Westinghouse Air Brake Technologies Q1 2025 Earnings Call Transcript

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Provided by Quartr
April 23, 2025
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Operator

Good morning, and welcome to the Labtech First Quarter twenty twenty five Earnings Conference Call. All participants will be in a listen only mode. 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.

Kyra Yates
Kyra Yates
VP of IR at Wabtec

Thank you, operator. Good morning, everyone, and welcome to Wabtec's first quarter twenty twenty five earnings call. With us today are President and CEO, Rafael Santana CFO, John Olin and Senior Vice President of Finance, John Mastlers. 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. Some statements we are making are forward looking and based on our best view of the world and our business today.

Kyra Yates
Kyra Yates
VP of IR at Wabtec

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.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Thanks, Cairo, 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 financials. Before we get into the numbers, I'd say that we had a strong start to the year delivering results ahead of our expectations. While we had favorable business outcomes in the quarter such as business mix and timing of expenses, more importantly, we have amplified our cost control levers as a direct result of the uncertain economic environment that we're anticipating to play out over the remainder of the year.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

With that said, we are approaching the remainder of the year with caution, with discipline and the focus to take the necessary actions to deliver against our commitments in an uncertain and volatile economic landscape. Having Having that in mind, sales were $2,600,000,000 which was up 4.5%, adjusted EPS was up 21% from the year ago quarter, and total cash flow from operations for the quarter was $191,000,000 The twelve month backlog was $8,200,000,000 up 6%, reflecting the continued momentum and visibility across the business. Shifting our focus to slide five, let's talk about 2025 end market expectations in more detail. While key metrics across our Freight business remain mixed, we are encouraged by the strength international market activity and our current pipeline of opportunities across geographies. However, we are cautious with regards to our North American business as the current tariff activities play remainder of the year.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

North American traffic was up 3% in the quarter. Despite this traffic growth, the industries and Wabtec's active locomotive fleets were largely flat when compared to last year's first quarter. 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 continue to invest in solutions that drive fuel efficiency, reliability, productivity and safety. Looking at the North American railcar build, last quarter we discussed the industry outlook for 2025 to be about 35,000 cars to be delivered, which is down 17% from last year. This industry forecast has remained unchanged.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Internationally, activity is strong across core markets such as Africa, Asia and CIS. Significant investments to expand and upgrade infrastructure are supporting a robust international locomotive backlog and orders pipeline. In mining, an aging fleet continues to support activity to refresh and upgrade the truck fleet. 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.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Next, let's turn to Slide six to discuss a few business highlights. In Kazakhstan, we continue making progress on finalizing orders associated with our installed fleet by signing a $300,000,000 multi year service agreement to increase the availability, reliability and productivity of KTZ's locomotive fleet. In North America, we secured $140,000,000 order from a Class one customer for new locomotives. This order demonstrates the need for our Class one customers to upgrade their aging fleet by investing in new locomotives. Moving to the APAC region, we secured orders totaling $130,000,000 for new equipment and service contracts.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

This included orders for new locomotives and mining drive systems. These orders continue to highlight the growth opportunity we see in the region. Moving to our Transit segment. Transit won two multiyear platform door contracts valued at $85,000,000 for the Madrid Metro and the new Hamburg Metro U5 line. And finally, we secured a $50,000,000 order to provide brakes and couplers for servicing the New York City Transit Authority.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

This win signifies the European and North America Transportation Authority's commitment to investing in solutions that enhance passenger safety and modernize metro networks. Overall, these successes continue to demonstrate our leadership in the markets we serve and the commitment of the Wabtec team to deliver meaningful results for our business and for our customers. Moving to Slide seven. Before turning it over to John, I want to briefly discuss the positive momentum we have in our international markets. Over the last several quarters, we have highlighted that our international pipeline of opportunities continue to be strong.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Our international revenue has grown over the last couple of years at a high single digit growth rate and delivers a higher level of profitability than our North American region. The continued growth in our international locomotive installed base has enabled us to leverage our international footprint and has under underpinned our share gains in services, components and digital solutions. As we walk around the world, let's discuss some of these drivers. In Europe, our Transit business is supported by urbanization trends and growing infrastructure funding, which has led to resilient and steady revenue growth, while providing safer, cleaner and more cost effective commuting. The CIS region growth is driven by the locomotive fleet expansion, which has led to robust growth in services and digital products in the region.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

The Sub Sahara Africa region is benefiting from new mining projects and volume growth. The new equipment orders for the Simandou mining project that were secured in 2024 are expected to provide further opportunity for services and digital growth in the region. Beyond Guinea, there are more opportunities for African expansion in 2025. Moving to the APAC region, we see trends supportive of growth for both freight and transit. Urban infrastructure investment and our growing installed base of equipment is driving transit growth, while mining, fleet renewals and a growing locomotive installed base supports freight growth, particularly in Australia.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

And finally, South America is upgrading fleets, exploring alternative fuel and automation technologies, as well as implementing various digital products such as Strip Optimizer suite of onboard products, PTC two point zero, digital mining and our inspection technologies. This is in support of the region's needs for efficient transportation of goods to help with increased freight demand. We expect our execution, the strength of our business and our leading products and technologies will result in Wabtec continuing to convert the opportunities in our pipeline into orders and growth. With that, I'll turn the call over to John to review the quarter, segment results and our overall financial performance. John?

John Olin
John Olin
Executive VP & CFO at Wabtec

Thanks, Rafael, and hello, everyone. Turning to Slide eight, I will review our first quarter results in more detail. Our first quarter results came in better than expected behind strong operating margin expansion. The drivers of the first quarter's operating margins were due largely to favorable timing of expenses mix, improved operational execution and as a result of our proactively taking a more defensive spending posture as we head into significant economic uncertainty. Sales for the quarter were $2,610,000,000 which reflects a 4.5% increase versus the prior year.

John Olin
John Olin
Executive VP & CFO at Wabtec

Sales growth in the quarter was driven by the Freight and Transit segments. Excluding the impact of currency, sales were up 6.2%. For the quarter, GAAP operating income was $474,000,000 The increase was driven by higher sales, improved gross margin and proactive cost management. Adjusted operating margin in Q1 was 20.7%, up 1.9 percentage points versus the prior year. This increase was driven by improved gross margins of 1.7 percentage points and driven by operating expenses, which grew at a slower rate than revenue, increasing our Q1 margin by an additional zero two percentage point.

John Olin
John Olin
Executive VP & CFO at Wabtec

GAAP earnings per diluted share was $1.88 which was up 22.9% versus the year ago quarter. During the quarter, we had net pretax charges of $9,000,000 for restructuring, which were primarily related to our integration and portfolio optimization initiatives to further integrate and streamline Wabtec's operations. As you may recall in our Q4 earnings call, we introduced Integration three point zero, which is expected to drive $100,000,000 to $125,000,000 of run rate savings as we exit 2028 and another round of portfolio optimization initiatives are expected to eliminate roughly $100,000,000 of low margin non strategic revenue while reducing manufacturing complexity. In the quarter, adjusted earnings per diluted share was $2.28 up 20.6% versus the prior year. Overall, Wabtec delivered another strong quarter, demonstrating the underlying strength of the business.

John Olin
John Olin
Executive VP & CFO at Wabtec

Turning to Slide nine. Let's review our product lines in more detail. Before we discuss our business group sales performance for the quarter, I would like to point out that we have realigned a couple of our businesses within the Freight segment. Essentially, we have moved our NorthCo maintenance of way and a freight distribution business components group from our services group. This shifts $91,000,000 of revenue in the quarter to components from services.

John Olin
John Olin
Executive VP & CFO at Wabtec

Prior year's results have been adjusted to make our presented financials comparable year over year. We believe that this realignment will improve focus and better match our group's competencies to deliver improved growth in the future. With that being said, first quarter consolidated sales were up 4.5%. Our Services sales were up 16.9%. This was driven by the timing of modernizations and overhauls.

John Olin
John Olin
Executive VP & CFO at Wabtec

During the first quarter, we allocated additional capacity to our Mods production, which was the reverse of what we experienced in the fourth quarter. Regarding our core service business, we experienced expected growth as our active fleets ran according to plan. Equipment sales were down 9.5% from last year's first quarter. This decrease was expected given the shift of capacity to mods during the quarter. In Q2 and the second half of the year, we are planning for a shift back to new locomotive production.

John Olin
John Olin
Executive VP & CFO at Wabtec

This is expected to result in slightly lower year over year mod production in Q2 and a more pronounced reduction in the second half. Component sales were down 0.8% versus last year due to portfolio optimization efforts and a lower North American railcar build, which was partially offset by increased industrial product sales. Digital intelligence sales were up 2.8% from last year. This was driven by growth in our international sales, which was partially offset by a lower North American market. In our Transit segment, sales were up 5.3% and driven by our Products and Services business.

John Olin
John Olin
Executive VP & CFO at Wabtec

Foreign currency exchange had an adverse impact on sales in the quarter of 2.6 percentage points. The momentum in the Transit segment remains positive due to elevated infrastructure investment and global ridership, which accelerates the need for investments in sustainable infrastructure. Now moving to Slide 10. GAAP gross margin was 34.5%, which was up 1.8 percentage points from the first quarter last year. Adjusted gross margin was also up 1.7 percentage points during the quarter.

John Olin
John Olin
Executive VP & CFO at Wabtec

In addition to higher sales, gross margins benefited from timing of expenses, favorable mix and modest contract escalation. Mix within the Freight segment was also favorable despite significantly higher new local and mod deliveries in the quarter. Foreign currency exchange was a headwind to revenue as well as gross profit and operating margin in the quarter. During the quarter, we also benefited from improved operational execution into our proactive approach on cost controls. Our team continues to execute well by driving operational productivity and lean initiatives.

John Olin
John Olin
Executive VP & CFO at Wabtec

Turning to Slide 11. For the first quarter, GAAP operating margin was 18.2%, which was up improved 1.9 percentage points to 21.7%. GAAP and adjusted SG and A and engineering expenses was up versus the prior year, with adjusted SG and A slightly lower as a percentage of revenues. Engineering expense was $46,000,000 slightly lower than Q1 last year. We continue to invest in engineering resources and current business opportunities, but more importantly, we are investing in our future as industry leader in fuel efficiencies and digital technologies that improve our customers' productivity, capacity utilization and safety.

John Olin
John Olin
Executive VP & CFO at Wabtec

Now let's take a look at segment results on Slide 12, starting with the Freight segment. As I already discussed, Freight segment sales were up 4.2% during the quarter. GAAP segment operating income was $420,000,000 driving an operating margin of 22.1%, up 1.9 percentage points versus last year. GAAP operating income included $3,000,000 of restructuring costs, primarily related to our integration and portfolio optimization initiatives. Adjusted operating income for the Freight segment was $488,000,000 up 11.2% versus the prior year.

John Olin
John Olin
Executive VP & CFO at Wabtec

Adjusted operating margin in the Freight segment was 25.7%, up 1.6 percentage points from prior year. The increase was driven by improved gross margin behind favorable business mix, timing of expenses, improved productivity and proactive cost controls. Finally, twelve month segment backlog was $6,070,000,000 Our twelve month backlog was up 9.1% on a constant currency basis, while the multiyear backlog of 17,850,000,000.00 was up 1.4% on a constant currency basis. Turning to Slide 13. Transit segment sales were up 5.3% at $7.00 $9,000,000 When adjusting for foreign currency, Transit sales were up 7.9%.

John Olin
John Olin
Executive VP & CFO at Wabtec

GAAP operating income was $90,000,000 Restructuring costs related to integration and portfolio optimization were $6,000,000 in Q1. Adjusted segment operating income was $103,000,000 Adjusted operating income as a percent of revenue was 14.6%, up 1.9 percentage points. The increase was driven by higher adjusted gross margin behind favorable mix and strong operational execution. Finally, Transit segment twelve month backlog for the quarter was $2,130,000,000 which was up 2.2% on a constant currency basis. The multiyear backlog was up 5.1% on a constant currency basis.

John Olin
John Olin
Executive VP & CFO at Wabtec

Now let's turn to our financial position on Slide 14. First quarter cash flow generation was $191,000,000 We continue to greater than 90% cash conversion for the full year. Our balance sheet and financial position continued to be strong as evidenced by: first, our liquidity position, which ended the quarter at $2,540,000,000 and our net debt leverage ratio, which ended the first quarter at 1.5 times. The leverage ratio was below our stated range in anticipation of funding the acquisition of Evidence Inspection Technologies division that we announced on January 13, which is expected to close at the end of the second quarter. Upon closing this purchase, we anticipate that our leverage ratio will be roughly 2.3 times.

John Olin
John Olin
Executive VP & CFO at Wabtec

We continue to allocate capital in a disciplined and balanced way returns for our shareholders. During the quarter, we repurchased $98,000,000 of our shares and paid $43,000,000 in dividends, which was recently increased by our Board of Directors, up 25% per share versus prior year. With that, I'd like to turn the call back over to Rafael to talk about our 2025 financial guidance.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Thanks, John. Now let's turn to Slide 15 to discuss our 2025 outlook and guidance.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

As you've heard today, our team delivered a good start to the year. Our international pipeline remains strong and our twelve month and multi year backlogs provide visibility for profitable growth ahead. With that being said, we are approaching the remainder of the year with caution, but with the discipline and focus to take the necessary actions to deliver against our commitments in an uncertain and volatile economic landscape. Consequently, we are increasing our previous adjusted EPS midpoint guidance and we now expect adjusted EPS to be in the range of $8.35 to $8.95 up 14% at the midpoint. Our revenue and cash flow conversion guidance remains unchanged.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Now let's wrap up on Slide 16. As you heard today, our team continues to deliver on our value creation framework, thanks in large part to our resilient installed base, world class team, innovative technologies and our continued focus on our customers. With solid underlying demand for our products and technologies and intense focus on continuous improvement and cost management, consistent with our previous guidance, we continue to expect to drive mid single digit organic growth, while delivering double digit EPS growth through our planning horizons, thereby maximizing our returns to our shareholders. As we have discussed, the current economic environment is uncertain and volatile. We will be proactive with our cost control levers and drive actions to deliver against our commitment.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

With that, I want to thank you for the time this morning and I'll turn now the call over to Kyra to begin the Q and A portion of our discussion. Kyra?

Kyra Yates
Kyra Yates
VP of IR at Wabtec

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.

Operator

We will now begin the question and answer session. The first question today comes from Rob Wertheimer with Melius Research. Please go ahead.

Rob Wertheimer
Director of Research at Melius Research LLC

Hey, thanks and good morning everybody. Rafael, you called out in your opening remarks just some of the obvious uncertainty around North America. I wanted to ask just how that shows up in your business or in your pipeline or your pre pipeline, whether it's less appetite from new logos, more than expected, more for mods, less for mods, more so just kind of talk about what you meant by those comments and what you're seeing? Thank you.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Absolutely. Well, first, it's as we look into some of those dynamics, we continue to see North America lagging versus what we see internationally and that's really part of how we're managing the overall business. We've got strong momentum internationally. It's more profitable and those orders continue. We have a strong pipeline that we're continuing to convert.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

So it's good to see. We're seeing some other elements tied to both the transit and the mining business, which continue to be strong. Even on our Components business, Industrial seems to be holding quite well. So I go back to the fundamentals for the business continue to be strong. I think the best way to look at it is the quality of the backlog in which we've got not just better visibility at this point, but higher margins.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

With that, there's always going to be elements of lumpiness quarter to quarter on both the elements of how we go up those orders, but how we go about delivering on them. So we continue to approach the year with caution, but very focused here on what we can control. And ultimately, we're going to continue to take the actions to number one, deliver on the 25 guidance, but most importantly, make sure that we're driving profitable growth into 2026 and beyond.

Rob Wertheimer
Director of Research at Melius Research LLC

Perfect. And so you're saying basically that both the profitability and the order flow from international is currently anyway offsetting any hiccups or weakness or softness or penetration of America. But are you seeing like less appetite for mods in North America right now? Or just any color there on what you mean by that? I'll stop there.

Rob Wertheimer
Director of Research at Melius Research LLC

Thank you.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

It's very customer specific at the end of the day. I think what we've seen is not necessarily customers migrating from one to the other. It's customers that maybe were not investing as much. You see them now investing on some new fleets. So we've certainly seen Tier four locomotives growing in North America.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

I think the other elements here to keep in mind is very often we're very focused on North America and dynamics between new locals and mods. We're managing ultimately a global business and there's elements here of how we make some of those shifts and moves between the global volumes we see in North America. We'll very often look at that continue to expand and expand on some of these agreements. So it's very dynamic from perspective. And I go back to the comments I made, which is taking every action to deliver on the 25% guidance, which we've just given you and making sure that we're driving profitable growth into 2026 and beyond.

Rob Wertheimer
Director of Research at Melius Research LLC

Thank you.

Operator

The next question comes from Ken Hoexter with Bank of America. Please go ahead.

Adam Roszkowski
Adam Roszkowski
Equity Research Associate at Bank of America

Hey, team. It's Adam Roszkowski on for Ken Hoexter. Thanks for taking my question. So maybe Rafael or John, I think the 2025 guidance assumes tariffs with the exception of reciprocal tariffs. So can you just clarify kind of what you're expecting there?

Adam Roszkowski
Adam Roszkowski
Equity Research Associate at Bank of America

Is that just assuming that after the ninety day pause, there's no further impacts? If you could clarify. Thanks.

John Olin
John Olin
Executive VP & CFO at Wabtec

Thanks, Adam. So as we put our guidance together, we looked at all the tariffs that have been, I would call the first round of tariffs and excluding the reciprocal. So that would include, Adam, twenty five percent in Canada, Twenty Five Percent in Mexico, Twenty Five Percent steel and aluminum and 20% in China. So those are they've been initiated in February and March. We're currently paying on those tariffs today and that's been built in to our forecast, both the impacts on cost as well as revenue.

John Olin
John Olin
Executive VP & CFO at Wabtec

We have not built in the reciprocal, which is 125% to China and 10% on all the other countries. And that's simply a factor of there is so much volatility in those and kind of the forward look at those tariffs, whether they'll be on or off. As you mentioned, Adam, there's a ninety day reprisal on lifting them higher. So we're going to continue to read that situation. Now those tariffs don't won't start to affect financially until the May because there's an on water exemption for them to hit.

John Olin
John Olin
Executive VP & CFO at Wabtec

So we're going to take some more time and understand where they land and the impact that they'll have on the economy.

Adam Roszkowski
Adam Roszkowski
Equity Research Associate at Bank of America

Thanks, John. And then just following up on the kind of the cadence and shape of this year. I think last quarter you noted that you expected balanced revenue growth, but 2H would be a little bit more heavier weighted on the EPS side. So maybe just talk about how you're thinking about margin progression in both Transit and Freight? Thanks.

John Olin
John Olin
Executive VP & CFO at Wabtec

Adam, going back to this incredible amount of uncertainty and volatility, I don't think it helps much to kind of go out a couple of quarters. Maybe to bring it in a little bit, let's talk about the second quarter in relationship to the first quarter. We do expect a strong solid quarter in the second quarter. However, couple of things that you should note as we do move into the second quarter is the a lot of the mix favorability that we had and drove a fair amount of margins in the first quarter. We'd not expect this to at the same level in second quarter.

John Olin
John Olin
Executive VP & CFO at Wabtec

Remember, our first quarter revenue mix I'm sorry, our mix was driven by strong revenues out of the Services Group at up 16.9% and somewhat given back with regards to the Equipment Group down 9.5%. And again, this is just how we allocate the capacity that we have. In the second quarter, we expect our equipment group to be up a fair amount and our services group to be up, but at a much more moderated pace. So that will be a headwind with regards to mix in the second quarter. And the second thing as we had mentioned, there's some timing items that impacted our first quarter that we expect to not repeat in the second quarter.

Adam Roszkowski
Adam Roszkowski
Equity Research Associate at Bank of America

Thank you.

Operator

The next question comes from Jerry Revich with Goldman Sachs. Please go ahead.

Jerry Revich
Jerry Revich
Senior Investment Leader & Head of US Machinery, Infrastructure, Sustainable Tech franchise at Goldman Sachs

Yes. Hi. Good morning, everyone, and congratulations on the strong start to the year. I want to ask in terms of on the feedback from customers, Rafael and John, that you're hearing on the tariff side. Can you just talk about are there any customers that are essentially opting to age their fleet or any specific feedback that you're seeing?

Jerry Revich
Jerry Revich
Senior Investment Leader & Head of US Machinery, Infrastructure, Sustainable Tech franchise at Goldman Sachs

And as you think about Integration three point zero, to what extent are you thinking about potential pivot in that strategy if you were to, let's say, increase capacity in The U. S. As you think about that multiyear plan? To what extent does the tariff situation impact your planning process?

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Sure, a couple of things. I mean, there's clearly what I'll call a balancing act here. I think we've been working quite constructively with both customers and suppliers to ultimately make sure that we're managing the supply chain shifts in a way that's fair and that minimizes disruption. I think a large part of our focus here is ultimately making sure that we're protecting what I'll call the reliability and availability of our customers' fleets. That's key.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

That's how they ultimately support the service levels and ultimately how we support demand. So I think it's important to start there. We're actively evaluating a range of levers, things like USMCA. We've looked at alternative sourcing strategies. Of course, you've got to evaluate inventory positioning and broader supply chain adjustments.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

But at the same time, I think we've taken cost. You asked specifically with regards to integration two point zero and three point zero. We do have the opportunity to accelerate those and those are the kinds of things that we're going to actively and proactively manage it. And we've taken pricing actions that help offset additional pressures we're facing there.

John Olin
John Olin
Executive VP & CFO at Wabtec

And Gerry, you also asked about any pivot on Integration three point zero or our strategy's direction there.

John Olin
John Olin
Executive VP & CFO at Wabtec

And the answer is no. Our strategy remains the same. There's plenty of opportunity for us to reduce costs by that 100,000,000 to $125,000,000 Now as we get into the execution piece, we'll look at we do an IRR in every project that we run. And as the economics change, some of that may change. But overall, the direction remains the same and our ability to take out 100,000,000 to $125,000,000 is not going to be affected by the tariffs.

Jerry Revich
Jerry Revich
Senior Investment Leader & Head of US Machinery, Infrastructure, Sustainable Tech franchise at Goldman Sachs

Super. And then can I ask the international installed base is growing really nicely? I think you're also going to have more locomotives entering the sweet spot from a service standpoint based on your models. What kind of growth rate do you expect in international aftermarket service just given the age profile 25, 20 six? What are your models tell you as those fleets age?

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Jerry, we certainly see an acceleration of that. I mean, the way I would answer you there, if you look at more mature service businesses that we have running out there, if you look at the core of services and that excludes things like modernization, you'll see those growing at what I'll call 6% to 7% rate. That's what we've seen in the past. I think one of the things that's important here is we're seeing not just that transition that you spoke about of fleets that were under warranty entering to a normal service. Our fleets are running.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

They're running hard. And what I mean by that, we have over 18,000 units that we monitor regularly. When you look at the megawatt hours that really translate into how much work those units are doing. Those hours are up. They're up in the first quarter of this year as well and we haven't really seen change on that.

Jerry Revich
Jerry Revich
Senior Investment Leader & Head of US Machinery, Infrastructure, Sustainable Tech franchise at Goldman Sachs

Thank you.

Operator

The next question comes from Daniel Imbro with Stephens. Please go ahead.

Daniel Imbro
Managing Director at Stephens Inc

Yes. Hey, good morning, guys. Thanks for taking our questions.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Hey, Daniel.

Daniel Imbro
Managing Director at Stephens Inc

Maybe to follow-up on the tariff backdrop, John, I appreciate the color on maybe what you're including, what you're not including. But can you maybe actually expand on what the impacts are from these tariffs? I think back in 2018, there was a few million dollars of a gross margin headwind per quarter. But could you maybe expand on how many of your freight components are imported? What that import map looks like?

Daniel Imbro
Managing Director at Stephens Inc

And what the actual impacts will be starting on May 1?

John Olin
John Olin
Executive VP & CFO at Wabtec

Thanks, Daniel. Hey, Daniel, we're not going to disclose the impact of the tariffs on business due to the fact that timing volatility uncertainty continue to change on daily basis. Don't think that would benefit. Again, we've got a great competency going here of putting them on and taking them off and delaying them. So not going to provide any of that guidance at this point.

John Olin
John Olin
Executive VP & CFO at Wabtec

Suffice to say, we are collaborating with our stakeholders to minimize the impact of incremental tariffs on our businesses. We're also working multiple work streams to minimize the tariffs. And we've adjusted our prices of the tariffs that are currently in place, again with the exception of the reciprocal tariffs.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

I think as you mentioned, I mean, we've done this over the last six years and we'll continue to manage this dynamic environment. There could always be an element of specific impact into quarters, we'll continue to navigate these challenges and continue to really make sure that we drive profitable growth over time for the business.

Daniel Imbro
Managing Director at Stephens Inc

Great. That's helpful. Appreciate it. And then maybe my second or a follow-up is on just free cash flow. The first quarter, I think it was down year over year, John.

Daniel Imbro
Managing Director at Stephens Inc

I think the receivable securitization slowed, if we read that right. Was that just a timing issue or something in the ABS market different where it was less receptive given the volatility? Just any thoughts on how it should trend through the year? You reiterated the 90% free cash flow conversion guidance, but just curious what's going to make that get better given the timing there? Thanks.

John Olin
John Olin
Executive VP & CFO at Wabtec

Yes, Daniel, thanks for the question. Matter of fact, we had a very good cash flow quarter in the first quarter when you adjust for that securitization financing that happened a year ago. So what you're seeing is we ended the year last year with a balance of $230,000,000 of outstanding securitization and this quarter, the first quarter of this year, we have zero. So with that, you're seeing that change and that's driving the $143,000,000 lower, actually a fair amount more than that. And if you adjust that out, we would be up over 20% in terms of cash flow for the quarter.

John Olin
John Olin
Executive VP & CFO at Wabtec

As we go forward, Daniel, we have amended our securitization trust and will now recognize all changes in securitizations in the financing section of the cash flow statement. So they won't be flowing through operating cash anymore. Now it doesn't mean we still have the prior year quarter that will have an impact on the growth rates. But going forward, there'll be no more cash from securitization or changes in securitization in working capital I'm sorry, in operating cash.

Daniel Imbro
Managing Director at Stephens Inc

Great. Thanks for all the detail. Appreciate it.

Operator

The

Operator

next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Angel Castillo
Angel Castillo
Executive Director at Morgan Stanley

Hello?

Operator

Your line is open. You can answer your question.

Angel Castillo
Angel Castillo
Executive Director at Morgan Stanley

Hello?

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Good morning. You have a sense. Go ahead.

Angel Castillo
Angel Castillo
Executive Director at Morgan Stanley

Can

Angel Castillo
Angel Castillo
Executive Director at Morgan Stanley

you hear me?

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Yes.

Angel Castillo
Angel Castillo
Executive Director at Morgan Stanley

Hey,

Angel Castillo
Angel Castillo
Executive Director at Morgan Stanley

this is Angel Castillo on from Vincent Andrews. Anyway, just thank you for taking my time. Just wanted to ask about the margin backdrop. You talked about the 2Q dynamic. I was hoping you could quantify that a little bit better just in terms of how much of that mix favorability, how much of an impact that is maybe on a sequential basis?

Angel Castillo
Angel Castillo
Executive Director at Morgan Stanley

And same thing with the timing dynamic that you talked about and any other kind of factors that may be surprised in the first quarter, if you could kind of help quantify the magnitude of the move?

John Olin
John Olin
Executive VP & CFO at Wabtec

Thanks, Angel. Angel, not going to quantify in terms of percentage points. I think that we'd like to do is to make sure the understanding of we had four dynamics that really drove our first quarter margin and certainly came in over our expectations, mix being the biggest piece of expect that that be the same in the second quarter. But on a full year basis, mix is more of a timing element on a full year basis. The other one is, as we talked about some timing of expenses.

John Olin
John Olin
Executive VP & CFO at Wabtec

And again, that's just more of the way the timing works out. Think the other two though are areas where we will see them continue on and that's why we took our guidance up. And that is with the strong productivity that we've experienced, again, by Integration two point zero and portfolio optimization. They came in higher than expected, and we'd expect that to stick on a full year basis. And then finally, this idea of proactive cost management, right, As we've seen the tariffs come in and we are getting incredibly prudent on every dollar that we spend to make sure that we can deliver on our commitments to our shareholders.

John Olin
John Olin
Executive VP & CFO at Wabtec

So some of that favorability is what we're taking our guidance up for as well.

Angel Castillo
Angel Castillo
Executive Director at Morgan Stanley

And maybe to that point on just the margin side and the ability to kind of respond to the tariff dynamic. Curious for the reciprocal side, there's still a little bit of uncertainty and particularly as we go into kind of the May 1 timeframe. Could you talk about your ability to kind of respond and quickly kind of pivot to whatever the ultimate kind of normalized level of tariffs is? Meaning should we expect somewhat of a lag in terms of any kind of your ability to kind of pull levers beyond to kind of reflect the kind of new environment? Or is there an ability to kind of pass that through and reflect the kind of May 1 kind of immediately as soon as we know?

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Like I said before, I think it's going to be a balancing act here. We're managing through a number of variables. I think it's important to really highlight some of the comments John made here with regards to second quarter, which we've got more visibility into it. We're taking every action to make sure we deliver on the guidance for the year. But down from that perspective is really making sure that we're managing the business here, most importantly to drive profitable growth into 2026 and beyond.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

And there's an element of shifts on suppliers. There's an element of really looking at our inventory positioning. We have, as I mentioned, not just taken cost actions, we've also taken pricing actions that help us offset those additional pressures. There will always be some element of variability quarter to quarter, but we're taking every measure here to continue to drive profitable growth over time. Andrew, I mentioned a couple of times May 1.

John Olin
John Olin
Executive VP & CFO at Wabtec

The reciprocal tariffs won't start hitting us or we won't be charged at the border until the May.

Angel Castillo
Angel Castillo
Executive Director at Morgan Stanley

I'm sorry, yes.

John Olin
John Olin
Executive VP & CFO at Wabtec

Earlier of that or May 26 for an on water exemption. So we got a little bit more time before the financial impact start to hit us.

Angel Castillo
Angel Castillo
Executive Director at Morgan Stanley

Got it. Very helpful. Thank you.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Thank you.

Operator

The next question comes from Bascome Majors with Susquehanna. Please go ahead.

Bascome Majors
Senior Equity Research Analyst at Susquehanna

I understand the concern about being too precise on the reciprocal tariffs when a lot of that is still in flux and you've got some time to see how that plays out. But can you give us a little qualitative help on your supply chain? For example, some of the locomotives you're assembling internationally in Kazakhstan or maybe India, how much of that content do you support with kits and engine and other key components shipped out of The U. S? Just understanding the back and forth of what's coming from The U.

Bascome Majors
Senior Equity Research Analyst at Susquehanna

S. If those negotiations end up in escalation rather than de escalation? Thank you.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Let me start with just North America. I mean, have a large footprint in North America. We're largely localized in North America. And even as you look into the aspects of USMCA, we're quite balanced from that perspective. As you go into, I'll call those international markets, we'll balance the elements of what I'll call what's competitive locally.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

And at the same time, you've got to make sure you're leveraging the scale on some critical components that will ultimately be imported. So it's a balancing act here between global and local. I think we do that quite well and that's one of the elements that we'll continue to manage through that transition.

Bascome Majors
Senior Equity Research Analyst at Susquehanna

But your term balanced, are you suggesting that the content, if a locomotive built in Central Asia is actually similar in value to what's coming locally and what's coming from The U. S? I just want to understand how literally we should take the word balanced when you think about the puts and the takes of what's coming from each direction in some of your international supply chains?

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Shkam, I'm being generic here because some of this is going to depend even on the maturity of some of those supply chains and scale that we use them internationally. But take for instance, like in Kazakhstan, I mean, we'll have a lot of the fabrication, a lot of the elements tied to the platform and all of that. It's done vocally. I mean, what you ultimately shift is some of the very specific controls, some of the on the side to the engines and things like that. So it's what I'll call how you go about leveraging the elements of things that you can acquire locally on competitive terms.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

At the same time, you leverage the scale of concentrating some of these specific components in certain markets. And I think we're very well balanced from that perspective.

John Olin
John Olin
Executive VP & CFO at Wabtec

But we don't we wouldn't expect a huge amount S. Outside.

John Olin
John Olin
Executive VP & CFO at Wabtec

We haven't seen much retaliatory tariffs at all around the world with the exception of China.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Our biggest impact continues to be in North America from that perspective.

Daniel Imbro
Managing Director at Stephens Inc

You both.

John Olin
John Olin
Executive VP & CFO at Wabtec

I'm asking we didn't catch that.

Bascome Majors
Senior Equity Research Analyst at Susquehanna

I'm sorry. I said thank you.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Thank you.

Operator

The next question comes from Saree Boroditsky with Jefferies. Please go ahead.

Jae Hyun Ko
Jae Hyun Ko
Equity Research Senior Associate at Jefferies

Good morning. This is James on for Saree. Thanks for taking questions. I guess, I just wanted to touch on the margin. You talked about international margins being higher than North America margins.

Jae Hyun Ko
Jae Hyun Ko
Equity Research Senior Associate at Jefferies

So I just wanted to understand when did that crossover occur? And what are primary drivers behind that shift? Is it like mix pricing like or structural like cost advantage? And kind of do you expect like international to continue to outpace like North America on a margin basis?

John Olin
John Olin
Executive VP & CFO at Wabtec

James, this is John. It isn't something that just happened. We just haven't disclosed it. So this is the first time we're really talking about the margin differential between international and North America. There's a common question that we get and basically the margin structure that we have in our international business yields a higher overall margin than our North America business does.

John Olin
John Olin
Executive VP & CFO at Wabtec

And we would expect that certainly continue on into the future.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

I think if you go back five years ago in the business, there was a number of markets that we were still at the stage in some cases of developing a platform to compete. You're still in the early stages of standardizing some of the elements of the product, which certainly made I think a lot of progress in terms of the productivity on some of the international footprint we have out there. I think that has ultimately helped us really transform this over time. But I think John's comments that it hasn't changed overnight.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

I mean this is something we've been working at it and it's good to see reflected in a business that it's more profitable internationally than in North America.

Jae Hyun Ko
Jae Hyun Ko
Equity Research Senior Associate at Jefferies

Great. I guess then another follow-up question here. You guys talked about like amplified cost control measures. Like can you provide more color here? Is this like structural and kind of included in Integration two point zero and three point zero efforts?

Jae Hyun Ko
Jae Hyun Ko
Equity Research Senior Associate at Jefferies

Or will they kind of reverse once kind of uncertainty and the like inflation and everything kind of resides?

John Olin
John Olin
Executive VP & CFO at Wabtec

Certainly in addition to our more structural efforts of integration and portfolio optimization. This is James, just getting down to blocking and tackling, right, is things that's traveling less, holding positions open, again, scrutinizing all investments, accepting higher return capital projects and so on and so forth. What we're doing is, to provide a more opportunity and a certainty that we'll hit those guidance that we delivered today. But I want to assure you, James, that it has nothing to do with anything that would have an impact on the future of our business. But these are just things that we can tighten up and as we get a little bit more defensive on the risk profile that we have through the remainder of 2025.

Jae Hyun Ko
Jae Hyun Ko
Equity Research Senior Associate at Jefferies

Got it. Thanks for the color.

John Olin
John Olin
Executive VP & CFO at Wabtec

Thank you.

Operator

The next question comes from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Steve Barger
Steve Barger
Managing Director - Equity Research at KeyBanc Capital Markets

Thanks. To follow-up on the international margin difference, is that positive variance pretty consistent across regions and product lines? And I know you're focused on margin expansion continually, but do you feel like there's still room to run on international?

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

I think it's consistent, the growth we've seen in our margins internationally. Of course, it will vary country to country based, number one, on some of the maturity of some of the products we sell. It varies also depending on what the mix is in some of these countries. But I think we have seen consistent improvement in the margin and that's driven a lot by some of the integration work that we have done and just really being very focused on our lean efforts and productivity efforts across the board. We feel like we have a good portfolio to compete for the opportunities we have out there.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Even on the most recent opportunities like Gany, we were able to ultimately adapt to some of the existing platforms to be able to competitively compete in these products, which have ultimately translated into, I think, really positive margins on the equipment side of the business.

Steve Barger
Steve Barger
Managing Director - Equity Research at KeyBanc Capital Markets

That's great. And I know it's an uncertain environment and you don't want to look too far ahead. But just to ask it again directly, have you heard anything from your emerging market customers about international trade policy changing how they think about building rail or mining infrastructure? Like would you do you think that there's a negative reaction to that? Or are those countries just focused on what they're doing?

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

I mean tariffs are certainly not good, but the projects we talk about here, I mean those are decade long projects in a lot of ways. You think about Guinea, it's not about price of iron ore right now or it's not about any elements of specific tariffs that we're transitioning here. With that, some customers are more mature out there. I think we've also seen the dollar weakening. So there's so many elements moving and in transition here that can make the business more competitive.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

There's some other ones. There are more headwinds to this. So right now, as I said, I think a lot of them are just really focused on running their business and making sure that we're taking the necessary actions to mitigate some of the things that we can control in that regard. And those were some of my comments in terms of we really have this balancing act on looking at supply chains and making sure we are being constructive and proactive with our customers.

Steve Barger
Steve Barger
Managing Director - Equity Research at KeyBanc Capital Markets

Thank you.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Thank you.

Operator

The next question comes from Oliver Holmes with Redburn Atlantic. Please go ahead.

Oliver Holmes
Director - Equity Research at Redburn Atlantic

Hi, guys. Thanks for having me on. Just a quick one for me on pricing pass through. Just as a comment you made earlier about passing through or maybe just actually repricing for tariffs and if I'm correct, your contract enable you to pass that through to customers. Just wondering how customers are reacting to that pass through?

Oliver Holmes
Director - Equity Research at Redburn Atlantic

And is there a risk that perhaps they want to keep their CapEx budgets flat to maybe extend their delivery cycles? Thanks.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Well, I'd go back to really the posture we've been having, which was want to make sure, I mean that as we look into this managing the supply chain shifts, we do it in a fair manner and we minimize disruption. I mean, if you look at it, I mean, fleets are running. So the need to make sure that you're supporting those fleets is there and you want to make sure you support reliability and availability of those fleets. And that's prime time to make sure you're ultimately supporting the demands you have from the customers of our customers in that case. We're continuing to take a number of strategies.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

I mentioned USMCA because we're working quite actively there to qualify more items in that regard. We are certainly looking at our inventory positioning. We've taken ourselves cost actions that have also helped us through that process, but we also taken pricing actions. So it's not a one way stream of cost and pricing go through. I think there's a number of levers that we've been working through it and that's what really keeps I think more constructive dialogue with not just customers, but with suppliers in that context as well.

Oliver Holmes
Director - Equity Research at Redburn Atlantic

Thank you.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Thank you.

Operator

Next question comes from Scott Group with Wolfe Research. Please go ahead.

Ivan Yi
Director at Wolfe Research, LLC

Hey, good morning guys. This is Ivan Yee on for Scott. First, quickly going back to tariffs. I know you're not quantifying the exact financial impact, but can you roughly estimate how much can you pass through? Can you pass through 100% of this through higher pricing?

Ivan Yi
Director at Wolfe Research, LLC

Just any additional color. Thanks.

John Olin
John Olin
Executive VP & CFO at Wabtec

Ivan, we will work with our customers. Again, first of all, we're going to do everything we can to minimize those tariffs through USMCA exemptions as well as moves that we can do in our supply chain. But at the end of the day, we expect to come out of this whole and margins intact and deliver on the margins that we've signed up for I'm sorry, the guidance that we've signed up for.

Ivan Yi
Director at Wolfe Research, LLC

Thank you. And then my follow-up, any additional color on the new Class I local order? How many units? When does it start? Over how many years?

Ivan Yi
Director at Wolfe Research, LLC

Thank you.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

We're again not going to comment on any specific business with any specific customer on that regard. To your question earlier, I mean, we certainly manage a basket of opportunities and different projects with various customers. So this is ultimately a discussion that's very customer specific based on really the impact that you see, the elements you're able to mitigate and how you ultimately translate that into any price changes into those projects.

Ivan Yi
Director at Wolfe Research, LLC

Thank you.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Thank you.

Operator

The next question comes from Tami Zakaria with JPMorgan. Please go ahead.

Tami Zakaria
Tami Zakaria
Executive Director at JP Morgan

Hi, good morning. Thank you so much. I actually appreciate all the comments you gave on tariffs earlier given how fluid the situation is.

Tami Zakaria
Tami Zakaria
Executive Director at JP Morgan

I think I heard you talk about pricing action. I just wanted to clarify, are you able to reprice the backlog if needed? Or would pricing actions be primarily focused on new orders going forward if tariffs escalate from here?

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Again, I'm not going to go into specifics. I mean, as I said, we do have a basket of business. Do have customers, those involved, not just sometimes new locomotives, modernizations. There's a number of multiyear agreements that sometimes we have. We've got customers that are more transactional in nature in terms of the parts.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

So this is ultimately about managing that basket of business and making sure that through that process we're both we're fair, we're smart as we look into balancing all the elements of the things that are at stake here And that's what we're really managing. And I think to the comments we've made earlier, we feel strong about being able to manage that despite of any specific impact on any given quarter. We expect to be able to manage this through and continue to really make sure we deliver on the guidance we've provided through the year, but more importantly make sure we're constructing profitable growth into twenty twenty six and beyond. I think those were really some of the comments here John made.

Tami Zakaria
Tami Zakaria
Executive Director at JP Morgan

Understood. That's fair. That's very helpful. Thank you. And a follow-up question on FX.

Tami Zakaria
Tami Zakaria
Executive Director at JP Morgan

It seems it was a headwind in the first quarter, but the U. S. Dollar strength has reversed from earlier in the year. So is there any FX headwind embedded in the revenue guide for this year?

John Olin
John Olin
Executive VP & CFO at Wabtec

Again, the guidance takes everything that we know right before we issue it, so earlier this week, Tammy. So it would include our view of what revenue or what currency would be over that period of time.

Tami Zakaria
Tami Zakaria
Executive Director at JP Morgan

Got it. Thank you.

Rafael Santana
Rafael Santana
CEO, President & Director at Wabtec

Thank you.

Operator

This

Operator

concludes our question and answer session. I would like to turn the conference back over to Kyrie Yates for any closing remarks.

Kyra Yates
Kyra Yates
VP of IR at Wabtec

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

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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