Q4 2024 Westinghouse Air Brake Technologies Corp Earnings Call
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Speaker Change: Good day, and welcome to the Lab Tech 4th Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode.
Speaker Change: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Kyra Yates, Vice President of Investor Relations. Please go ahead.
Kyra Yates: Thank you, Operator. Good morning, everyone, and welcome to Wabtec's fourth quarter 2024 earnings call. With us today are President and CEO Rafael Santana, CFO John Olin, and Senior Vice President of Finance John Mastelers.
Kyra Yates: Today's slide presentation, along with our earnings release and financial disclosures, were posted to our website earlier today and can be accessed on the Investor Relations tab.
Kyra Yates: Some statements we are 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.
Kyra Yates: 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.
Thanks, Kyra, and good morning, everyone.
Speaker Change: Before John and I get into the details of the fourth quarter, I'd like to share some thoughts on the past year, this year, and the next five years.
Kyra Yates: Overall, the WATTAC team has delivered another very strong year. We saw top-line growth of 7 percent, operating margin expansion of 190 basis points.
cash conversion of 117% and adjusted EPS growth of 28%.
Kyra Yates: The team continues to lay a solid foundation for us to build on, as we look to realize the full potential of our company.
Kyra Yates: Looking ahead, I'm excited by the underlying momentum of our business and the team's unrelenting focus on driving continuous improvement and delivering for our customers.
Kyra Yates: I believe Wabtec is well-positioned to drive continued profitable growth ahead. To that end, our 2025 financial guidance includes mid-single-digit revenue growth and margin expansion, which will deliver our fifth consecutive year of double-digit EPS growth.
Kyra Yates: Finally, we are currently 3 years into our 5-year long-term guidance that was issued in early 2022. I am pleased to report that we have largely achieved our 5-year goals in just 3 years.
Kyra Yates: Consequently, we are announcing our new five-year long-term guidance and we have even more opportunity to drive value today than we did three years ago.
Kyra Yates: These opportunities are evidenced by the launch of Integration 3.0 and our continuing efforts to optimize our portfolio, which will support over 350 basis points of margin improvement over the next five years.
Kyra Yates: Our financial position remains strong. We continue to execute against our capital allocation framework to maximize shareholder value by investing for future growth and returning value to our shareholders.
Kyra Yates: And as a result of our performance in 24, in our confidence in the future, our Board of Directors has increased our dividend by 25% and has authorized another $1 billion for share repurchases, which we announced in December.
Let's move to slide 5 to discuss our Q4 results.
Speaker Change: 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.
Speaker Change: We delivered a strong fourth quarter. Sales were $2.6 billion, which was up over 2%, and adjusted EPS was up 9% from the year-ago quarter.
Speaker Change: Total cash flow from operations for the quarter was $723 million dollars, representing a strong cash conversion of 212%.
Speaker Change: The 12-month backlog was $7.7 billion, signifying continued momentum and visibility across the businesses.
Speaker Change: Shifting our focus to slide six, let's talk about our 2025 and market expectations in more details.
Speaker Change: While key metrics across our freight business remain mixed, we are encouraged by the strength of our business, international market activity, and our current pipeline of opportunities across geographies.
Speaker Change: North American car loads continue to be up for the quarter. Despite this car load growth, the industry's and WAPTEC's active locomotive fleet were largely flat when compared to last year's fourth quarter.
Speaker Change: Looking at the North American rail car builds, demand for new rail cars was down compared to 2023 and landed at approximately 42,000 cars for 2024. The industry outlook for 2025 is to be down nearly 17%.
Speaker Change: Internationally, activity is strong across core markets, such as Latin America, Africa, Asia, and CIS.
Speaker Change: Significant investments to expand and upgrade infrastructure are supporting a robust international locomotive orders pipeline.
Speaker Change: In mining, commodity prices, and an aging fleet, continue to support activity to refresh and upgrade the truck fleet.
Speaker Change: Finally, moving to the transit sector, we continue to see underlying indicators for growth. Ridership levels are increasing in key geographies along with fleet expansion and renewals.
Speaker Change: Next, let's turn to slide 7 to discuss a few business highlights.
Speaker Change: This quarter, we converted over a billion dollars of pipeline in new locomotive and modernization orders.
Speaker Change: With that context, in North America, we secured $355 million in mods within the quarter, including the first mods order with Pheromax.
Speaker Change: These orders demonstrate the need for our class one customers to continue to invest in their fleets over time.
Speaker Change: The fourth quarter was also a strong quarter for international orders.
Speaker Change: We want orders for new locomotives totaling $649 million with several customers.
Speaker Change: These locomotives will help support the mining and agricultural growth in various international markets.
Speaker Change: In this context, we would like to highlight Africa, where we continue to capture significant growth opportunities in that region.
Speaker Change: We won another order to support the Simandou project, which is the largest mining project ever undertaken in the region.
Speaker Change: This project will be worth over $1 billion when you combine the equipment and services opportunities.
Speaker Change: These international wins demonstrate continued demand for best-in-class solutions that drive productivity, reliability, and durability for our customers.
Speaker Change: Moving to our digital intelligence business, we signed significant orders with Class 1 customers for advanced automation train handling solutions. And finally, we won signaling contracts for over a hundred million dollars with our North America Transit customers.
Speaker Change: This is our digital group's strongest year for orders, totaling approximately $1 billion.
Speaker Change: All of this demonstrates the underlying strength across our businesses, the team's relentless focus on execution, and the strong pipeline of opportunities which we continue to execute on.
Speaker Change: Moving to slide 8, before turning it over to John, I want to briefly discuss our ability to deliver strong and sustainable results.
Speaker Change: Over the last five years, WAPTEC has demonstrated a solid track record of managing through challenging markets, geopolitical issues, hyperinflation, and other significant disruptions.
Speaker Change: We believe our dedicated management team, favorable end markets, and our leading technologies and solutions will enable us to remain resilient and more profitable.
Speaker Change: Our 12-month backlog of $7.7 billion provides visibility and support for growth.
Speaker Change: The 12-month backlog has consistently grown over the past four years despite a weaker North American rail market and a volatile macroeconomy.
Speaker Change: Our track record of strong operating margin expansion across the business is evidence of our ability to deliver productivity, manage costs, and price for value we deliver.
Speaker Change: And finally, we have also demonstrated our ability to consistently generate strong cash flows, with cash conversion averaging 98% over the last five years.
Speaker Change: We expect that our execution, combined with the strength of our business, leading products and technologies will result in Wabtec being resilient through economic cycles, delivering profitable growth, and driving superior shareholder returns.
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, Rafael. And hello, everyone.
John: Turning to slide 9, I'll review our fourth quarter results in more detail. Sales for the fourth quarter were $2.58 billion, which reflects a 2.3% increase versus the prior year. Sales growth in the quarter was driven by the transit segment.
John: Excluding the impact of currency, sales were up nearly three percent.
John: For the quarter, GAAP operating income was $334 million. The increase was driven by higher sales and improved gross margin as we focus on continuous improvement and productivity.
John: Adjusted operating margin for Q4 was 16.9%, which was largely flat to prior year.
John: Gap earnings per diluted share was $1.23, which was up 2.5% versus the year-ago quarter.
John: During the quarter, we had net pre-tax charges of $32 million for restructuring, which were primarily related to our Integration 2.0 and Portfolio Optimization initiatives to further integrate and streamline WebTex operations.
John: In the quarter, adjusted earnings per diluted share was $1.68, up 9.1% versus the prior year.
John: Overall, Wabtec delivered another solid quarter, demonstrating the underlying strength of the business.
John: Turning to slide 10, let's review our product lines in more detail.
Fourth quarter consolidated sales were up 2.3 percent.
John: Our services sales were down 15.9 percent as expected and as we discussed in our third quarter call. This was driven by the timing of modernizations and overhauls and was a reverse of the growth that we saw in the third quarter for our services business.
John: For the full year, services had revenue growth of 3.6 percent.
John: Equipment sales were up 41.8% from last year's fourth quarter. This increase was expected and was also the reverse of what we saw in the third quarter. For the year, equipment sales were up a very strong 17.5%.
John: Component sales were up 4.8 percent versus last year due to a higher international freight car sales and industrial products growth, which was partially offset by the lower North American rail car build.
John: Digital intelligence sales were down 1.4% from last year. This was driven by softness in North America, which was partially offset by our international sales of PTC, next generation on board products, and digital mining products.
In our transit segment, sales were up 7.1%.
John: Moving to slide 11, GAP gross margin was 30.9%, which was up 0.6 percentage points from fourth quarter last year. Adjusted gross margin was up 0.8 percentage points during the quarter.
John: Our team continues to execute well by driving operational productivity and lean initiatives.
John: Turning to slide 12, for the fourth quarter, gap operating margin was 12.9%, which was up 0.7 percentage points versus last year.
Adjusted operating margin was largely flat year-over-year at 16.9%.
John: GAAP and adjusted SG&A expenses were up versus the prior year.
Engineering expense was 51 million dollars.
$10 million lower than Q4 last year.
and Kristine Kubacki.
Speaker Change: Now let's take a look at the segment results on slide 13, starting with the freight segment.
John: As I already discussed, freight segment sales were largely flat during the quarter.
John: The fourth quarter sales were impacted by a shift of our locomotive and mod production to the first half in an effort to level load our quarterly production.
John: Gap segment operating income was $273 million, driving an operating margin of 15.2 percent up 1.6 percentage points versus last year.
John: GAAP operating income included $9 million of restructuring costs primarily related to our Integration 2.0 and Portfolio Optimization initiatives.
John: Adjusted operating income for the freight segment was $348 million, up 0.9% versus the prior year.
John: Adjusted operating margin in the freight segment was 19.4 percent, up 0.1 percentage points from prior year.
John: The increase was driven by improved gross margin, even despite significant mixed headwinds, and largely offset by a similar increase in our operating expenses expressed as a percentage of revenue.
Finally, Segment 12 Month Backlog was $5.58 billion.
John: Our 12-month backlog was up 5.4% on a constant currency basis.
while multi-year backlog of $18 billion was up 3.2%.
Turning to slide 14.
John: Transit segment sales were up 7.1% at $789 million. When adjusting for foreign currency, transit sales were up 7.5%.
Gap operating income was $103 million.
John: restructuring costs related to integration 2.0 and portfolio optimization were 21 million dollars in Q4.
Adjusted Segment Operating Income was $130 million dollars.
John: Adjusted operating income as a percent of revenue was 16.4%, up 1.5 percentage points.
John: During the quarter, Adjusted Gross Margin was up behind Favorable Mix and Integration 2.0 Savings.
John: Gross margins were partially offset by operating expenses being higher as a percentage of revenue.
and Kristine Kubacki.
John: Finally, Transit Segment 12-month backlog for the quarter was $2.1 billion.
John: Our 12-month backlog was up 5.6% on a constant currency basis, while the multi-year backlog was up 5.0%.
Now let's turn to our financial position on slide 15.
John: Fourth quarter cash flow generation was very strong at $723 million resulting in total year cash from operations of $1.83 billion, an increase of 52.7%. During the year,
John: Cash flow benefited from significantly higher net income, improved working capital, and the receipt of a tax refund.
John: Our balance sheet and financial position continue to be very strong, as evidenced by First, our liquidity position, which ended the quarter at $2.21 billion And, our net debt leverage ratio, which ended the fourth quarter at 1.5 times
John: The increase of our year-end cash and the reduction in our year-end leverage ratio was in anticipation of funding the acquisition of Evidence Inspection Technologies Division that we announced on January 13th, which is expected to close in the first half of the year.
John: During the year, we repurchased nearly $1.1 billion of our shares and paid $140 million in dividends.
John: As a result of our performance in 2024 and our confidence in the future, our Board of Directors approved a 25% increase in the quarterly dividend and in early December increased our existing share repurchase authorization by $1 billion.
John: We continue to allocate capital in a disciplined way to maximize returns of our shareholders.
and Kristine Kubacki.
John: Moving to slide 16, I would like to touch on the progress we made against our Integration 2.0 and Portfolio Optimization Initiatives.
John: With regards to Integration 2.0, recall that this was a restructuring program that anticipated one-time expenses of between $135 to $165 million.
John: That would yield an incremental $75 to $90 million of run rate cost savings by the end of 2025.
John: With the program-to-date restructuring expenses of $146 million, we achieved $87 million of run rate savings as we exited 2024.
John: And, we now expect $97 million of run rate savings as we exit 2025, at an estimated cost of $161 million.
John: Regarding our Portfolio Optimization Initiative, we have executed against all planned dispositions of the non-strategic product lines that were identified to help improve our focus and profitability while reducing manufacturing complexity.
John: Under the program, we have incurred $56 million of expenses versus an expected $85 million.
John: Overall, we could not be happier with the progress our team has made against our Integration 2.0 and Portfolio Optimization goals.
John: It helped position WebTech to realize the multi-year margin expansion that Rafael mentioned earlier.
John: Now moving to slide 17 to quickly recap the year. Overall the team delivered a great year for all our stakeholders.
John: The resiliency of the business and strong execution provides us with a solid foundation for profitable growth as we enter 2025.
Rafael: With that, I'd like to turn the call back over to Rafael.
Rafael: Thanks John. Now let's turn to slide 18 to discuss our 2025 Outlook and Guidance.
Rafael: We believe that the underlying customer demand for our products and solutions continues across the business.
Rafael: Our international pipeline remains strong, and our 12-month and multi-year backlogs provide visibility for profitable growth ahead.
Rafael: The team is committed to driving top-line growth and margin expansion in 2025.
With these factors in mind, we expect 2025 sales.
Rafael: between $10.7 billion to $11 billion, which is up 5% at the midpoint from last year.
Rafael: and adjusted EPS to be between $8.35 and $8.75, up 13% at the midpoint.
Rafael: We also expect cash flow conversion to be greater than 90% despite delivering 117% cash conversion in the prior year.
Rafael: I'm confident that Wabtec is well positioned to drive profitable growth and maximize shareholder returns in 2025 and beyond.
Rafael: And because of our confidence in the future, I would like to take the opportunity to update our long-term guidance.
Rafael: Moving to slide 20, let's discuss our new five-year plan in more details.
Rafael: Over the last three years, we executed our previous five-year plan ahead of expectations.
Rafael: We generated strong cash flows and applied that cash towards maximizing shareholder returns.
Rafael: We strengthened the balance sheet and invested in the business for future growth.
Rafael: Looking forward, our priorities and our value creation framework remain unchanged.
Rafael: As we look forward, our team will continue to leverage our leadership position.
Rafael: We expect to grow our business faster than the industry and to deliver mid-single-digit organic top-line growth.
Rafael: We are committed to driving over 350 basis points of margin expansion.
Rafael: Finally, we also expect to generate strong cash flow that will average greater than 90% cash conversion through 2029.
Now, let's move to page 21.
Rafael: Let's spend a minute to discuss what we expect to achieve in terms of organic revenue growth and incremental margin expansion over the next five years.
Rafael: Starting with revenue growth, we expect our revenue to grow at an average annual growth rate of mid-single digits.
We see three drivers to reach this mid-single-digit growth.
Rafael: First, is the underlying industry's organic growth rate in the low single digits.
Rafael: Second, North America has one of the oldest fleets in the world.
Rafael: This, combined with growing international opportunities, will drive locomotive and modernization sales over the next five years.
Rafael: Finally, the innovation that we provide to our customers enhances lifecycle value by driving improved efficiencies and ultimately delivering an attractive return for their investment.
Next, let's talk about margin expansion.
Rafael: As mentioned earlier, we see even more cost opportunities in the next five years than we did three years ago.
Through our strong focus on simplification and continuous improvement
Rafael: combined with capital investments in high return projects and pricing for value, we expect to drive margin improvement of greater than 350 basis points over the next five years.
Moving to page 22.
Rafael: I'd like to discuss our new Integration 3.0 and Portfolio Optimization Initiatives as the enablers to the greater than 350 basis points margin expansion.
Rafael: As we have discussed, Integration 2.0 was a success, and we have momentum as we move into our Integration 3.0 initiative.
Rafael: The details of this effort are seen on this page, and we'll focus on simplifying, streamlining, and consolidating our operations.
to achieve these goals.
Rafael: We will take what we learned from our first program and leverage our strong execution and continuous improvement mindset to deliver on a goal of between $100 to $125 million of additional run rate savings by 2028.
Rafael: We're also announcing today our second phase of portfolio optimization. We will continue to prune product lines that are not a strategic fit.
Rafael: By exiting those product lines, we will improve our focus and profitability while reducing manufacturing complexity.
Rafael: Sales from these product lines totaled about $100 million of sales in 2024 and represented a lower than average margin profile.
Now, let's wrap on slide 23.
Rafael: As you heard today, our team continues to deliver on our value creation framework thanks in large part to our resilient install base, world-class team, innovative technologies, and our continued focus on our customers.
Rafael: With solid underlying demand for our products and technologies, and rigorous focus on continuous improvement and cost management, we feel strong about the company's future, thereby maximizing our shareholders' returns.
Rafael: With that, I'd like to thank our team for their great work this year and their continued commitment to drive top quartile returns.
Kyra Yates: I will now turn the call over to Kyra to begin the Q&A portion of our discussion. Kyra?
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. If you have additional questions, please rejoin the queue. Operator, we are now ready for our first question.
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We will now begin the question and answer session.
Kyra Yates: To ask a question, you may press star then 1 on your touchtone phone.
Kyra Yates: If you are using a speakerphone, please pick up your handset before pressing the keys.
Kyra Yates: If at any time your question has been addressed and you would like to withdraw your question, please press star and two.
Speaker Change: The first question today comes from Rob Wurthemeyer with Mellies Research. Please go ahead.
Rob Wurthemeyer: Hi, thanks. I actually wanted to start one out with a strategic question on your on your long-term framework. Just for clarity, you have 350 books now. I think it was...
Rob Wurthemeyer: 275 at the midpoint on the last framework. And the base year is updated, right, from 22 to 25, so you sort of stack the margin improvements from that period along with the 350 versus the 275.
Rob Wurthemeyer: That's the one question. And then more strategically, you look at that walk on slide 21, and you have 80 BIPs, 85 BIPs of margin expansion from revenue growth. I guess that's where pricing is embedded. I'm not sure if that's all pricing. And so how are you thinking about your pricing power strategically? Do you feel like...
Speaker Change: That's fully embedded in the guide. Do you have, you know, do you have room to flex? I'm just curious about how you think about pricing. Thank you.
Speaker Change: Thanks, Rob. Good morning. Let me start and then I'll pass it on to John here, but I'll start with...
Fundamentals of the business are strong.
Speaker Change: We finished 24 with every single one of our businesses driving profitable growth. Orders in 24 were 20% higher than 23, and we have strong coverage going to 2025.
Speaker Change: The quality of our backlog has continued to improve. I'll say there's a sense we can drive further simplification costs out across the business. The momentum is there and this will drive on our cycle of profitable growth for WAPTEC.
Speaker Change: I think we've got a portfolio that's well-positioned to provide customers a significant payback.
Speaker Change: We're seeing fleets are old, so we have here a significant opportunity.
Speaker Change: to continue to price for the value that we deliver out there and we continue to expand that visibility in terms of coverage. The coverage for this year is aligned with the coverage we've had for the previous three years and as we provide this guidance we see us starting some of that really margin expansion stronger I had here of the first year.
Speaker Change: John. All right, Rob, let's talk about margins and the long-term plan. So you're absolutely right. When we look at the first five-year plan that we kind of truncated at three years,
Speaker Change: We were expecting a midpoint of 275 basis points. We overachieved that in a three-year period of time versus the five. And now we're looking to deliver another more than 350 basis points.
Speaker Change: for the next five years, and that's using 2024 as the base, Rob. I think the biggest point here is to point out that we see more opportunity today
Speaker Change: than we did three years ago, in terms of our ability to grow margins. We've got a lot of experience with it, and we see more of that opportunity now that we've been through the last three years, so we feel real good about that.
Speaker Change: Rob, you asked a little bit about how we're going to deliver the 350 basis points. You started out with the pricing, but I'd like to go back and talk a little bit about the cost side.
Speaker Change: The way we're going to do it is similar to the way that we did the first 300 basis points over the last three years. About two-thirds of it is going to be driven by our focus on cost management.
Speaker Change: and that comes in several flavors. One you're very well aware of and that's integration what will now be 3.0 as well as continuous improvement and our further propagation of lean throughout the organization and then finally we get the absorption benefit and we also expect SG&A to grow at a slower rate over that period of time than our revenue.
Speaker Change: So that leaves the other third and and I would say Rob that the other third is really driven by innovation
Speaker Change: and our ability to continue to innovate and bring products out to our customers that will drive value for them and a return on investment that they're looking for and with that it allows us to drive increased value and what we would call, Rob, is pricing for value.
Speaker Change: The other part of pricing is really cost recovery from inflation and as we've talked about a lot of that is automatically built into price escalators that we have across
Speaker Change: over 60% of our revenue. So again, we feel real good about where we're at today, what we see today versus what we saw three years ago in our ability to drive over that 350 basis points in the next several years.
Okay, thanks. I'll let somebody else. Thanks.
Speaker Change: The next question comes from Angel Castillo with Morgan Stanley. Please go ahead.
and Kristine Kubacki. Thank you.
Hi, good morning and thanks for taking my question.
Speaker Change: I wanted to just maybe go back to, you know, when you think about the kind of margin opportunity, maybe focus more so on the plus side.
Speaker Change: What kind of leverage do you see or buckets to kind of drive incremental upside? I know it's early, you just announced the $100 million to $125 million, but just to the extent that you see incremental opportunity, as you noted, to drive more margin expansion, can you just kind of lay out those buckets for us?
Speaker Change: Angel, let me just start with the strong pipeline of opportunities we have, which really provides not just strong coverage in 2025, but we're really strengthening the visibility beyond that.
Speaker Change: As you saw, I mean, in the fourth quarter alone, we've got over a billion dollars of orders for new locomotives and modernizations.
So that demand continues.
International Growth, it's really a very strong market for us.
Speaker Change: We are winning. We're winning in Africa, winning in Kazakhstan, in Brazil, in Chile, in Australia. And we're continuing to drive momentum. A lot of Dakar, especially on the international, strengthens the visibility here into 2026, 2027 and moving forward. In North America, we continue to see demand on new locomotives and mods.
Speaker Change: Our customers continue to invest for improved costs. North America is sitting in one of the oldest fleets.
Speaker Change: for relevant markets we serve and the need to invest here for continued reliability and reducing cost.
Speaker Change: is there. I think the other piece is the quality of the backlog.
It's stronger.
I think, really, the margin rates.
in the overall business will benefit from that.
On the top of that, you add the fact that
Speaker Change: I mean, we've really been keen on driving lean efforts, cost actions.
driven by simplification John
Speaker Change: spoke about like really a renewed and stronger sense of cost-out opportunities. And with integration 3.0 and portfolio optimization, I think this will drive another cycle of significant profit growth.
Speaker Change: for WAPTAC. So with that, we'll continue to see variation on quarters, but we see strong progress and momentum continuous.
Speaker Change: That's very helpful and maybe just to clarify on the strong North America locomotive demand, are you seeing any step change in terms of the activity or desire to kind of replace equipment there and the one to two percent is that the renewal is that just basically a continuation of what you've seen in the last couple of years or do you anticipate it returning to kind of historical levels of replacement?
Speaker Change: Let me be just very specific there. If you look at the mods and new locomotives combined,
Speaker Change: that's still growing at high single digits as we go into 2025.
Speaker Change: I think what it changes there is really some customers that are investing now and investing for new, but that's not a change from going from mods to new. It's really an element of when customers buy and the volumes there in that context. So the combination of both for North America continues to grow in the high single digits.
Speaker Change: What he saw in terms of the modernization of the FDL vantage of locomotives, you're going to see a bigger and better value proposition going to the EVO platform, which you're going to get like up to 7% of fuel efficiency. So we see that as an opportunity to actually continue to build momentum there.
Very helpful, thank you.
Speaker Change: The next question comes from Sari Boroditsky with Jeffrey. Please go ahead.
Speaker Change: Hi, thanks for taking the question. Maybe just kind of turning a little bit to digital, your outlook contemplates for 2025 slower demand in North America. Maybe just what the feedback has been on digital and why the North America has been softer here and what can drive this market for long-term growth?
Yeah.
Speaker Change: Well, first, I think strong quotes for our business as I think about how we...
Speaker Change: We've really been churning that around with a softer North American market, but I think we've continued to talk about stronger international demand. The business closed the year with a billion dollars in orders. That's one of the strongest in the last five years, and we see higher demand for onboard locomotive products.
Speaker Change: Digital Mining Technologies, despite of this softer demand in North America. And we continue to see a pipeline here with higher demands from international, and that's both PTC, the on-board locomotive products.
Speaker Change: And when you think about it, the software demand in the U.S. is really the discretionary element of OpEx and some of the impact we've had from the commuter signaling business.
Speaker Change: I think recurring revenues and short-term convertibility continue to be a focus.
Speaker Change: area, but this business has really grown profitably last year and it's off to growing profitably again in 2025. So positive dynamics there, international really leading the growth here.
Speaker Change: Now maybe just a little bit about freight margins, you've been guiding them weaker in the fourth quarter, so I guess it's not that surprising, but you know it does follow really strong results in the first nine months of the year. Can you just talk about how to think about the step-up in freight margins into the first quarter and full year 2025, and how do you think about mix given the expectation for higher new locomotive shipments and lower mods?
Speaker Change: I'm glad you pointed out, we've certainly been kind of following along in the cadence of the year that we expected. And that had a fair amount of profitability in the first half of 24. And so as we get through the fourth quarter, it's exactly what we expected.
Speaker Change: But, Siri, I would also, you know, encourage everyone to divorce.
Speaker Change: kind of the financial growth from the underlying momentum. The underlying momentum as we exit the fourth quarter.
Speaker Change: It's very strong. And with that, it gets back to your question.
Speaker Change: with regards to kind of where does margins go from here.
Speaker Change: We finished this quarter at, what, 16.9 percent. We would expect that to pop back up. Remember why the margin is down this quarter. Again, it goes back to that cadence. As we pulled forward a fair amount of mix with our production schedule into the third quarter.
Speaker Change: into the third quarter and out of the fourth quarter. So we saw that sequential decline in the third to the fourth from the third to the fourth quarter which we expected and we would expect that to pop back into the first into the first quarter of next year.
Thanks for taking the questions.
Ken Hoekstra: The next question comes from Ken Hoekstra with Bank of America. Please go ahead.
Hey, Greg. Good morning.
Speaker Change: So I want to talk about the 2025 outlook, not the five-year, which I think you've delved into a bunch.
Speaker Change: You may be the upside downside given the range you've talked about and given the 12-month backlog at
Speaker Change: I think you said just over $7.5 billion, which is now about, I guess, 70% of the midpoint of your revenue range. Maybe talk a little about those, you know, the upside, downside of that. And then just on the last question, maybe the move to smooth out your
your base through the year.
Speaker Change: You know, you just gave kind of four Q1Q thoughts, should we see a more level throughout the year, or do you still have kind of anticipated dips in any given quarter based on that mixed flow? Thanks. Hi, Ken. This is John. Let's start with the cadence of our earnings next year.
Speaker Change: and I'm glad you pointed that out, is we spent a lot of time and energy in 2024 kind of level-loading our factories more for, in particular, mods and locos.
Speaker Change: and we did a great job and the operations team did a fantastic job. So what does that mean going forward? As we look at the cadence of revenue, kind of first half, second half of 2025, we would expect that growth.
Speaker Change: to be very equal or balanced between the first halves. We're always going to have variation, but we would expect a very balanced level of revenue growth. When we look at earnings,
Speaker Change: Earnings is going to, first half is going to be more tempered. The growth will be more tempered in the first half than the second half.
Speaker Change: A couple reasons for that, as we look at a year ago we had very strong margin growth in the first half of 3.1 percentage points.
Speaker Change: and 0.8 percentage in the back half. And the second reason is, as we look at our programs such as Integration 3.0 and others, productivity programs, we'll see that continue to build margin throughout the year. So again, first half.
We'll see growth, but more tempered than the second half.
Speaker Change: When we look at the first quarter, you should expect first quarter margins to be in line with what they were a year ago. And again, going back to Siri's question, that we'll see margins on a sequential basis rise quite significantly between the fourth and the first quarter.
Great, and thoughts on the backlog versus the total?
I'm sorry, Ken.
Speaker Change: I guess the upside-downside, right, in terms of your backlog is about 70% of the total, so maybe your thoughts on what's the upside-downside to that. Yeah, so with the coverage, number one, the 12-month backlog we feel very good about as we look forward. We're at 5.5% on a comparable basis of that backlog.
Speaker Change: 72% of that, Ken, is kind of set in orders, right? So that'll provide some of the stability against that and some of the variation that we could have in that number. The other 28% is our flow business.
Speaker Change: right, and we've got various things that flow through that business. When we look at a big piece of it, or a part of that, is the freight car build.
Speaker Change: And with that we expect, and the industry expecting that to be down a little bit, so a little bit of headwind there.
Speaker Change: and there may be some variation depending on how the car build comes out.
Speaker Change: The other part of the flow business is largely in various aftermarket parts and whatnot, and we expect growth out of that. So we feel very good about the guidance that we put out there in the midpoint, which is around 5 percent.
Speaker Change: But we're going to see normal variations, but we feel real good with the backlog that we have as we move into 2025.
Speaker Change: and just can you just clarify it did you exclude the evidence inspection
Speaker Change: revenues or the acquisition from your Outlook as well? Yes, thanks Ken.
Speaker Change: Evident is not included in the guidance that we provided this morning at all. There's nothing in there. What we will do is we will update our guidance after we close on that transaction and we would expect that to be probably toward the second, the latter part of the second quarter.
Speaker Change: With that, you could expect a fair amount of adjustment in revenue, right? Because the asset that we're buying in 24 had revenue of over $430 million.
So we get about a half a year in there.
Speaker Change: plus the growth on that. In terms of EPS, wouldn't expect that much growth, right? The first year, a fair amount of interest. We're very pleased with the transaction and that we'll have a treat of
Speaker Change: EPS in the first year, but even more so in the first half, but again, that'll be more of a slight increase to EPS
Great. Thanks for the time, John. Thank you, Ken.
Speaker Change: The next question comes from Daniel Imbrough with Stevens. Please go ahead.
Hey, good morning, guys. Thanks for taking our questions.
Good morning.
Speaker Change: Rafael, John, if we could dig a little more into the revenue growth side. So, in the fourth quarter, it does look like organic growth decelerated a bit here. When we look at that deceleration, is that just pricing growth slowing as we lap inflation, or kind of what was behind that in the fourth quarter? And then, similarly, I know you just talked about the backlog, but ending the year up 3%, another bit of a decel, is that just you guys walking away from lower margin business? Rafael, you mentioned that quality has improved. So, if you could just expand on maybe why that has, you know, slowed,
Speaker Change: produced our products, right, in particular the MODS and LOCAL was on.
Speaker Change: production and delivery. And so all of those were expected, actually they were expected four quarters ago when we knew what we were going to be producing in the fourth quarter of this year. So what you're seeing on our top line growth is simply the sales that we have off the production, largely on mods and locos.
Speaker Change: But the underlying momentum of the business has been very consistent throughout the four quarters that we have.
Speaker Change: and we feel real good about that moving into next year.
Speaker Change: And those lead indicators of future growth are the backlog that you mentioned. And the headline is at 3%, but the underlying comparable growth is at 5.5%.
Speaker Change: that's right in line with what we would expect at this point of the year and going back to the comments that we talked about in terms of coverage we've got a strong coverage that's very comparable to the way it has been the last three years so that gives us a lot of confidence
as we move into 2025. And as Rafael had mentioned,
Speaker Change: The orders were up 19.7% this year, so that gives us that forward-looking momentum. And as we mentioned in the key highlights, we had over a billion dollars of mod local orders in the fourth quarter alone.
Speaker Change: So, everything's moving in the direction that we would expect to continue on with that underlying momentum that is growing in that mid-single-digit range, regardless of what you see in the fourth quarter with regards to the accounting view of what was shipped versus what's being consumed.
Speaker Change: If you take a little bit of the view on the specific businesses, yes, as per my comments, the backlog, the margin keeps improving there, and it's really across the board. Takes transit.
Speaker Change: I think early last year, I got the question on, was there still room to improve margins? So that goes with 90 basis points of margin improvement last year. Growth was maybe a bit ahead with 6%.
Speaker Change: We'll continue to be prudent there and selective, but the team is off to another strong profitable growth year in transit.
Speaker Change: You look at digital, the strength is there in the waters, despite of the volume last year, which was still a slight growth, a significant margin growth, and that team has got the eye on the ball there on the service front.
Speaker Change: Locomotives are running, they're running hard. We have over 18,000 locomotives connected, so we understand that very well. It's reflected in both the parts that we sell, it's reflected into the maintenance service agreements, and that's well above the growth that you saw for the total business last year, so it feels strong there. International fleets are growing. I think we've highlighted before four and a half percent caliber there, so that's a
Speaker Change: there was really the combination of mods and capex there and even components with all that pressure we saw business that grew last year the team continues to really balance the business based on the realities they face and we're going off for another profitable growth year on that business despite of the market pressures
Speaker Change: So, all in all, I think really strong momentum and the business is ready to really drive another strong and significant profitable growth cycle.
Speaker Change: Thanks for that, Culler. And then, John, if I could follow up, or maybe I'll fail on the pricing strategy question earlier. You talked about pricing for value. I guess,
Speaker Change: As you increase the technology and you increase your differentiation versus peers, why would that not support just higher levels of organic pricing growth over time since the value you're adding is increasing? And then on the cost side of that equation, I guess, you know, obviously, CPI and inflation can remain stubborn, but what do you think is the right underlying cost level of inflation before the cost takeouts you're doing?
What is the underlying cost growing up?
Speaker Change: Okay, let me unpack that in a couple of tanks and first part is...
Speaker Change: When we say we price for value, a piece of that is you're improving the product, so you're not delivering the same product you did in the previous year. And the value delivered there is really tied to what I'll call the core fundamentals that drive return for our customers, which is
Speaker Change: where the life cycle cost of our products stand against competition and really, I think it's very positive to see we're winning. We're winning really against various competitors that are out there and that's very positive. When you talk about inflation and how we price there, John did mention the elements of our contracts and agreements having escalation.
Productivity, Cost Style, Deficiency, Designing for Cost.
Speaker Change: We've come ahead of inflation through that and we feel strong about continuing to do that. I've got a number of actions.
Speaker Change: As you see, based on the long-term guidance, we start very strong in terms of the margin expansion. We drive 425. And that's, for me, just a function of the teams continuing to really go out there, identify cost-out projects.
Speaker Change: simplify the footprint and we continue to build off of that. So, 350 bases plus is really a direction here that team will continue to execute towards.
Thanks. Best of luck.
Thank you.
Speaker Change: The next question comes from Jerry Revich with Goldman Sachs. Please go ahead.
Yes, hi, good morning, everyone.
Jerry Revich: Can we just talk about the margin performance in transit? The fourth quarter tends to be your strongest margin quarter generally, but you folks delivered really outsized gains this quarter. How should we be thinking about the sequential cadence for that?
Jerry Revich: line of business in 25, and then relative to the 350 basis points that you folks laid out, do you expect outperformance in transit over that five-year timeframe relative to the 350 basis point total?
Jerry Revich: Jerry, let me take the question with regards to Q4 margin performance, and then Rafael can share more on...
kind of the move of transit into the future.
You're absolutely right, Jerry. You know, businesses...
Jerry Revich: tend to have over time cadences and within our transit business the Q4 operating margins tend to be higher.
Jerry Revich: and that's partly due to the fact that some of our customer, a fair amount of customers are
Jerry Revich: government or quasi-government agencies and they get their budgets and they end up spending what's on left and typically on higher margin products.
Jerry Revich: So that's why we see that. Having said that, the more important part of that discussion is the fact that we grew that.
Jerry Revich: by 150 basis points in the fourth quarter, up to 16.4 percent. And the drivers of that jury were mixed, well, a couple-fold. One was mixed.
Jerry Revich: And if you look, when we showed the aftermarket, aftermarket was up about 11.5%. And while OE was still up a good amount, where you'd see some of that selectivity that Rafael talked about,
Jerry Revich: very favorable mixed dynamics and so that pushed the margins up and part of that 150 basis points was due to that. The other is has been what we've been talking about for some time on integration 2.0. You know we're in that ramp that really that sweet spot of the ramp and
Jerry Revich: And about two-thirds of that is lodging in the transit business, and we're enjoying that margin lift, which certainly will hold as we move into the future.
Jerry Revich: The teams are continuing the significant work to simplify the footprint and further improve margins.
The business is becoming more and more competitive.
Jerry Revich: As described before, I mean, we're going to continue to see variation quarter to quarter, as John mentioned. It could be mix, it could be timing of projects.
will continue to be selective about growth in the segment.
Jerry Revich: But this team is committed and they are continuing to take action and you're going to see some significant profitable growth again in 2025.
Jerry Revich: The backlog is stronger, the business is on track to full-year margins, and this will benefit from integration 3.0, portfolio optimization, and, well, book-to-bill was positive as well as we closed the year.
We're continuing to execute the playbook for that business.
Speaker Change: Jeff, can I ask on services, you know, the seasonality has been a little bit different in 23 versus 24. Can you just talk about the variation that we see?
Speaker Change: quarter-to-quarter. What does that look like for the core services business if we were to strip out mods? Has that stayed relatively constant? And how are you thinking about 25 seasonality relative to 24? Again, just for services, X mods, just so we can...
See how the baseline is performing.
Speaker Change: Yeah, when we look Jerry, when you look at the core
80% of the growth, or 80% of the business.
Speaker Change: That's our parts business, right? And that's got a very normal...
and more measured cadence to it.
Speaker Change: What you are seeing when you look at the numbers on a total services basis.
Speaker Change: is some of that rebalancing that we've done in particular between the third and the fourth quarter. So that's driven by the other 20%, which is our MODS revenue coming out of services.
Speaker Change: You know, as we move into the next year, we expect that underlying growth to be steady.
Speaker Change: across the four quarters. However, we're still going to see variation depending on how we manufacture the mods.
Speaker Change: Overall, our manufacturing, when we look at combined MODs and LOCOs, we would expect that to be very consistent. But we're still going to have times.
Speaker Change: because we like to do customer runs as much as we can with the same product.
Speaker Change: We're going to see things at times that what we saw in the third and fourth quarter is where we'll see a little bit more flip-flopping between the equipment P&L with new locos and the mods But overall the underlying piece is a consistent and well-performing business
Super. Thank you.
Speaker Change: The next question comes from BASCOM Majors with Susquehanna. Please go ahead.
Speaker Change: Rafael, earlier you talked about a high single-digit contribution to growth this year from the combination of new locos and mods. Can you roughly break us out you know what that looks like between
pricing units and how each are growing this year and
Speaker Change: More midterm, I believe both of your largest mod contracts in North America are through the end of this year. Can you talk about where you are in the cadence of...
Speaker Change: extending those agreements and how you feel about a, you know, steady to accelerating pace of growth in 2026 and beyond. Thank you.
Yo.
Speaker Change: I'll start with we've got active discussions with customers in North America for both new units
Speaker Change: and Four Mods, so that's continuing and that's very much connected to what I described.
Speaker Change: What you're seeing specifically going to 25, which is different than you saw it, is you've got some customers, especially on the new unit side, investing in a more heavy framework than on the mod side. So it's less about...
Speaker Change: specific customers shifting from one to the other than is just an element of mix.
Speaker Change: in North America. We continue to see a strong interest there and that's really tied to the return they get on that investment. A piece of it is some of the elements of really just cost.
Speaker Change: to operate the product, the R piece of it, it's obsolescence.
Speaker Change: if you think about the electronics and all these elements. So we see that demand continuing.
Speaker Change: And to your point on the Evolution fleet, where are you in the testing, how are the results been, and when do you expect to launch that fully as a commercial product?
Speaker Change: So we expect by the end of next year that to be fully commercialized, so seeing really the full impact of that going to 27. So product is currently being tested. We're expanding the number of units.
Speaker Change: and really making sure that ultimately you translate the same reliability and availability of the products as we continue to really modernize the fleet that's out there and continue to drive value for customers.
Thank you.
Speaker Change: The next question comes from Ivan Nee with Wolf Research. Please go ahead.
Ivan Nee: Yes. Good morning, guys. Thanks for taking my question. First, on the long-term guidance, you're calling for 70 basis points of average annual improvement. Is that a good annual run rate target, or is it more front-end loaded or more back-end loaded through 2029?
Speaker Change: Thank you. I'll start there. I mean, it's clearly more front-end loaded. You see how I was starting the guidance for 2025.
Speaker Change: and it has to do with, again, this is a continuous improvement process.
Speaker Change: So, the team's got a clear DAC that's being operationalized, so we translate into delivering on the guidance that has been provided. But that's a work that continues, and we'll continue to expand on that DAC of projects as we look into it.
Speaker Change: Thank you. And then, how much of your raw materials are imported? What impact would tariffs on Canada, Mexico, China, and potentially other countries have on your COGS and ultimately your gross profit? Thank you.
Speaker Change: Yeah, so the tariff plan continues to be, I'll call it quite foolish, right? It's changing on a day-to-day basis. That's not included in our guidance.
Speaker Change: With that being said, over the past five years, we've successfully managed inflation, we've had tariffs as well, but while all of that was happening with expended margins.
Speaker Change: So, I think we've demonstrated and we continue to be committed on really on our ability to drive positive outcomes in very dynamic environments.
Speaker Change: So, while there could be an impact on any specific quarters, as we've done before, we would expect to navigate this challenge over time in collaboration with various stakeholders with positive outcomes throughout.
Thank you.
Speaker Change: As a reminder, if you would like to ask a question, please press star, then 1 to join the question queue.
Speaker Change: The next question comes from Steve Barger with KeyBank. Please go ahead.
Speaker Change: Hey, thanks for sticking me in. Rafael, with digital intelligence growth shifting towards international, how do you think about the market size for international digital and can you talk about your penetration rate in North America versus international?
Yes
Speaker Change: So a couple points there. Number one, international, it's very significant. PTC is a very compelling offer. We're seeing customers really with a strong interest.
Speaker Change: On that, we've gotten a number of discussions really going across all the geographies that I typically discuss here, and we continue to see really a momentum picking up there in terms of how you drive automation. With all that being said,
Speaker Change: And there's still, of course, more significant opportunity here, especially for adoption of the most, I'll call it, traditional products that we have high penetration in North America, including Treap Optimizer and Zero to Zero and other things.
Speaker Change: One thing that we've really seen more recently in North America, and it really goes back to the last couple weeks, is I think we're seeing some positive progress, and I think that's encouraging. I mean, we've seen really at least one waiver here going through the FRA, which is really a positive for us.
Speaker Change: And it speaks to not just the safety plan for the railroads.
Speaker Change: It speaks to ultimately us continuing to expand on that platform that we have.
Speaker Change: And this case is the TRIP Optimizer Air Brake Control product, which is, again, a next step on that evolution of products that will allow customers not just to run it safer, it will advance also the elements of automation and I'll call ultimately efficiency for our customers.
Speaker Change: Good to see that progressing after a couple of years, you know.
Speaker Change: And if that's right, what is the long-term target for recurring revenue as you think about the legacy products and, you know, maybe include the inspection acquisition that you just did evident?
Speaker Change: Yeah, if you think about it, I mean, we started this journey on digital lawn and I'm not going to mix with that then at this point.
We've started really with recurring revenues below 20%.
Speaker Change: Very much connected. I mean, if you think about how the next generation of PTC and how that's being commercialized
Speaker Change: If you think about the number of products that we can build on the top of that, which you speak to movement planner, you speak to a lot of the automation the railroads can do in terms of driving efficiency, in terms of driving, really I'll call ultimately a lower cost.
into their operations. So we're exactly on that path.
Speaker Change: And that's the direction that business has got to go. I think as you look into some of the opportunities here for capital allocation, whenever we're looking at any element of M&A, as we discussed before, digital is certainly an area that we look at it. And it's got to go with the fundamentals that continue to make our businesses strong, which
Speaker Change: significant growth here ahead and Abedin meets all those elements. We'll grow business with our end markets.
Speaker Change: Our business group will unlock significant opportunity from that business on serving evidence and markets, and we've got significant opportunity here to leverage a lot of the capabilities we have in-house.
That's really great detail. Thank you. Thank you.
and Kristine Kubacki.
Ken Hoekstra: The next question comes from Ken Hoekstra with Bank of America. Please go ahead.
Hey, great. Thanks for the follow-up question.
Speaker Change: Rafael, I guess the stock's been down 8% this morning. I think there's a concern on the mid-single-digit revenue growth outlook versus what you've been generating, which has been...
Speaker Change: may be closer to upper single-digit or even double-digit. So, do you take away this is a conservative outlook?
missing the opportunity on M&A.
Speaker Change: I think that's why you're getting a lot of backlog at 3% growth and questions on pricing. Maybe you want to just take an opportunity to kind of...
for your thoughts on that.
Speaker Change: Okay, so two things Number one, M&A is not being incorporated on this, right? I want to be very clear. I mean we're looking at this really as a function of What I'll call organic growth, so I just want to start there
Speaker Change: The second piece, which I think it's also important not to be missed.
We've continued to do our portfolio optimization.
Speaker Change: There is probably a hundred million dollars of impact that goes right into the top line. You're seeing it there. So hopefully that's not being missed.
as well in that context.
Speaker Change: When we provide guidance, it's ultimately aligned to the operating plans we have from each one of the businesses. And that's what guides us to what we're providing. As we said, coverage is very much aligned with the coverage we've had last year. If you think about how we've got it through the year, I think we continue to have opportunities here to drive.
Speaker Change: I think increased share of wallet from our products, and that's what our teams are really fighting to do every day. With that, we're very much committed to deliver on the guidance we've provided.
Speaker Change: and as we look into the long-term guidance we are starting that accelerated in an accelerated form and we have no intention to slow down in that regard.
Great. Appreciate the clarification. Thanks, Rafael.
Thank you.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Kyra Yates for any closing remarks.
Kyra Yates: Thank you, Betsy, and thank you everyone for your participation today. We look forward to speaking with you again next quarter.
Kyra Yates: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.