Wabtec's President and CEO, Rafael Santana, begins the conference call by welcoming participants and introducing the other speakers. He provides an update on the company's business and highlights their strong performance in the fourth quarter of 2023, with increased sales, margin expansion, and earnings and cash flow growth. Despite economic uncertainty, Wabtec saw strong performance in both their Freight and Transit segments.

The second paragraph discusses the financial performance of Wabtec in the year-ago quarter, highlighting an 18.5% increase in adjusted EPS and a strong cash flow. The backlog and multi-year backlog also saw growth, indicating positive momentum for the company. The CEO is optimistic about the future and believes Wabtec is well-positioned for profitable growth. The company's financial position is strong and they plan to invest in future growth and return cash to shareholders. The focus then shifts to the market expectations for 2024, with mixed metrics in the Freight business but strong demand for locomotives and digital technologies. The North American railcar build also showed growth in 2023.

In 2024, the industry expects to deliver 38,000 cars, with strong activity in core markets like Latin America and Australia. Significant investments in infrastructure and an aging fleet are driving demand for truck fleet upgrades in the mining sector. In the Transit sector, urbanization and decarbonization are fueling the need for clean and efficient transportation solutions. Recent business highlights include a multi-year order for modernizations in North America, increasing momentum in the mining sector, a major order for brake systems in India, and the acquisition of a JV in Kazakhstan to enhance manufacturing capability.

The fourth quarter results for Wabtec demonstrate continued momentum and a strong focus on customer satisfaction. The company is well-positioned for growth with innovative technologies and a strong pipeline. Wabtec has a history of managing through challenging markets and disruptions, and their backlog and track record of strong execution support this. The company has consistently delivered strong cash flow and operating margin expansion, making them resilient and predictable through economic cycles.

In the fourth quarter, Wabtec saw a 9.5% increase in sales, driven by growth in both the Freight and Transit segments. GAAP operating income was $308 million, with a 17.0% adjusted operating margin. GAAP earnings per diluted share were $1.20, up 39.5% from the same quarter last year. The company had pre-tax charges of $47 million, including $19 million for restructuring and $28 million for exiting non-strategic product lines. The acquisition of the remaining 50% interest in the LKZ assembly joint venture generated a gain of $35 million. Adjusted earnings per diluted share were $1.54, up 18.5% from the previous year. Equipment sales were down 19.3% due to lower locomotive deliveries in the quarter, but total equipment sales for the year were up 15.8%. Wabtec had a strong quarter, showcasing the strength of their business.

In the fourth quarter, Wabtec saw a 17.4% increase in component sales, driven by higher demand for railcar and industrial products, as well as the acquisition of L&M. Digital intelligence sales were down 6.7%, but services sales grew by 23.9% due to higher modernization deliveries and strong parts sales. In the Transit segment, both OE and aftermarket sales increased, contributing to a 14.3% increase in segment sales. Gross margin and operating margin also improved, driven by higher sales, favorable price/mix, and improved productivity.

In the fourth quarter, GAAP and adjusted SG&A expenses decreased as a percentage of revenue due to higher sales and cost management. Engineering expenses remained flat, but the company is investing in future technologies. In the Freight segment, sales and operating income increased, and backlog showed good visibility into the future. The Transit segment also saw an increase in sales and operating income, with restructuring costs related to integration activities.

In the second quarter of the year, Wabtec's adjusted operating margin increased by 0.1 percentage points due to volume growth and Integration 2.0 savings. The company's Transit segment backlog also saw growth. Wabtec's Integration 2.0 initiative and portfolio optimization efforts are expected to lead to greater profitability and margin expansion by 2024. The company remains on track to meet its 2025 goals for savings. In addition, Wabtec is focused on strategic acquisitions that will contribute to earnings, margins, and return on invested capital. The recent acquisition of L&M has shown promising performance and potential for long-term growth.

In the fourth quarter, Wabtec acquired the remaining stake in its LKZ assembly joint venture and recorded a non-cash gain. They also announced the exit of some non-strategic product lines in 2024 to improve profitability and reduce manufacturing complexity. This, along with their Integration 2.0 initiative, will help drive margin expansion. Cash flow was strong in the quarter, resulting in a favorable net debt leverage ratio of 1.9 times. During the year, they made strategic acquisitions and returned funds to shareholders. Overall, their ROIC improved by 1.2 percentage points.

In summary, Wabtec has had a successful year, with strong revenue growth, expanded margins, and robust cash flows. They are confident in their ability to continue profitable growth in 2024, despite macro challenges. The company's strong order pipeline and backlog provide visibility for future growth. The team is committed to driving top-line growth and margin expansion, and the CEO thanks the employees for their dedication and execution.

Wabtec is well positioned for long-term growth and shareholder returns due to strong demand, backlog visibility, and focus on improvement. The call was turned over to Kristine for the Q&A portion. The first question was about Freight margins, which saw a decline in the fourth quarter despite an improvement in mix. The company attributes this to seasonality and overall margin structure, with the Freight segment still seeing an increase of 2.3 percentage points.

The company is pleased with the margins in the Freight segment for the fourth quarter and expects both the Freight and Transit segments to grow revenue and margin in 2024. They anticipate higher revenue growth in the first half of 2024 compared to the second half, and also expect higher margin growth in the first half. The 5% revenue growth at the midpoint is driven by a combination of price and volume, with no acquisitions factored in. The backlog is 10% higher than the revenue growth, indicating potential for future growth.

Rafael Santana, CEO of the company, explains that the 16% revenue growth last year was due to strong fundamentals, a well-positioned portfolio, and global demand. However, the company's guidance takes into consideration factors such as low North America carloads and increasing parkings, which may affect growth in the future. In the fourth quarter, organic Freight revenue growth was lower than in the previous quarter and is expected to continue decreasing in 2024.

Rafael Santana discusses the $92 million organic Freight revenue contribution in the fourth quarter and explains that it is the lowest number seen in the last two years. He attributes this to headwinds in the North American rail market, but notes that the backlog is strong and the pipeline of opportunities is the strongest in the last five years. He also mentions that there is variation quarter-to-quarter, but they are focused on profitable growth in the future, particularly in the international market. The next question from Jerry Revich is about customer discussions with California on sub-Tier 4 locomotives and the regulatory process and timeline for new versus modified locomotives. Rafael responds by saying that there is ongoing discussion and customer preference for new locomotives that meet the proposed standards, and he expects more clarity in the future.

In November, CARB petitioned the EPA for a waiver and support for regulation of in-use locomotives. The EPA has not yet responded, but the ruling went into effect at the beginning of this year. The outcome of the rule is still uncertain, but the company is well-positioned to support their customers regardless. They have the best products and are able to use bio and renewable fuels. They are also testing alternative fuels, such as hydrogen, and integrating batteries and hybrid systems into their fleet. The company has not factored in any potential regulatory changes into their guidance. The cash flow conversion rate is expected to be over 90%, and the CapEx is expected to remain at 2% of sales over the investment horizon.

Rob Wertheimer asked Rafael Santana about the recent order for mods from CSX and how it relates to the total number of mods in 2023. Santana explains that customers invest for returns and are focused on driving down costs and improving reliability. He also mentions the opportunity for growth as older fleets are replaced.

The speaker discusses how customer investment decisions are influenced by technology and regulations, and how they are working towards a lower emissions environment. The next question asks about revenue growth and the speaker explains that equipment will be the fastest growing segment, with mods and locos growing at a faster rate. There may be a mix headwind in 2024, but the speaker emphasizes that this is a good mix. The question also clarifies if there will be double-digit growth in mods this year, to which the speaker confirms.

John Olin asks for an update on the battery loco and its timing of first delivery. Rafael Santana responds by saying that combined mods and new are expected to grow faster than the average in 2024. He also mentions that the company unveiled the first heavy-haul battery electric locomotive in the fourth quarter, which will start running in Australia this year. He also talks about the focus on driving efficiency and supporting customers with fuel costs. Allison Poliniak then asks about the digital intelligence business in North America, and Santana responds by saying that there has been slower growth in that area, possibly due to customers pushing off investments in the near term.

During the quarter, the company experienced higher demand from international markets, but softer demand in the US due to discretionary OpEx and the commuter signaling business. However, the pipeline of opportunities remains strong, driven by international and digital mining solutions. The company also announced its entry into the railcar telematics market, which is a multi-billion dollar opportunity. The company is focused on recurring revenues and cost optimization through Integration 2.0, which is expected to result in a run rate of $75 million to $90 million by the end of 2025.

During a conference call, Ken Hoexter from Bank of America asks a question about the mix of international and domestic revenue for the company and how it will impact margins. Rafael Santana, the CEO, responds by stating that they have a strong pipeline of international deals and expect to see growth in that area beyond 2024. He also mentions that the conversion of backlog into revenue can vary from quarter to quarter, with some quarters seeing low-single digit growth and others seeing double-digit growth.

The company is focused on ensuring convertibility and coverage for their products in the next 12-18 months. They are confident in their ability to drive profitable growth and expect their book-to-bill to be over 1 in the long term, but it may be lumpy due to multi-year orders.

The company is focused on portfolio optimization and is divesting $110 million in low-margin or no-margin revenue. This will bring down revenue but is expected to have a positive impact on margin percentage. The company has announced a $1 billion share buyback authorization and is on track to continue its capital allocation strategy from 2023. No specific timeline or impact on EPS guidance was mentioned for the share buyback.

In 2023, the company had a good balance between free cash, operating cash, and investments in M&A and share repurchases. They will prioritize M&A over share repurchases if there are good opportunities, but will return excess cash to shareholders if needed. The company has authorized up to $1 billion for share repurchases. The guidance for 2024 includes all aspects of the business and the use of cash, including share buybacks. The company expects margin growth in both the Freight and Transit sides, with easier comps and the impact of the strike being incorporated into their overall guidance.

The speaker discusses the company's margins, which are expected to be favorable due to productivity, absorption, and the benefits of Integration 2.0 and portfolio optimization. However, there may be some unfavorable mix factors. In response to a question about the cadence of earnings and revenue growth, the speaker mentions that the company expects higher revenue growth in the first half of the year compared to the second half, but it is difficult to provide specific percentages due to the variability of delivery schedules.

In a recent conference call, Wabtec discussed the neutral volume environment for North American rail and the potential impact on their service revenue. They also mentioned the continued opportunity for customers to invest in productivity and cost reduction, which has led to stable active fleets. In terms of international growth, the recent buyout in Kazakhstan is structured as an assembly joint venture and will not have a significant impact on revenue growth, but it will improve their supply chain in the CIS region.

The joint venture allowed for the assembly of kits made in other parts of the world, giving the company control over its supply chain in a region with expected growth. The equipment group is expected to have the fastest growth, with both locomotive and mining equipment contributing. Transit had strong growth in 2024, but Freight is expected to have higher growth, with equipment and services outpacing consolidated guidance.

Rafael Santana, CEO of the company, discusses the strong fundamentals of the Transit business, with a book-to-bill ratio of over 1 for the year. The company is working on simplifying the footprint and expects margin expansion in 2024. Integration 2.0 is a significant contributor, but there may be variation quarter-to-quarter due to project mix and timing. The conference call concludes with the moderator thanking everyone for participating and announcing the end of the call.

This summary was generated with AI and may contain some inaccuracies.