Westinghouse Air Brake Technologies Corporation (WAB) Earnings Call Transcript & Summary

Good day, and welcome to the Wabtec Second Quarter 2026 Earnings Conference Call. [Operator Instructions] 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.

Thank you, operator. Good morning, everyone, and welcome to Wabtec's Second Quarter 2026 Earnings Call. With us today are Chairman and CEO, Rafael Santana; CFO, John Olin; and Senior Vice President of Finance, John Mastalerz. 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. 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.

Thanks, Kyra, and good morning, everyone. We are proud of the progress we have made in the first half of the year, which is strengthening our position as a leading industrial technology company. It reflects the strength of the leadership vision, we continue to build across our portfolio and the continued focus of the Wabtec team to deliver for our stakeholders. With that, let's move to Slide 4. 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. We delivered a strong first half of the year, which exceeded our expectations despite tariff headwinds on favorable business mix and challenging prior year comparisons. Through disciplined execution across the organization, we achieved robust growth, expanded margins and delivered double-digit earnings per share growth. Looking ahead to the second half, I remain encouraged by the healthy pipeline and continued demand for our core products and services. The profitable growth of our 12 months and multiyear backlogs and our focus on driving productivity and efficiency. This momentum is evident in our second quarter operational execution and our overall financial results. Having said that, sales were $3.2 billion, which was up 17.5% and adjusted EPS was up 22% from the year ago quarter. Total cash flow from operations for the quarter was $441 million, backlog remains a key strength. 12-month backlog was up 11% from the prior year, while the multiyear backlog exceeded $30 billion, up 42%. Our financial position remains strong. We continue to execute against our capital allocation framework and expect to continue to compound long-term value for our shareholders. Shifting our focus to Slide 5. Let's talk about our 2026 and market expectations in more detail. While key metrics across our freight markets remain mixed, we continue to be encouraged by the overall strength and resilience of our business. We are seeing solid momentum in our international markets and the pipeline of opportunities across geographies remain strong. In North America, carload traffic was up 4% in the quarter. As a result of this growth, Wabtec and industries active locomotive fleet was up compared to last year's second quarter. Internationally, carloads growth during the quarter was mixed, but the long-term carload growth trends continue to be robust, significant investments to expand and upgrade infrastructure are driving our international orders pipeline. Looking at the North American railcar build, the industry forecast for new railcars slightly up compared to prior quarter, and is now projected to be approximately 25,000 cars for 2026, which is still down 21% from 2025. Finally, turning to the transit sector. we continue to see positive underlying indicators for growth. Ridership continues to increase in key markets such as Europe and India, and we continue to see strong backlogs at car builders supported by robust levels of public investment for fleet expansion and renewals. Now let's turn to Slide 6 and highlight several recent business wins. During the quarter, we secured a $1 billion order from an Australian customer spending across locomotives, services, components and digital solutions. This award highlights the breadth of Wabtec's capabilities and demonstrates how our integrated offerings are creating value throughout the product life cycle. We also signed a $184 million order for positive shrink control with Vale, strengthening our long-standing partnership in marking an important step forward in advancing rail safety, efficiency and automation across Brazil's rail network. In Transit, we were awarded a $55 million platform door order for the Grand Paris Express project. Moving to mining. Our APAC team secured a $52 million order to supply Drive Systems for 240-ton mining trucks. Overall, the successes continue to demonstrate our leadership in the markets we serve, the strength of our pipeline and the commitment of the Wabtec team to deliver meaningful results for our customers and stakeholders. With that, I'll turn it over to John to review the quarter segment results and our overall financial performance. John?

Thanks, Rafael, and hello, everyone. Turning to Slide 7, I'll review our results in more detail. Our second quarter results came in better than expected, driven by stronger revenue growth and increased operating margin expansion. As we discussed in our last call, we expected the quarter's revenue growth to be similar to first quarter's results. Second quarter revenue growth came in stronger than the first quarter, driven by a combination of a couple of things. First, we had favorable timing of shipments and second, we experienced incremental flow business revenue. We also expected our margin expansion to be similar to the first quarter. In actuality, our operating margin expansion also came in favorable to Q1's results. This was driven by better-than-expected product mix and our continued focus on productivity and efficiency with programs such as integration 3.0. Having said that, sales for the second quarter were $3.18 billion, which reflects a 17.5% increase versus the prior year, with strong contributions from both the freight and transit segments, excluding the impact of currency, Q2 sales were up 16.6%. For the quarter, GAAP operating income was $600 million, which was up 27.1% versus the prior year. The increase was predominantly driven by higher sales, improved gross margin and lapping prior year's transaction costs resulting from our recent acquisitions. Adjusted operating margin for Q2 was 21.9%, up 0.8 percentage points versus the prior year. This improvement was achieved despite tariff-related headwinds, unfavorable mix and tough year-over-year comps. GAAP earnings per diluted share was $2.33, which was up 18.9% versus the year ago quarter. During the quarter, we had net pretax charges of $6 million for purchase accounting charges and transition costs associated with our recent acquisitions. In the quarter, adjusted earnings per diluted share was $2.76, up 21.6% versus the prior year. Overall, the quarter reflects the strength of our execution the resilience of our business and solid momentum as we move through the year. For the second half, we expect year-over-year revenue growth to temper as we lap the inclusion of inspection technologies in the prior year period. We also expect the majority of our margin expansion for the year to occur in the back half of the year. Our second half margins are expected to benefit from: first, tempering year-over-year tariff impacts as we begin to lap 2025 tariff increases. Next, increasing productivity momentum from our Integration 3.0 and portfolio optimization initiatives and finally, lapping more moderate prior year margin growth. When we look at the cadence of growth between the third and the fourth quarters, we expect revenue growth to be slightly higher in the third quarter versus the fourth. And on the margin side, we anticipate the opposite dynamic. We expect a meaningful acceleration in margin growth in the fourth quarter with third quarter's performance generally consistent with the margin growth rates delivered in the first half of the year. Now turning to Slide 8. Let's review our product lines performance in more detail. Second quarter consolidated sales were up 17.5%. Equipment sales were up 35% from last year's second quarter. This was driven by higher locomotive deliveries and increased mining sales. Our services group drove strong core services sales growth in the quarter, which was offset by lower modernization deliveries as we expected. Looking ahead, we expect modernization deliveries to grow in the second half of the year returning services to growth in the back half. That said, we continue to expect full year services revenue to be down due to the lower number of modernization deliveries that were shipped in the first half when we compare that to the prior year. Consequently, as modernization deliveries ramp up in the second half, we would expect equipment revenue growth to remain positive, but at a very moderate pace versus the 43% growth achieved in the first half. Component sales were down 0.7% versus last year due to the industry's decline in the North America railcar build and due to lower revenue from our portfolio optimization efforts, partially offset by increased industrial product sales. Digital Intelligence sales were up 88.5% from last year. This was driven by contributions from the inspection technologies and Froster acquisitions. In our Transit segment, sales were up 18.9%, driven by the Delmar acquisition and growth across our products and services businesses. Foreign currency exchange had a favorable impact on sales in the quarter of 1.3 percentage points. Moving to Slide 9. I GAAP gross margin was 36.5%, which was up 1.8 percentage points from the second quarter last year. Adjusted gross margin was up 1.9 percentage points during the quarter. GAAP operating margin was 18.9%, which was up 1.5 percentage points versus last year. Adjusted operating margin improved 0.8 percentage points to 21.9%. Operating margin was positively impacted by cost recovery from contractual price escalation, increased productivity and integration savings, partially offset by rising manufacturing costs higher year-over-year tariffs and unfavorable mix. Adjusted and GAAP SG&A expenses were higher year-over-year due largely to the SG&A expense associated with our acquisitions. Engineering expense was $70 million, $20 million higher than Q2 last year, primarily due to acquisitions. We continue to invest in engineering resources and current business opportunities, but more importantly, we are investing in our future as a leading industrial technology company focused on improving our customers' fuel efficiency, labor productivity, capacity utilization and safety. Now let's take a look at segment results on Slide 10, starting with the Freight segment. As I already discussed, Freight segment sales were up a strong 16.9%. GAAP segment operating income was $504 million, driving an operating margin of 22.5% up 0.9 percentage points versus last year. Adjusted operating income for the Freight segment was $579 million, up 20.6% versus the prior year. Adjusted operating margin in the Freight segment was 25.8%, up 0.8 percentage points from the prior year. The increase was driven by higher gross margin of 1.7 percentage points partially offset by an increase of 0.9 percentage points and our operating expense expressed as a percentage of revenue. The key driver of this is due to the mix of higher gross margin businesses as a result of our acquisitions of Inspection Technologies and Fraser and our continuous focus on productivity and efficiency. Finally, the Freight segment's 12-month backlog was $6.64 billion. Our 12-month backlog was up 10.2%, while the multiyear backlog of $25.33 billion was up 47.8%. Turning to Slide 11. Transit segment sales were up 18.9% at $936 million. When adjusting for foreign currency Transit sales were up 17.7%. GAAP operating income was $146 million, which reflected the quarter's robust revenue growth and operating margin expansion. These strong results were partially offset by $20 million of purchase accounting charges and noncash amortization expenses, which were primarily associated with the acquisition of Delmar in the first quarter. Adjusted segment operating income was $166 million. Adjusted operating income as a percent of revenue was 17.7%, up 2.5 percentage points from prior year. With the underlying momentum of the business and the Delmar acquisition serving as key contributors to this quarter's margin expansion. Finally, Transit segment 12-month backlog for the quarter was $2.5 billion, and our 12-month backlog was up 14.5%, while the multiyear backlog was up 19.4%. Now let's turn to our financial position on Slide 12. Our second quarter cash flow generation was $441 million, resulting in a cash conversion of 82%. Our balance sheet and financial position continue to be very strong as evidenced by: first, our liquidity position, which ended the quarter over $2 billion and our net debt leverage ratio, which ended the quarter at 2.2x. Our leverage ratio remained in our stated range of 2 to 2.5x. Even after funding the purchase of Delmar during the first quarter for approximately $1 billion and repurchasing $457 million of our shares in the first half. We continue to allocate capital in a disciplined way to maximize returns with an expectation of compounding our earnings for our shareholders. During the quarter, we repurchased $215 million of our shares and paid $53 million in dividends. With that, I'd like to turn the call over to Rafael to talk about our 2026 financial guidance.

Thanks, John. Now let's turn to Slide 13 to discuss our 2026 outlook and guidance. Overall, the team delivered a strong second quarter with operational results ahead of our expectations. Importantly, we continue to see underlying demand for our products and solutions across the business. That demand is reflected in a strong pipeline in both our 12-month and multiyear backlogs provide clear visibility into profitable growth ahead. With that backdrop, we are increasing our full year guidance. We now expect 2026 revenue of approximately $12.5 billion at the midpoint, up 11.5% from last year, which is an increase of 1 percentage point versus our prior guidance. We also now expect adjusted EPS to be in the range of $10.60 to $10.90, up 20% at the midpoint. Now let's wrap up on Slide 14. As you heard today, our team continues to execute against our value creation framework and our 5-year outlook. The strength of our performance is driven by our resilient installed base, world-class team, innovative technologies and our customer-focused approach. We are also encouraged by the integration and early performance of our recent acquisitions, which are strengthening our portfolios and expanding our total available markets for future growth. Overall, I believe Wabtec's uniquely positioned as a leading industrial technology company with a strong foundation, a talented global team and significant opportunities ahead we are well positioned to deliver profitable growth and continue to compound shareholder value over time. With that, I want to thank you for your time this morning, and I'll now turn the call over to Kyra to begin the Q&A portion of our discussion. Kyra?

Thank you, Rafael. We will now move on to questions. [Operator Instructions]. Operator, we are now ready for our first question.

Our first question comes from Ken Hoexter with Bank of America.

Congrats on raising the outlook. Rafael or John, maybe you noted kind of the mixed carload outlook on a global basis, some wins on international, Australia in particular. Maybe thoughts on sustaining the 12-month backlog at that nearly onetime book-to-bill. Are you seeing maybe Rafael just give an update on kind of what you're seeing out in the market in terms of keeping that progress going on the orders?

Okay. Ken, in terms of demand and backlog conversion, I mean, we are seeing improved demand in the year, and we're converting a strong pipeline into multiyear backlog and higher margins. You certainly see that globally. You saw that strong win we had in Australia in the second quarter. We continue to have opportunities of size, and you're going to see a couple of those coming to the second half of the year. So strong from that perspective. On the execution front, I'd say we're continuing to drive better execution, and that's really coming with improved margins and that's driven by productivity gains and the progress on simplification Integration 3.0, despite of the headwinds we still face with inflationary pressures, still managing through tariffs and cheap shortages with the impact to electronics. I think the other item to highlight is the acquisitions, which continue to perform very well, early days. So overall, it's been a stronger year with our teams delivering ahead of plan in support of the long-term guidance. John, you might want to comment more on the specifics of the quarter.

Yes. When we look at the second quarter, Ken, revenue was ahead of expectations as well as earnings. When we look at revenue, revenue was driven by a couple of things. Number one, on more of a sustainable basis. We saw our flow businesses accelerate. And that is on the freight side. And as you pointed out, Ken, partially driven by the improvement in carloads, which is driven to higher year-over-year locomotives and operations during the quarter. And then we also saw some strength in the aftermarket in our transit business. The other piece of our revenue in the second quarter was some timing on shipments. We did see some pull forward in the -- from the back half into the second quarter. And also, as we talked about in the first quarter, we had a lower organic growth. We saw some pushouts of that. So they landed in the second quarter as well. But overall, a very strong revenue growth at 17.5%, with organic growth up 8.5%. When you kind of shift to the earnings side of it -- and I'm sorry, going back to revenue for that and the piece that is really more sustainable on the flow business. We've looked at that. We've forecasted it forward and that growth to continue in the second and the third and the fourth quarters at largely the same rate, and that has resulted in us raising our overall revenue guidance by the $110 million or a full percentage point on the year. So now we're sitting at a midpoint of 11.5%. On the other side, the earnings. We did see earnings come in a bit more than what we had expected. And a fair amount of that was driven by 2 things. Number one, is on the revenue, on the flow revenue, it comes at typically a higher margin, and we saw that reflected in favorable mix, but overall, mix was still unfavorable but less unfavorable than what we had anticipated. And then the other area is on their integration and productivity came in stronger, making really good progress on Integration of 3.0. And with that, we did the same thing and extended that goodness over the back half. And with that, raised our midpoint of our guidance by $0.30 up to the $10.75.

John, if I can just get a follow-up there. You mentioned the 3.0. Can you talk about how much cost savings were realized and it sounds like, I don't know, maybe the message you're trying to give for margins into the third quarter from second quarter based on the run-up you gave us?

Yes. So Ken, as you know, in the first quarter, we raised our guidance by $15 million on Integration 3.0, and we saw the momentum and the timing of these projects at that time. And we've seen that convert certainly in the second quarter, and we would expect from our original thoughts on the year that Integration 3.0 is going to drop more goodness on the year. And again, that is part of that increase in the EPS guidance of $0.30.

Our next question comes from Scott Group with Wolfe Research.

So if I look, the 12-month backlog is up 11%, the total backlog is up 42% year-over-year. I think that's the big spread we've ever seen between the 2. I guess, I'm trying to understand like what's the timing for that multiyear backlog to start converting to revenue? And ultimately, I guess what I'm trying to figure out is like we had high single-digit organic growth in Q2. Is that sustainable?

Well, thanks. I'll start with just the total backlog, and this is very strong coverage, Scott, to your point, and that's how we run the business, make sure that we have that coverage. It's probably the strongest coverage we've had and some multiyear backlog to call over really a multitude of years. So that's very good and really strengthens our position to deliver on the long-term guidance we provide. In terms of the 12-month backlog, I think that number really supports the mid-single-digit growth on 5% to 6% that we've described for the year. And I think you've got to extract from that some of the nuances associated with especially the acquisitions we've done. John, I don't know if you want to add to that?

Yes. Scott, you had mentioned organic growth in the second quarter. When you look at our overall growth of 17.5%, the easy way to look at this is half of it, about 8.5% is driven by the year-over-year impact of acquisitions. And the other half of that, about 8.5% is driven by organic growth. And that's certainly an acceleration from what we saw in the first quarter. If you remember, our first quarter organic growth was up 2.3% based on tighter shipments as well as the write-down of a digital project. So I think the best way to look at organic growth is to look at it on the first half basis that takes care of some of the timing nuances there, which were up 5.5%. And we feel good about that. When you look at the 12-month backlog is an indicator of that, if you take out the acquisitions and currencies and more normalize that, we are in that range of mid-single digits. And we see that continuing on in the back half of the year given the strength that we're seeing in particular of our flow business.

Okay. That's helpful. And then just 1 follow-up for you, John. I think your comment about like the pace of margin suggests Q4, we see some really strong year-over-year margin improvement. I know it's early, but like is that a good way to think about what '27 could look like that exit rate?

I would say, looking at the half, Scott, is more indicative of that. So let's talk about why we're expecting what we're expecting, right? We're expecting the -- probably a significant majority of organic growth to be in fourth quarter. We expect growth in the third quarter, but that's going to be in the range of around 0.5 point that we saw in the first half of the year. So why is the fourth quarter going to be up so much? And I think first, we start with what happened a year ago in the fourth quarter. If you remember, Scott, we had 1 heck of a cash flow in the quarter. And next cash conversion was just shy of 300% and as I think you also know is our comp plans and our focus on cash is throughout the organization, but it is embedded in both our short-term and long-term comp plans and then drove a higher expense than we had anticipated. The second area in last year was the fact that our transit business was level loading some production and move forward some benefit through production and moving production forward in the second and the third quarter. And consequently, we had a pretty weak margin in transit in the fourth quarter, and that was driven by the manufacturing inefficiencies as we rebalance that. So we're lapping those 2 things that aren't going to repeat again this year. The other piece of it, again, goes back to tariffs, right, our tariff expense is going to be pretty even between quarters this year and certainly in the back half. However, the comparable is very different. In the third quarter last year, we had very little expense. We just started to see some, but it was nominal at best. The fourth quarter, though, we saw a large rise in our expense for tariffs as things keep up the balance sheet, right, from when we incurred the tariff. And so the headwind in the fourth quarter is going to drop quite significantly between what we saw in the first 3 quarters. And between the confluence of those 3 things, we expect our fourth quarter to be up more than we would typically expect in a quarter with regards to margin growth.

Our next question comes from Angel Castillo with Morgan Stanley.

Just maybe I wanted to start on components. I was hoping we could kind of unpack that a little bit more. I guess, you still have railcars down even though the outlook has improved a little bit, but just the 1% decline is quite notable and you've talked about some of the pieces around flow and you also mentioned, I guess, Industrials business. So can you just help quantify, I guess, how much has the flow business improved? How much is maybe the railcars OE side down and then on the industrial part of the business, we would love to just hear a little bit more about how that's progressing, what changes you're seeing there, in particular, I guess, the data center part of your components business. Just curious one, what you're seeing in terms of demand there and then just more broadly from data centers, how is your strategy kind of changing or evolving base of the demand you're seeing? So I know there's a lot in there, but all kind of related to components.

Angel, I'll start, and I'll let John dive into a little bit of the details. We described -- I mean we saw North America freight volumes strengthening. With that, we saw really more of a demand for our full product rated on parts, some fleets being on par as part of that. And we've seen that continued strengthen the transit backlog when you talk specifically about the components business, I think despite of the lower freight car build I think our teams have continued to adjust, number one, the operations to align with that volume. I think they've driven significant cost discipline and margin improvement for the business. And we are continuing to see strong demand in the industrial applications and some of that is particularly visible the heat exchangers which go into some of the demand for power generation, which is a positive in that regard. John?

Yes. Specifically, Angel, the components was down 0.7 percentage point and except if you go back over the last 6 quarters, we've really seen pretty much the same thing as we're bouncing around that flat. Certainly, the team has been absorbing a significant downstroke with regards to railcar businesses -- business, which is about 60% of overall revenue. And the other piece of it that we're finding this year seeing this year is the exit of some nonstrategic business and revenue in there. So they're fighting, as Rafael amended from a cost standpoint, certainly from a market share and they're offsetting a fair amount of what they can, but also getting a little bit of help on the industrial side. And we're not seeing a big shift in what we've seen in the industrial side for the last 6 or so quarters. It is up on a small basis. It's up pretty good, again, benefiting from some of the data center stuff, but it's a small base, but it is enough to largely offset what we're seeing that and the work of the team to offset what we're seeing with railcars being down. We're hoping that, that turns in 2027, and that's what the early forecasts are. But we still got a couple of more quarters that we expect railcars to down in the 20% range.

Got it. That's very helpful. And maybe just as a follow-up, I guess, could we maybe unpack the data center portion of power generation maybe separate from what you might be seeing in heat exchangers and how that's progressing versus maybe any potential equipment demand and how your strategy, if it's changing at all, how you're viewing that market, the attractiveness to potentially look to target that a little bit more readily. I guess just how are you thinking about that? Or what are you seeing? .

Angel, I mean, as you mentioned, all sort of the positive heat exchange is a positive for us. You're seeing that as, I'll call it, significant offset some of the pressures we've got on the freight car side of the house. In terms of the engine side, when you look at engines and specific, I mean, our engines are really built for some of the most demanding applications in the world. They are exceptional for reliability and fuel efficiency. With that being said, when we think about data centers, a large part of that is connected to back power only applications. We charge engines are generally not the most competitive solution for that application. We're continuing to look into selective opportunities for power generation applications, especially where we have more restriction around emission standards, but this is very much a niche segment of the market. And at this stage, we have had really only very, very nominal sales in this space.

Our next question comes from Bascome Majors with Stephens.

I wanted to revisit the EVO Advantage modification program. I know you guys reported quite a bit of orders earlier this year in that space. Can you just give us an update on how the product is resonating with the Class 1 rails in North America, where you are on the ramp up of actual delivery to where you think you'll be a run rate into next year? And how the pipeline compares to the backlog and just a big picture of how you expect that to evolve as this product continues to out in the marketplace?

First, I think we've seen continued progress in terms of the program. We've announced that in the first quarter. We began our first order in North America in the second quarter that's consistent with what we expected. We see that as an opportunity to really continue momentum with regards to refreshing our installed base around the world, especially in North America, providing what I'll call more value for our customers with fuel efficiency and really driving, I think, greater and better value outcomes for our customers. So we continue to expand on the value that we can bring to our customers on fuel efficiency and continue to stay ahead and widen really the competitive advantage versus our competition. So positive from that perspective.

And you said first order in 2Q. So just to be clear, the $1.3 billion in orders you received later last year that was not for the advantage the order conversion for this product is still mostly ahead.

Exactly. That's correct.

Our next question comes from Rob Wertheimer with Melius Research. .