Westinghouse Air Brake Technologies Corporation — 2024 Q1

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 margin, let's talk about a couple of those pieces. One, there was great operational execution that led the increased productivity, that we would expect would continue.

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'll say quite fluid. So 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, ultimately 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 requires manufacturers to reduce greenhouse gas by 25% for the heavy truck fleet.

Bascome, let me start here because, #1, we're confident on the fundamentals of the business. I mean we've had a strong performance and over the last years and now in this quarter and hopefully comes through here, the team's commitment and the robustness of the strategy. I think we're continuously innovating. I think that's been a key piece, even if you think about mods or new locos. We're continuously adapting to some of these market changes to ensure we remain in a growth 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.

Yes. Bascome, when we look at locos and mods over the long term, we would expect it 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 more nearer in, when we look at -- in the first quarter, as well as the first half, we are actually getting some mix favorability from locos and mods 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 was -- that we delivered over 4 quarters, the back half of '22 and the front half of '23 that was very low margin as we moved into a market. So that's providing some of the mix that you're seeing and that will just be in the first half.

Congrats on a solid quarter. Just wanted to talk about your decarbonization slide, 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 or you have conversations with customers, what are you hearing in terms of the benefits of some of these improvements that you're making in enabling 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 second half and then flowing into 2025?

Yes. So a couple of comments there. #1, this has been really part of a long-term strategy on making sure that we have the most really fuel efficient and fuel is a significant part of the expenses for our customers. So we continue those investments there. I think there is continued opportunity to take advantage of both the Tier 4s and the mods. And I do believe we have some of the best products there in the market. We see that playing not just in North America, we see that playing internationally as well. We really like the opportunity here. And I think customers welcome the ability to transition from known core products 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 on really making sure hydrogen is also a part of that solution.

Very helpful. And then shifting over to capital allocation, just strong performance in the first quarter, strong performance around the kind of the cost management. But as you think about your -- the strong balance sheet that you have and ability to return cash to shareholders, should we expect that there's potential for bigger buybacks and deploying more capital to shareholders? Or how are you kind of seeing -- you talked about the raise of the dividend but kind of the other outlets of cash? How should we kind of think about that for the full year?

Yes. Angel, #1 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 2 to 2.5x net debt leverage ratio, right, we're towards 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, we will prioritize -- with 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 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.

This is Ivan Yi on for Scott Group. I wanted to touch on pricing here. I know you guys don't really give out any core pricing numbers but can you directionally talk about the how the pricing trends are kind of going? And what are your expectations for pricing sort of the rest of this year?

Ivan, 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.

So I think, first, I mean, I think there's certainly an element of, I'll call it, overall life cycle cost that those units provide and that's how you got to keep that in mind. And those are investments that have been done over time that have really positioned our fleets to #1, be it 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 comes with significant investments we've made over time on an engineering team that are able to really drive what I call continuous improvement to those fleets over time and really the service network that we've got and our ability to support customers across the globe on that.

Yes. We're moving forward with the exit of, I'd call low margin revenue from the business, right? So Matt, when we look at that 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're working through exit strategies for different product lines.

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. But in one end, while we are 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.

We -- as we look at longer term and over time, it's probably a range of 3% to 5%. It's probably a range that we should keep it 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.

Uptake vary, really across the globe, depending on both the availability and the elements of, I'll call 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. So you might have 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. And playing right to it, we're seeing also government support in terms of creating potentially some areas where you might have hydrogen that might play a role.

Yes, James, as we look forward in the business, we believe we see the mid-single digits on the revenue side and double digits on the EPS side. 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 profitable growth ahead. And I think that's important. And at the same note, you're going to have, again, variation, whether it's quarter-to-quarter, half-over-half but there is strong momentum here in both the pipeline, in both North America and internationally. And I think the auto piece, we sometimes don't talk enough, it's just ongoing lean initiatives, the progress on integration should [indiscernible] the portfolio optimization efforts. I mean those 2 things combined really provide us an opportunity here for both margin and revenue expansion.

Yes, Adam, we are -- when we look at the cost from a cost standpoint, we are about $120 million, $125 million down the runway of what we were expecting of $135 million to $165 million and that's kind of realized in the first 2 years. And from a standpoint of savings, we run a run rate savings base at $22 million a year as we exited 2023. And with that, Adam, we are ramping up to that $75 million to $90 million that you mentioned as we exit 2025. So we would expect an escalation of the $60 million, the midpoint, $60 million, $65 million, whatever the midpoint is over the next couple of years and would expect that to be somewhat linear. But most of the projects have all been 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 quickly over the next 2 years.

Yes. 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. So we will see a step down in the revenue growth, it will grow and we'll see a step down in the margin growth.

I -- there's certainly a choice to be made but it's really very customer-specific. So I wouldn't say there would be not 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 net to transition over time with the reversibility they need.

So 2 comments. I do expect hydrogen to be, I'm going to call both tested and there could be an element here if 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 midterm.

So we do that similarly. We do that today with LNG. We have a [indiscernible] that's, 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 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 still going to be a niche application.

Thank you, Dave and thank you, everyone, for your participation today. We look forward to speaking with you again next quarter. Goodbye.