and Adjusted EPS to be between $7.00 and $7.40 per share, up about 21.5% at the meeting.
Rafael Santana: As you've heard today, our team delivered a very strong start to the year.
We believe that the underlying customer demand for our products and solutions continues across our business.
Rafael Santana: Our orders pipeline and 12 month backlog continues to be strong providing visibility for the profitable growth ahead.
Rafael Santana: With these factors in mind, we are increasing our previous guidance. We now expect 2024 sales up down $4 billion at the midpoint up seven 5% from last year.
Rafael Santana: And adjusted EPS to be between $7.
Rafael Santana: And $7 40 per share.
Rafael Santana: <unk> about 21, 5% at the midpoint.
Rafael Santana: Finally, we continue to expect cash flow conversion to be greater than 90%. Looking ahead, I am confident that Wabtec is well positioned to drive profitable growth in 2024 and beyond. Now let's wrap up on slide 16. As you've heard today, our team continues to deliver value for our stakeholders, thanks in large part to our resilient installed base, world-class team, innovative technologies, and our continued focus on our customers. Overall, we believe we have an opportunity to continue building significant long-term momentum with growth in modernizations, in new locomotive sales, in digital solutions, and in transit Systems.
Rafael Santana: Finally, we continue to expect cash flow conversion to be greater than 90%.
Rafael Santana: Looking ahead I am confident that <unk> is well positioned to drive profitable growth in 2024 and beyond.
Rafael Santana: Now, let's wrap up on slide 16 as.
Rafael Santana: As you've heard today, our team continues to deliver value for our stakeholders. Thanks in large part to our resilient installed base World class team.
Rafael Santana: <unk> technologies, and our continued focus on our customers.
Rafael Santana: Overall, we believe we have an opportunity to continue building significant long term momentum with growth in Modernizations and your locomotive sales in digital solutions and in transit systems.
Rafael Santana: With solid underlying demand across the portfolio, increased visibility through our backlog, and intense focus on continuous improvement and cost management, Wabtec is well positioned to drive profitable long-term growth and maximize shareholder returns. With that, I want to thank you for your time this morning, and I'll now turn the call over to Kyra to begin the Q&A portion of our discussion. Kyra?
With solid underlying demand across the portfolio increased visibility through our backlog and intense focus on continuous improvement and cost management <unk> is well positioned to drive profitable long term growth and maximize shareholder returns with that I want to thank you for your time.
Hirer: This morning, and all churn now the call over to higher to begin the Q&A portion of our discussion.
HIER: Thank you Raphael, we will now move onto questions, but before we do and out of consideration for others on the call I ask that you limit yourself to one question and one follow up question and if you have additional questions. Please rejoin the queue. Operator, we are now ready for our first question.
Kyra Yates: Thank you, Rafael. We will now move on to questions. But before we do, and out of consideration for others on the call, I ask that you limit yourself to one question and one follow-up question. And if you have additional questions, please rejoin the queue. Operator, we are now ready for our first question.
Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, please press star, then 2.
HIER: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
HIER: Our first question comes from Justin Long with Stephens. Please go ahead.
Justin Long: Thanks and good morning. Good morning, Justin.
Justin Long: Thanks, and good morning, good morning, Justin.
Rafael Santana: So I think the most surprising part of this quarter was the big sequential improvement in freight margins. And I wanted to ask if there was anything unique to this quarter that drove that improvement, or does this just speak to the operating leverage in the business as equipment revenue ramps up? And, John, if there's anything you can share on how freight margins are expected to progress over the rest of the year, what's baked in the guidance versus what we just saw in the fourth quarter, the 24%?
Justin Long: So I think the most surprising part of this quarter was the big sequential improvement in freight margins and I wanted to ask if there was anything unique to this quarter that drove that improvement or does this just speak to the operating leverage in the business as equipment revenue ramp and John.
John if there's anything you can share on how freight margins are expected to progress over the rest of the year, what's baked in the guidance versus what we just saw in the fourth quarter the 24%.
Speaker Change: Great just.
John A. Olin: Great, Justin. When we look at the freight margins up 5.1 percentage points, we do not expect to end the year up 5.1 percentage points. There are a few things in there that are going to bring it down over the course of the back half. But overall, our margins are building from our guidance from the last guidance to this guidance. We feel very good about the way the year is going. But specifically, Justin, on freight margins, let's talk about a couple of those pieces. One, there was great operational execution that led to increased productivity.
When we look at the freight margins up five one percentage points, we do not expect to end the year up five one percentage points. There are a few things in there.
Speaker Change: That are going to bring it down.
Speaker Change: Over the course of the back half, but overall our margins are building from our guidance from the last guidance to this guidance, we feel very good about the way the year is going but specifically adjusted on freight margins, let's talk about a couple of those pieces. One there was great operational execution that led the increased productivity that.
John A. Olin: That we would expect would continue. When we look at a couple other things, one, the mix was very favorable. And we expect mix to be favorable in the first half, but we do expect mix to turn unfavorable in the back half. So that will be a drag on freight margins a bit in the back half of the year. The second piece is that there was a fair amount of absorption in the quarter given the 17.2% growth of the freight segment.
Speaker Change: We would expect would continue when we look at the couple of other things one mix was very favorable and.
Speaker Change: And we expect mix to be favorable in the first half, but we do expect mix to turn.
Speaker Change: Unfavorable in the back half so that will be a drag on freight margins a bit in the back half of the year.
Speaker Change: Second piece is that there was a fair amount of absorption in the quarter given the $13 eight around 17, 2% growth of the freight segment.
Speaker Change: We don't expect the back half of the year to have such rich red.
John A. Olin: We don't expect the back half of the year to have such high revenue growth. And therefore, we would expect that to be more neutral in the back half. And then finally, during the quarter... Justin, we lapped an investment that we made in the year-ago period, if you remember, for a next-generation digital development of PDS software. And as we lapped that in the first quarter of this year, that's adding about a third of the overall margin benefit to the enterprise overall, so a little bit more in the freight. We don't expect that to repeat, but again, as we
Speaker Change: <unk> growth and therefore, we would expect that.
Speaker Change: Be more neutral in the back half and then finally during the quarter.
Justin Long: Justin we lapped.
Justin Long: Sure.
Justin Long: At one time.
Justin Long: Investment that we made in the year ago period, if you remember for a next generation digital development.
Justin Long: Pds software and as lapping that in the first quarter of this year, that's adding about a third of the overall margin benefit.
Justin Long: On to the enterprise overall, so a little bit more on the freight group. So we don't expect that to repeat but again as we look to the back half of the year.
Justin Long: Freight we expect margins to be up but just not at the same extent as youre seeing in the first quarter.
Speaker Change: Okay got it thanks, and I guess secondly, we have the proposed locomotive regulations from car by now.
Justin Long: Okay, I got it. Thanks.
Rafael Santana: And I guess, secondly, we have the proposed locomotive regulations from CARB. I know the public comments around that were due to the EPA earlier this week, but do you have any color around the timing of a final decision on that front? And if the current proposal does pass, any initial thoughts on how quickly this could impact your business based on some of the recent conversations you've had with customers? Suggestion, you're
Speaker Change: Blake comments around that were due to the EPA earlier this week, but do you have any color around the timing of a final decision on that front and if the current proposal does pass any initial thoughts on how quickly this could impact your business based on some of the recent conversations you've had with customers.
Speaker Change: So adjustment and you are right there.
Rafael Santana: So, Justin, you're right there. I mean, the public comment period was due last Monday. They had a public hearing. I think the outcome here of the rule remains, I'd say, quite fluid.
Speaker Change: The public comment period.
Speaker Change: Was due last Monday or they had a public hearing I think.
Speaker Change: Outcome here of the rule remains so I would say quite fluid so what I'll tell you as well.
Rafael Santana: What I'll tell you is we're technically very well positioned here to support customers for all outcomes. We've got the best-in-class products. We've got the lowest emissions, the lowest fuel consumption, best reliability, and ultimately the best availability and value for customers there. One thing that I would want to highlight is the EPA also recently finalized the new standards for highway vehicles, which require manufacturers to reduce greenhouse gas emissions by 25% for the heavy truck fleet
Speaker Change: We're testing we are very well positioned here to support customers for all outcomes. We've got the best in class products, we've got the lowest emissions the lowest fuel consumption best reliability.
Speaker Change: Ultimately best availability and value for customers. There one thing that I would want to highlight is <unk>.
Speaker Change: The EPA also recently finalized the new standards for highway vehicles, which requires manufacturers to reduce our greenhouse gas by 25% for the heavy truck fleet.
Rafael Santana: And the EPA also defined through that liquid hydrogen for internal combustion engines would be classified as zero emissions, despite using some oil. And this is important as it allows, first, for our installed base of internal combustion engines to use hydrogen, which can be a transition to fuel cells ultimately. But I call this out because this definition of zero emissions, I think, plays well into our plans to help railroads transition to near zero emissions with a really reversible solution through that period.
Speaker Change: The EPA also defined through that the liquid hydrogen for internal combustion engines would be classified as zero emissions. Despite of using some oil and this is important as it allows first for our install base of internal combustion engines to use hydrogen.
Speaker Change: Which.
Speaker Change: Can be a transition to fuel cells ultimately, but.
Speaker Change: I call. This out because this definition of zero emissions I think plays well into our plants to help railroads transition to near zero emissions with really a reversible solution here through that period.
Speaker Change: Okay. Thanks for the time and congrats on the quarter. Thank.
Justin Long: Okay, thanks for the time and congrats on the quarter.
Speaker Change: Thank you.
Susquehanna: Okay. The next question comes from <unk> majors with Susquehanna. Please go ahead.
Operator: Okay, the next question comes from Bascome Majors with Susquehanna. Please go ahead.
Bascome Majors: Thanks for taking my questions. Just to follow up on that, John or Rafael, less about this year but more long-term, can you go a little bit deeper into the favorability of mix given the growth and some of the subsegments, be it equipment or the modification side of services that you've typically talked about as being a little bit lower mix than some of your businesses and how that was able to drive such meaningful gross profit expansion, not just the fixed cost absorption? How do you view that in a longer-term context relative to your long-term incremental margin guidance of 25 to 30 percent? Thank you.
Bascome Majors: Thanks for taking my questions just to follow up on that.
Bascome Majors: John of Raphael.
Majors: Less about this year, but more long term.
Can you go a little bit deeper into the favorability of mix given the growth in some of the sub segments.
Speaker Change: Equipment or or the modification side of services that you've typically talked about as being a little bit lower mix in some of your businesses.
Speaker Change: How that was able to drive such a meaningful gross profit expansion not just the fixed cost absorption and just how you view that in a longer term context relative to your long term incremental margin guidance of the 25% to 30%. Thank you.
Rafael Santana: Bascome, let me start here because, number one, we're confident in the fundamentals of the business. I mean, we've had a strong performance over the last years and now this quarter, and hopefully, the team's commitment and the robustness of the strategy will come through here. I think we're continuously innovating. I think that's been a key piece, even if you think about mods or new locos.
Speaker Change: Let me start here because number one we are confident on the fundamentals of the business.
Speaker Change: A strong performance.
Speaker Change: Over the last years and now this quarter and hopefully comes through here the team's commitment and the robustness of the strategy I think we're continuously innovating and I think that's been a key piece, even if you think about mods or new logos, we're continuously adapting to some of these market changes too to ensure.
Rafael Santana: We're continuously adapting to some of these market changes to ensure we remain in a good off-the-floor trajectory. We've been actively managing our pipeline to really convert some of these opportunities into tangible results. I think we've also continued to take proactive steps when challenges arise in this process. I think it's important to highlight that you're going to continue to see variation in quarters and yearly results, but we're confident here in our ability to continue to drive profitable growth over time in the business. I'll let John comment on the specifics of the quarter and the half. Yeah, Bascome, and when we look at...
Speaker Change: We remain in a growth trajectory.
Speaker Change: We've been actively managing our pipeline to really convert some of these opportunities into tangible results. I think we've also continued to take proactive steps to win challenges horizon. This process I think it's important to highlight that youre going to continue to see variation on quarters yearly.
Speaker Change: But it would cost in here and our ability to continue to drive profitable growth over time and the business I'll, let John comment on the specifics of.
John: The quarter and the half.
John A. Olin: Yeah, Bascome, and when we look at locos and mods over the long term, we would expect them to provide a headwind on overall mix. And again, we talked about this, there's good mix and bad mix, and this is a really good mix because it puts an asset out there that we're going to make money off of for decades to come. But if we look closer in, when we look at the first quarter, as well as the first half, we are actually getting some mixed favorability from locos and mods because of what we're comparing to in the year-ago period.
John: Yes.
John: When we look at logos and <unk> over the long term, we would expect it to provide a headwind on overall mix and again, we've talked about this theres good mix and bad mix and this is a really good mix because it puts an asset out there that we're going to make money off of for decades to come but if we look more nearer in when we look at that in the first quarter.
John: As well as the first half we are actually getting some mix favorability from locals and labs.
John: Because of what we're comparing to in the year ago period. If you remember in the year ago period, we had talked about an international order that.
John A. Olin: If you remember in the year-ago period, we talked about an international order that we delivered over four quarters, the back half of 22 and the front half of 23. That was a very low margin as we moved into a market.
We delivered over four quarters the back half of 'twenty two in the front half of 'twenty three that was very low margin as we moved into our market. So that's providing some of the mix that youre seeing and that'll just be in the first half and again as I mentioned to Justin will start to reverse in the back half.
John A. Olin: So that's providing some of the mix that you're seeing, and that will just be in the first half. And again, as I mentioned to Justin, we'll start to reverse in the second half. I think, Bascome, the other thing I'd like to point out, as we look at the overall cadence of the year, you know, we talked about this last quarter, but we do expect the significant majority of our revenue growth and our profit growth to be in the first half of the year. And this is really due to the production of those locos and mods.
John: I think thats going the other thing I'd like to point out as we look at the overall cadence of the year.
John: We talked about this last quarter, but we do expect a significant majority of our revenue growth and our profit growth to be in the first half of the year.
John: And this is really due to the production of those locals in knotts.
John A. Olin: You know, as we came out of last year during the strike, we had the production or deliveries of our locos and mods being significantly lower in the first half of the year versus the back half of the year. And our aim this year is to more level load our quarters in that production. So with that, we expect Locos and Mods to be up about thirty percent in terms of deliveries in the first half of the year and down slightly in the back half.
John: As we came out of last year and the strike.
John: Had the production or deliveries of our logos and modest being.
John: Significantly lower in the first half of the year versus the back half of the year and our aim this year is to more level load our quarters and that production. So with that we expect locals and <unk> to be up about 30% in terms of deliveries in the first half of the year and down slightly in the back half and what thats going to do with <unk>.
John A. Olin: And what that's going to do is shift a fair amount of revenue into the first half, and with that will come that absorption that we talked about, and again, the mix is favorable in the first half and a little bit unfavorable in the second half. When we look at the back half, we expect it to be favorable on a year-over-year basis both for revenue growth and for margin growth but at a much more tempered level than we see here in the first half. Overall, this leads to the guidance that we delivered, which is an improvement in revenue growth as well as more profit margin growth.
John: A fair amount of revenue.
John: Into the first half and.
John: With that will come that that absorption that we talked about and again the mix is favorable in the first camp and a little bit unfavorable in the back half when we look at the back half we expect it to be.
John: Favorable on a year over year basis, both for revenue growth and for margin growth, but at a much more tempered level than we see in.
John: In the first half.
John: Overall, leading to the guidance that we delivered.
John: Which is an improvement in revenue growth as well as.
John: More profit margin growth.
Speaker Change: Thank you.
Operator: The next question comes from Angel Castillo with Morgan Stanley. Please go ahead.
Speaker Change: Thanks.
Speaker Change: The next question comes from Angel Castillo with Morgan Stanley. Please go ahead.
Angel Castillo: Thanks for taking my question and congrats on the solid quarter. Just wanted to talk about your decarbonization slide, you know, very strong performance there, and just the second half deliveries in terms of your targets for, you know, some of the alternative fuels are very impressive. So just curious, you know, as you think about or you have conversations with customers, what are you hearing in terms of the benefits of, you know, some of these improvements that you're making in enabling, you know, your engines to deliver some of these savings? How is that impacting overall kind of discussions, order patterns, and kind of expectations as we think about, you know, the second half and then flowing into 2025?
Angel Castillo: Alright, Thanks for taking my question and congrats on the solid quarter.
Angel Castillo: Just wanted to talk about your de Carbonization slide.
Angel Castillo: Very strong performance there and just the second half deliveries in terms of your targets for some of the alternative fuels is very impressive. So just curious as you think about it or you have conversations with customers.
Angel Castillo: What are you hearing in terms of the benefits of some of these improvements that youre, making.
Angel Castillo: And enabling.
Angel Castillo: <unk> engines to deliver some of these.
Angel Castillo: Savings how is that impacting overall kind of discussions order patterns and kind of expectations. As we think about second half and then flowing into 2025.
Rafael Santana: Yeah, so a couple of comments there. Number one, this has been really part of a long-term strategy of making sure that we have the most fuel efficient cars, and fuel is a significant part of the expenses for our customers. So we continue those investments there. I think there's continued opportunity to take advantage of both the Tier 4s and the mods, and I do believe we have some of the best products in the market. We see that playing not just in North America; we see that playing internationally as well.
Speaker Change: Yes. So a couple of comments there are number one this has been really part of our long term strategy on making sure that we have the most are really fuel efficient and feel is a significant part of expenses for our customers. So we continue those investments there I think there's continued opportunity to take advantage of both the tier fours and.
Speaker Change: Mods and I do believe we have some of the best products. There in the market, we see that playing not just North America, we see that playing internationally as well.
Rafael Santana: We really like the opportunity here, and I think customers will welcome the ability to transition from a known core product and be able to really take advantage of that to significantly reduce carbon emissions. And our engines, I'd say, are well prepared to take on both renewable and biofuels, and we're progressing here to really make sure hydrogen is also a part of that solution. So with that, I think we're very well positioned to support customers through that transition.
Speaker Change: We really liked the opportunity here and I think customers welcome the ability to transition from a non core product and be able to really take advantage of that to significantly reduce carbon emissions and job. Our engine. So I would say are well prepared to take on both renewable.
Speaker Change: <unk> and Biofuels and we're progressing here on really making sure our hydrogel.
Speaker Change: It's also a part of that solution. So with that I think we're very well positioned to support customers through that transition, but we also working on wildfire zero emissions technologies, which strike with some of the elements of the hybrid units that we're delivering this quarter to New York.
Rafael Santana: But we're also working on what I call zero emissions technologies, which start with some of the elements of the hybrid units that we're delivering this quarter to New York, and we're also delivering later this year the first really heavy haul battery electric locomotive that's going to Australia, which we unveiled last year. So I think we're continuing to pace some of our investments here in the light of adoption, but with Dell, we're very well positioned in that regard, and we really try to make our engines as agnostic as we can to make sure that we provide that reversibility for customers through transition.
Speaker Change: We're also delivering later this year the first really heavy haul battery electric locomotive Thats going to Australia, which one we unveiled last year. So.
Speaker Change: I think were wiped out continuing to pace some of our investments here in the light of adoption.
Speaker Change: But with Delaware they are well positioned in that regard and we really tried to make sure we make our agents as agnostics as agnostic as we can to make sure that we provide that reverse ability for customers to transition.
Speaker Change: Very helpful. Thank you and then shifting over to capital allocation just strong performance in the first quarter strong performance around the kind of the cash cost management, but.
Angel Castillo: a strong performance in the first quarter, a strong performance around kind of cost management. But as you think about your, you know, the strong balance sheet that you have and your ability to return cash to shareholders, should we expect that there's potential for bigger buybacks and more capital to be deployed to shareholders? Or how are you kind of seeing, you talked about the raise in the dividend, but kind of the other outlets of cash, how should we kind of think about that for the full year? Yeah, Angel. Number one is we have
Speaker Change: As you think about your strong balance sheet that you have an ability to return cash to shareholders.
Speaker Change: Should we expect that there is potential for bigger buybacks in <unk>.
Speaker Change: Play more capital to shareholders or how are you kind of seeing.
Speaker Change: You talked about the range of the dividend, but kind of the other outlets of cash how should we kind of think about that for the full year. Yeah. Angel number. One is we expect a fair amount of free cash for the year, but we've got the balance sheet, where we want it and when I say that it's in that zone of two to two five times net debt leverage ratio.
John A. Olin: Yeah, Angel, number one is we expect a fair amount of free cash for the year, but we've got the balance sheet where we want it, and when I say that, it's in that zone of two to two and a half times that debt leverage ratio, right? We're toward the low end of that, and we feel comfortable with that at this point as well. Having said that, it's... The cash that we generate, or the free cash, we will prioritize first M&A if we find good or creative strategic M&A, and then, if not, we'll return the excess cash to our shareholders in the form of share repurchases. And we feel good about the start to the year in terms of share repurchases with $175 million purchased. But we're looking to return all of our excess cash to our shareholders throughout the year.
Speaker Change: Right.
Speaker Change: Towards the low end of that and we feel comfortable with that at this point as well having said that.
Speaker Change: The cash that we generate we will prioritize the free cash we will prioritize first M&A. If we can if we find good accretive strategic M&A and then if not we'll return the excess cash to our shareholders in the form of share repurchases and feel good about that.
Speaker Change: Start to the year in terms of share repurchases with the $175 million purchase, but we're looking to return all of our excess cash to our shareholders throughout the year.
Speaker Change: Very helpful. Thank you.
Speaker Change: Our next question comes from Scott Group with Wolfe Research. Please go ahead.
Angel Castillo: Very helpful, thank you. Our next question comes from Scott Group with Wolf Research. Please go ahead.
Speaker Change: Good morning. This is <unk> on for Scott Group.
Speaker Change: Hey, good morning.
Speaker Change: Wanted to touch on pricing here and I know you guys don't really give out any core pricing numbers, but can you directionally talk about.
Operator: Good morning, this is Ivan Yi on for Scott.
Ivan Yi: Hi Ivan. You know, when we look at overall pricing in the quarter, pricing was up slightly, and our costs were slightly favorable. And so that helped provide a little bit of margin improvement in the quarter.
Speaker Change: How the pricing trends are kind of going.
Speaker Change: And what are your expectations for pricing sort of the rest of this year.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: When we look at overall pricing in the quarter pricing was up slightly and our costs were slightly favorable and so that helped provided a little bit of margin improvement in the quarter.
John A. Olin: The next question comes from Matt Elkott with TD Cowan. Please go ahead.
Speaker Change: The next question comes from Matt Alcott with TD Cowen. Please go ahead.
Matthew Youssef Elkott: Good morning, Thank you.
Operator: Good morning. Thank you. Rafael, I think you mentioned the industry locomotive fleet in North America was down, but Wabtec was up. Is this just a matter of what we already know, the railroads are increasingly coalescing behind Wabtec locomotives? How much is TripOptimizer a factor in that, and any other thoughts on that would be helpful.
Matthew Youssef Elkott: Raphael I think you mentioned industry locomotive fleet in North America was down but <unk> was up is this just.
Matthew Youssef Elkott: As a matter of what we already know the railroads are coalescing behind laptop locomotives increasingly.
Matthew Youssef Elkott: How much is trip optimizer a factor in that.
Speaker Change: Any other thoughts on that would be helpful.
Matthew Youssef Elkott: So, I think, first, I mean, I think there's certainly an element of, I'll call it, overall lifecycle cost that those units provide, and that's how you've got to keep that in mind. And those are investments that have been done over time that have really positioned our fleets to, number one, be the most efficient fleets at an engine level, so it starts there. It's continuous, if you think about our ability to provide service and support to those fleets, so our customers ultimately get not just the fuel efficiency, but they get the reliability and availability of those units, and that goes with significant investments we've made over time on an engineering team that are able to really drive what I'll call continuous improvement to those fleets over time, and really the service network that we've gotten in our ability to support customers across the globe on that.
Raphael: So I think first in man I.
Raphael: I think there's certainly an element of.
Raphael: I'll call. It overall lifecycle cost that those units provide Jim that's how you got.
Raphael: Got to keep that in mind and those are investments that have been done over time that have really position our fleets to number one be it the most efficient fleets at an engine level.
Raphael: So it starts there.
Raphael: Continuous if you think about our ability to provide.
Raphael: Service and support to those fleets. So our customers are ultimately get not just.
Raphael: The fuel efficiency, but they get the reliability and availability of those units and that goes with significant investments. We've made over time on an engineering team.
Raphael: That are able to really drive what I'll call continuous improvement to those fleets over time and really at the service network that we've got and our ability to support customers across.
Raphael: Across the globe on that on the top of that you include some of the elements of the digital investments, we've made and we continue to make to help our customers improve not just.
Matthew Youssef Elkott: On top of that, you include some of the elements of, really, the digital investments we've made and we continue to make to help our customers improve not just fuel efficiency but safety and to improve the various elements that they need. So I think this is really a validation of the investments we continue to make and the differentiation we continue to create in the product.
Raphael: Fuel efficiency, but to improve safety and to improve various elements that they need. So I think this is really a validation of the investments we continue to make.
Raphael: The differentiation, we continue to create in the product.
Speaker Change: Got it.
Rafael Santana: Got it. That's very helpful. And just one follow-up question. I think, John, back in February on the plant tour, you mentioned $110 million of revenue this year that could be discontinued to optimize margins. Could you provide an update on that?
Speaker Change: Very helpful and just one follow up question I think John.
Speaker Change: Back in February at the plant tour, you mentioned $110 million of revenue this year that could be discontinued to optimize margins.
John: Did you provide an update on that.
John A. Olin: Yeah, we're moving forward with the exit of what we call low-margin revenue from the business, right? So, Matt, when we look at the midpoint of our new guidance at 7.5%, it actually is higher than that, given the fact that we're taking out that $110 million. The majority of that will come out this year, but some of it will move into next year as we work through exit strategies for different product lines.
John: Yes, we're moving forward with the exit of.
John: I would call low margin revenue from the business right. So Matt when we look at that midpoint of our new guidance at seven 5%. It actually is higher than that given the fact that we're taking out that $110 million on the majority of that will come out this year, but some of it will move into next year is where we work.
John: Going through exit strategies for different product lines.
Matthew Youssef Elkott: Great. Thanks, John. Thanks, Rafael. Thank you. The next question comes from Jerry Revich with Goldman Sachs.
Speaker Change: Great. Thanks, Jon Thanks, Raphael Thank you Amit.
The next question comes from Jerry Revich with Goldman Sachs. Please go ahead.
Operator: The next question comes from Jerry Revich with Goldman Sachs. Please go ahead. Hi, this is Cleon for Jerry. Quick question on the transit segment.
Jerry Revich: Hi, This is clay on for Jay a quick question on the on the transit segment.
Jerry Revich: Had you had steady margin improvement in trends over the last couple of years do you view the bulk of the operational improvement in the business is now complete.
Jerry Revich: No, we don't. In fact, I think there's continued opportunity here to drive profitable growth in the business. First, some comments in the quarter. I think they were very much in line with the expectations we had. And those were some of them tied to the higher OE growth; we had high input costs, and some of that was offset by integration 2.0 savings.
Speaker Change: No we don't.
Speaker Change: In fact, I think they're a shop continued opportunity here to drive profitable growth in the business.
Speaker Change: First just some comments on the quarter I think they were very much in line with the expectations we had.
Speaker Change: And those were some of them tied to the higher OE growth, we had high input costs and some of that was offset by integration Chew got all savings but.
Rafael Santana: But in one end, while we're pleased with the overall progress that the business has had, we are continuing significant work there to simplify the footprint, to further improve and sustain margins. So I think you're going to continue to see that variation quarter to quarter, but the team here is very much committed to continue expanding margins, taking action to drive profitable growth, and being more selective, too, in terms of the opportunities we tackle, in terms of the differentiation we're able to provide in the products that we have, for a while now, you know, based on your upcoming bids, you know, what level of sales growth is sustainable for this segment, you know, over the next couple of years?
Speaker Change: And one and while we are pleased with the overall progress that the business has had we're continuing significant work there to simplify the footprint to further improve and sustained margins. So I think we're going to continue to see that variation quarter to quarter, but the team here is very much committed to continue to expanding margins.
Speaker Change: Taking action to drive <unk>.
Speaker Change: <unk> graph and being more selective to in terms of.
Speaker Change: The opportunities we tap all in terms of differentiation, we're able to provide and the products that we have.
Speaker Change: And along the same lines in transit on topline you've had solid book to Bill for a while now based on your.
Speaker Change: Oh coming bids what level of sales growth is sustainable for this segment over the next couple of years.
Rafael Santana: We, as we look at longer term and over time, it's probably a range of 3 to 5 percent. It's probably a range that we should keep in mind. But we continue to see favorable book-to-bill there. And I just would emphasize the first comment I made in terms of us being more and more selective about the opportunities that are out there.
Speaker Change: As we look out longer term and over time, it's probably a range of three to five per shot it's probably a range that we should keep it in mind.
Speaker Change: But we continue to see.
Speaker Change: A favorable book to Bill there.
Speaker Change: I just would emphasize.
Speaker Change: <unk> the first comment I made in terms of us.
Speaker Change: Being more and more selective about.
Speaker Change: The opportunities there are out there.
Speaker Change: Thanks, I'll pass it on.
Operator: The next question comes from Saree Boroditsky with Jefferies. Please go ahead.
Speaker Change: The next question comes from Saree <unk> with Jefferies. Please go ahead.
Saree Boroditsky: Good morning. This is James. I'm for Saree.
Speaker Change: Good morning. This is James on for Sarah Thanks for taking the questions.
James: Thanks for taking questions. So, I wanted to go back to alternative fuels here. So, I think rails are, I mean, while rails are focused on reducing CO2 emissions, I think fuel cost and efficiency also play a critical role here. So, can you kind of talk about the economics of using alternative fuels, such as bio-diesel and renewable?
James: I wanted to go back on or turn it feels here. So I think rails I mean, while rail's their focus on reducing C. O. Two emissions I think fuel costs and efficiency also play a critical role here. So can you kind of talk about the economics of using our turned it fuels such as biodiesel and renewable update.
Rafael Santana: They vary, really, across the globe, depending on both the availability and the elements of local subsidies that could play out there. And I think that's really been a key piece of our strategy, which is ultimately making sure that we've got that flexibility to support customers. For example, you might have renewable diesel available in a certain part of the country. But you might not have it in all parts of the country.
James: Vre really.
James: Across the globe, depending on both the availability any elements of alcohol subsidies that could play out there.
James: And so I think thats really being a key piece of our strategy, which is ultimately making sure that we've got that flexibility to support customers. So you might have a renewable diesel available in a certain part of the country you might not have it in all parts of the country. How you make sure you ultimately have an engine that's agnostic to that.
James: Right into it we're seeing also.
James: Government support in terms of creating potentially some areas, where you might have hydrogen.
Rafael Santana: How do you make sure you ultimately have an engine that's agnostic to that? And playing right into it, we're also seeing government support in terms of creating potentially some areas where you might have hydrogen that might play a role. And we look at this being, again, how you help our customers transition as some of that the development of what I call zero emission technologies, which plays into the battery electric. It plays ultimately into utilizing higher and higher hydrogen mixes, which could lead to fuel cells. But some of those are much farther out in terms of the opportunity to adopt them, in terms of the maturity of the technology, and in terms of the economics that it needs to get.
<unk> might play a role and we look at this being again, how you help our customers transition as some of that.
I'll call it <unk>.
James: <unk> overtime with reversible.
James: Technology, I think that that's a key piece without really making sure you don't lose sight of.
James: The development of a <unk> zero emission technologies, which plays into the battery electric it plays ultimately into utilizing.
James: High end higher hydrogen mix, which could lead to fuel cell, but some of those are much harder out in terms of the opportunity to adopt in terms of the maturity of the technology and in terms of the economics.
James: That it needs to get to.
James: Got it. Thanks for the caller.
Speaker Change: Got it thanks for the color and as a follow up I kind of wanted to go back on the margins again.
James: And as a follow-up, I kind of wanted to go back on the margins again. So back on Investor Day, you kind of talked about expanding margin by 250 to 300 BPS in the next five years. But given such a strong margin performance in the first quarter of 2024, despite a more temporary expectation for the back half, are you kind of thinking differently about the long-term margin target, or are you still kind of looking for 250 to 300 BPS margin expansion? Thank you.
Speaker Change: Back in Investor Day, you kind of talked about expanding margins by 250 to 300 bps in the next five years, but given such a strong margin performance in first quarter 2024, despite like more temporary expectation for the back half are you kind of thinking differently about the long term merger target or are you still kind of like looking forward to 50.
Speaker Change: 300 bps margin expansion. Thank you James as we look forward in the business. We believe we see the the mid <unk> mid single digits on the revenue side and.
John A. Olin: Yeah, James, as we look forward in the business, we believe we see mid-single digits on the revenue side and double digits on the EPS side. Nothing has changed based on our performance this year or last year in terms of our longer-term view of the industry and our performance within that industry. I think we continue to see opportunities to drive...
Speaker Change: Double digits on the EPS side.
Speaker Change: Nothing has changed based on our performance of this year or last year in terms of our longer term view of the industry and our performance within that industry. I think we continue to see opportunity to drive.
Rafael Santana: I think we continue to see opportunity to drive profitable growth ahead, and I think that's important. And on the same note, you're going to have, again, variation. What if it's quarter-to-quarter, half-over-half, but there's strong momentum here in both the pipeline and both North America and internationally. And I think the other piece we sometimes don't talk enough about is just the ongoing lean initiatives, the progress on integration 2.0, and the portfolio optimization efforts. I mean, those two things combined really provide us an opportunity here for both margin and revenue expansion.
Speaker Change: Our profitable growth I had and I think that's that's important shifts at the same notes you're going to have again variation, where if it's quarter to quarter half over half but.
Speaker Change: Derek shop strong momentum here in both the pipeline.
Speaker Change: And both North America, and internationally and I think the Rfps, we sometimes don't talk enough is just ongoing lean initiatives. The progress on integration should all the portfolio optimization efforts I mean those two.
Speaker Change: Things combined are really provide us an opportunity here for both margin and revenue expansion.
Great. Thank you.
Operator: The next question comes from Adam Roszkowski with Bank of America. Please go ahead.
Speaker Change: The next question comes from Adam Rose Koski with Bank of America. Please go ahead.
Adam Roszkowski: Hi, this is Adam Roszkowski on behalf of Ken Hoexter. Question for John. Could you provide an update on the $75 to $90 million run rate cost savings by 2025 and where you are now?
Speaker Change: Is that a moszkowski on for Ken Hester.
Speaker Change: Question for John.
Speaker Change: Could you provide an update on the $75 million to $90 million run rate cost savings by 2025, and where you are now.
John: Yes, Adam.
John A. Olin: Yeah, Adam, when we look at the cost from a cost standpoint, we are about $125 million down the runway from what we were expecting of $135 million to $165 million. And that's kind of realized in the first two years.
John: We are when we look at the cost from a cost standpoint.
John: We are about 120 and $125 million down the runway of what we were expecting a $1 35 to $1 65, and that's kind of realized in the first.
John: Two years and from a standpoint of savings we run a run rate savings base at $22 million a year as we exited 2023 and <unk>.
John A. Olin: And from a standpoint of savings, we were on a run rate savings base of $22 million a year as we exited 2023. And with that, Adam, we are ramping up to that 75 to 90 million that you mentioned as we exit 2025. So we would expect an escalation of, you know, the 60, midpoint, 60, 65, wherever the midpoint is over the next couple years. And we'd expect that to be somewhat linear.
John: With that Adam we are ramping up to that $75 million to $90 million that you mentioned as we exit 2025.
John: So we would expect an escalation of the 60.
John: Midpoint 60, 65 wherever the midpoint is over the next couple of years and we'd expect that to be somewhat linear but most of the projects have all been.
John A. Olin: But most of the projects have all been approved and are in different phases of execution, and some are actually being completed as well. And so we would expect those savings to ramp pretty quickly over the next two years.
John: Approved and are in different phases of execution and some are actually completing as well and so we would expect those savings to ramp pretty.
John: Pretty quickly over the next two years.
John: Helpful. Thank you and then you have given some good kind of one half second half.
Adam Roszkowski: And then you've given some good kind of one-half, second-half margin and profit commentary. You know, given the sort of [inaudible] of the year over year expansion to continue into the second quarter. Should that drop off a bit? Any color you can give us there? Thanks.
John: Margin and profit commentary.
John: Given the sort of.
John: Elevated impacts from last year, you called out about a third of the gain was due to that one time.
John: Item should we expect the same magnitude of freight margin.
John: Kind of year over year expansion to continue into the second quarter should that.
Speaker Change: Drop off a bit any color you could give us there. Thanks.
John A. Olin: Yeah, well, when we look at, from a growth perspective, margin growth perspective, we would expect the preponderance of that growth to be in the first half. We do expect growth, Adam, in the back half, but not nearly at the level that we're seeing in the first half. And, again, the first half is aided by the fact that revenue is going to be significantly The significant majority of revenue will be in the first half, and therefore the P&L leverage will follow that. And as we've talked about, mix is going to be favorable in the first half and the second half.
Speaker Change: When we look at from a growth perspective margin growth perspective, we would expect the preponderance of that growth to be in the first half we do expect growth Adam in the back half.
Speaker Change: But not nearly at the level that we're seeing in the first half and again. The first half is aided by the fact that revenue is going to be significantly.
Speaker Change: The significant majority of revenue will be in the first half and therefore, the P&L leverage will follow that and as we've talked about mix is going to be favorable in the first half in the second half. So we will see a step down in the revenue growth that will grow and we will see a step down in the margin growth.
John A. Olin: So we will see a step down in revenue growth. It will grow, and we'll see a step down in margin growth. But on a full-year basis, you know, we'll exit at our revised guidance, and we feel good about that. When we look at the second quarter, we expect the second quarter to be a strong quarter. Again, based on the production shifts that we've made, as well as the mix that we've talked about, I don't think it'll be at the same level of revenue growth or margin growth, but it'll certainly be a good quarter. And then, again, the back half will be more tempered growth.
Speaker Change: But on a full year basis will exit.
Speaker Change: At our revised guidance and we feel good about that when we look at the second quarter, we expect the second quarter to be.
Speaker Change: <unk> quarter again based on the production shifts that we've made.
As well as the mix that we've talked about I don't think it'll be at the same level of revenue growth or margin growth, but it'll be certainly a good quarter and then again back half will be more tempered growth.
Speaker Change: Thank you.
Thank you Adam.
Operator: The next question comes from Steve Barger with KeyBank Capital Markets. Please go ahead.
Speaker Change: The next question comes from Steve Barger with Keybanc capital markets. Please go ahead.
Steve Barger: Thanks. If we do get an accelerated domestic locomotive cycle driven by regulatory changes, would you anticipate change orders and cancellations for modifications, or would you think that would all be additive to the backlog?
Thanks.
Steve Barger: If we do get an accelerated domestic locomotive cycles, driven by regulatory changes would you anticipate change orders and cancellations for months or would you think that would all be additive to the backlog.
Rafael Santana: There's certainly a choice to be made, but it's really very customer-specific, so I wouldn't say there would be necessarily a complete reversal of that, and I do not expect cancellations in that regard, but there would certainly be an element of more thoughts towards really moving forward with the newer technology, especially as we include in that technology the ability to take on those alternative fuels, I think that really provides the customer here what I'll call the safe now to transition over time with the reversibility they need.
Steve Barger: There are certainly a choice to be made but it's really very customer specific solid and say.
Steve Barger: There would be now Sally a complete reversal of that and I do not expect cancellations in that regard but.
Steve Barger: There would certainly be an element of more top storage.
Steve Barger: Really moving forward with the newer technology, especially as we include in that technology, the ability to take on those alternative fuels.
Steve Barger: That really provides the cost front here, what I'll call the safe now to transition over time with the reversal relative they need.
Speaker Change: Understood. Thanks, and Rafael following up on the hydrogen conversation you said web is pacing investment to market adoption rates, but it's also come up several times on this call do you expect to see hydrogen equipment on track within the next say five years or has that mainline hydrogen equipment more 2030.
Steve Barger: And Rafael, following up on the hydrogen conversation, you said WAB is pacing investment to market adoption rates, but it's also come up several times on this call. Do you expect to see hydrogen equipment on track within the next, say, five years, or is that mainline hydrogen equipment more 2030 and beyond, just to kind of level set expectations? So a few comments.
Rafael Santana: And beyond just to kind of level set expectations. So two comments I do expect hydrogen to be I'm going to call both tested.
Rafael Santana: So, two comments. I do expect hydrogen to be, I'm going to call it, both tested, and there could be an element here if the government potentially steps in to create some corridors where you might be able to introduce that as an alternative fuel into the internal combustion engine. If your question is more around 100% hydrogen utilization, that's later down the road, and that goes with fuel cells, that goes with irreversible technology, so that's going to take a bit more time on that, so that's not in the near or mid-term.
Rafael Santana: There could be an element here, if government potentially stops and to create some core doors, where you might be able to introduce that as an alternative to the internal combustion engine.
If your question, it's more around 100% hydrogen utilization that's later down the road.
Rafael Santana: <unk> fuel cells that goes with irreversible technology, so that's going to take up a bit more time on that so that's that's that's not in the near or midterm.
Steve Barger: Yeah, I wasn't even thinking about 100% adoption; I was just thinking about the idea that you could have a legitimate freight hauling piece of equipment on the tracks in, say, five years. Is the technology there? So we do that.
Yes, I wasn't even thinking about 100% adoption I was just thinking about the idea that you can have a legitimate.
Rafael Santana: Freight hauling piece of equipment on the tracks in say five years is the technology there.
Rafael Santana: So we do that.
Rafael Santana: So, we do that similarly today with LNG. We have a tech car that, ultimately, you have an engine that's able to mix up to 78% of LNG. So, you should think along the same lines. At the same time, if there's any issues as you're running or the availability of fuel is not there, you're still able to complete the mission with the current engine that you have on. So, I think you could expect to see some experimentation there. There could even be some corridors, but I think it is still going to be a niche application.
Rafael Santana: Similarly, we do that today with LNG, we have.
Rafael Santana: <unk>.
Rafael Santana: Ultimately you have an engine that it's able to mix up to 78% of LNG. So you should think along the same lines at.
Rafael Santana: At the same time, if there is any issues as youre running or availability of fuel is not they are you still able to complete the mission.
Rafael Santana: The current engine that you have on so I think you could expect to see some experimentation there there could even be some car doors, but I think still going to be a niche application.
Speaker Change: Understood. Thanks. Thank.
Speaker Change: Thank you.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to <unk> for any closing remarks.
Kyra Yates: This concludes our question and answer session. I would like to turn the conference back over to Kyra Yates for any closing remarks.
Speaker Change: Thank you Dave and thank you everyone for your participation today, we look forward to speaking with you again next quarter Goodbye.
Kyra Yates: Thank you, Dave, and thank you everyone for your participation today. We look forward to speaking with you again next quarter. Goodbye.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: Okay.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.