Good day and welcome to the Wabtec First Quarter 2022 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Kristine Kubacki, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone and welcome to Wabtec's first quarter 2022 earnings call. With us today are President 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 on our website earlier today and can be accessed on the Investor Relations tab on wabteccorp.com. Some statements we're 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. With that, I’ll turn the call over to Rafael.

Thanks, Kristine, and good morning, everyone. Let's move to Slide 4, and I’ll start with an up on our business, my perspectives on the quarter and progress on our long-term value framework. John will then cover the financials. Overall, we achieved significant progress against our long-term strategies that we detailed at our Investor Day in March. We delivered a strong first quarter as shown by the 5% sales growth, adjusted operating margin expansion of 1.4 percentage points and adjusted earnings per share growth of 27%. Total cash flow from operations was $161 million. Finally, we ended the quarter with about $23 billion of multiyear backlog, which was up $1.1 billion from last year. Overall, our team overcame a volatile and disruptive environment and delivered a strong first quarter, despite challenges across the supply chain, higher costs and the impact from the conflict in Ukraine. We are monitoring the devastating situation in Ukraine. Our hearts go out to the people there, their resilience and courage are truly inspirational. For the year, we expected Russia to account for roughly 5% of our earnings. We do not expect our business in that market to return for the remainder of the year. Given the situation, our first priority is to continue to protect the safety of our employees in the region and abide by all sanctions. On the positive side, we do believe that the rail industry and Wabtec are well poised to benefit from significantly higher energy prices and from the likelihood of shifting global commodity flows over the medium term. Rail significant fuel advantage over truck is only widening with pricing fuel prices, improving the value proposition for rail. We are enhancing our customer’s productivity, capacity utilization and safety through investments in decarbonization and digital technologies. The breadth of our portfolio, along…

Thanks, Rafael and good morning, everyone. Turning to Slide 7. I will review our first quarter results in more detail. We had another good quarter of operational and financial performance, despite challenges in the supply chain, cost increases and the impact of Russia. Sales for the first quarter were $1.93 billion, which reflects a 5.3% increase versus the prior year. Sales were positively impacted by the continued broad recovery in our freight segment, higher pricing and the acquisition of Nordco, partially offset by lower year-over-year sales in transit, driven by unfavorable foreign currency exchange and supply chain disruptions. We continue to experience adverse impacts to our sales results in both segments due to shortages across many component parts, including computer chips, which caused delays in production and customer delivery. For the quarter, adjusted operating income was $319 million, which was up 15.2% versus the prior year. We delivered strong margin expansion, up 1.4 percentage points on an adjusted basis. Margins were aided by mix favorability, increased pricing and improved productivity, driven by higher absorption of fixed manufacturing costs, partially offset by $45 million to $50 million of higher costs. The team achieved margin expansion even in the face of a highly disrupted supply chain and a challenging inflationary environment. In the first quarter, adjusted earnings per diluted share were $1.13 and up 27% versus prior year. GAAP earnings per diluted share were $0.80, which was up 35.6% versus first quarter a year ago. During the quarter, we had charges of $7 million for restructuring and other onetime charges, largely related to our integration 2.0 initiative to further integrate Wabtec operations and to drive $75 million to $90 million of run rate savings by 2025. As Rafael noted, are pleased with our Q1 results, and particularly our sales growth in the…

Thanks, John. Let's flip to Slide 14 to discuss our 2022 financial guidance. Last quarter, we issued guidance with sales growth at the midpoint of 8% and EPS of $4.65 to $5.05 or up roughly 14% at the midpoint. Our guidance was based on improving industry momentum and strong underlying customer demand for our products. Despite headwinds from supply chain disruptions, unfavorable mix and a still challenging cost environment with higher investments in technology, we are continuing to take action to drive margin expansion and grow our business overtime. With the first quarter behind us, we feel strong about our businesses and delivered against our original planned financials, despite unplanned loss of business in Russia. I'm pleased with the strength and resilience of our business and more importantly, I'm extremely proud that our teams found the path to deliver to our plan. despite an ever-changing and challenging environment. The reality is that, our business in Russia was expected to earn about $0.25 per share in 2022, which pressures the top end of our guidance range. However, despite this pressure and recognizing the strong underlying execution, the pipeline of opportunities in the business, and the still volatile market conditions impacting 2022 and beyond, we are not changing our original guidance. Now let's turn to the next slide. Our team delivered a very strong start to the year despite a challenging and rapidly evolving environment. I'm proud of their efforts to deliver for our customers, drive strong financial results and further strengthen our financial position. As we look forward, the rail sector and Wabtec are well positioned to increase share and solve the critical issues facing the world's freight and logistics, et cetera. We will continue to lean in the strong fundamentals of the industry and our company to drive long-term profitable growth. Our long-term strategy continues to be built on our deep industry expertise, grounded in innovation, breakthrough initiatives and scalable technologies that drive value for our customers. These efforts will continue to be accelerated by our lean, continuous improvement culture and disciplined capital allocation. As we've said before, Wabtec's mission holds a larger purpose to move and improve the world. I am confident that this company will continue to deliver and lead the transition to a more sustainable future. With that, I'll turn the call back over to Kristine to begin the Q&A portion of our discussion. Kristine?

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

Our first question will come from Justin Long with Stephens. Please go ahead.

So maybe to start on the guidance, Rafael, you mentioned that Russia was $0.25 of the original guidance for the full year. Just to be clear on that, are you now assuming that number is 0? And if so, with the guidance range unchanged, can you talk about what the positive offsets are to that headwind in Russia?

Yes. So that's right. We are considering it's 0 for the year at this point. I think the offsets Justin, I'll start with the first quarter. We're really tied to -- well, first, I think the business is operating well. Our teams have done strong execution. We've also seen positive coming from the unparking of locomotives with demand on the services business. We also have seen a stronger mining business that now we have anticipated. So, if you think about the year, I think it's continuing to work to find offsets, not just tied to the loss of the business in Russia, but headwinds of inflation and supply chain, transportation costs as well. I think with the first quarter behind us, I think the team continues to work on those offsets. The other thing that I would add is, uncertainly have certainly increased since we last talked in February. But we have probably a stronger pipeline of opportunities in the business. And I think despite of the volatile market conditions, we felt really strong about maintaining guidance at this point.

Okay. Great. And maybe following up on the pipeline, specifically on international locomotives, do you already have enough in the backlog at this point to say your deliveries will not only be up in 2022, but also in 2023, just from an international locomotive perspective? And are there any data points you can share on new contract wins that are in the market today that you're bidding on?

Yes, Justin. Number one, we have fundamentally backlog again for what we need as far as new locomotives being delivered this year. And it's actually started that gains momentum through the year. If you look at the second half of the year, we're going to actually be delivering more than 50% more locomotives than we did on the year before in the second half. So, I think that's one data point. I think what was more exciting about the quarter was really the backlog. It was a positive again in the quarter. I think we see momentum in the order intake and growing backlog, the pipeline of deals has strengthened again. And this is probably the strongest pipeline of deals we've had over the last five years. And our commercial team here continues to be focused on converting this pipeline. I think you saw some of that progress with the things we announced here in the first quarter. The strength is also reflected on the 12-month backlog. This is certainly the highest we've had since the merger. And that's for both freight and transit. So, I think there's good momentum there and I think some of the things I described to you certainly helped, I think, '23, '24 and beyond. So multiyear orders that really help us to continue to build momentum. So that is something very positive we signed in the quarter.

Our next question will come from Jerry Revich with Goldman Sachs. Please go ahead.

Rafael, interesting developments that we've seen in your business over the years has been just the growth in mods and your strong mods market share. Can you just update us on what mod deliveries look like year-over-year in the first quarter? And what's the cadence look like over the balance of the year in light of the recent order strength you've had for Mod specifically? Thanks.

So Jerry, double-digit growth this year versus last year into the Mods business. When you look at across the year, I think there is a relative consistency we could have variation just in terms of time of shipment, but double-digit growth. But I think what's more exciting is I think I had mentioned that before on auto costs. I think what we thought would have been a cap in terms of that volume in North America, we see the opportunity here to further expand that business. And internationally, I think some of the momentum continues. And so we see that business with a strong opportunity here to continue to grow moving forward.

And then can you talk about the earnings cadence over the course of the year? When do you expect the revenue burn to accelerate given the moving pieces that you spoke about earlier?

Hi Jerry, this is John. With regards to the earnings cadence, we came out last quarter and talked about, we expected the first half to be a little bit lighter in terms of revenue growth. And - but heavier in terms of earnings growth, and that would reverse in the back half. And the big difference between the two is what Rafael just talked about, as our equipment grows and it's going to gain momentum through the back half. I think what we're seeing in the first quarter is very much in line with that overall sequence. And we had a revenue growth of 5.5% and margin growth of 1.4 percentage points. As we look to the back half, we would expect to see a significant revenue growth. However, our overall margin growth is going to be lower on a year-over-year basis than it is in the first half -- I'm sorry, on a year-over-year basis. That's driven, Jerry, by three things: one is the mix shift because of shipping in a much higher percentage of equipment sales; the second is, easier comps were tougher comps in the back half by about 1.5 percentage points; and the other is what Rafael mentioned as well, we'd expect more cost pressure in the back half because of the most recent cost surge that happened in Q1 with the invasion of Ukraine.

Our next question will come from Scott Group with Wolfe Research. Please go ahead.

Yes, good morning. This is Ivan Yi on for Scott Group. First on Russia, I understand you're expecting 0 for Russia this year, but how are you treating this exposure in your multiyear backlog? Thanks.

So, with regards to, number one, the business in Russia, we are complying with all sanctions and legal requirements. We are committed, again, to the safe operations of equipment in the region. And we have say to some extent, providing nominal support for this purpose. Given the uncertainty, given the conflict we have removed Russia from our backlog.

Thank you. And my follow-up, can you quantify the number or percentage of locomotive on parkings in 1Q? And what are your expectations for second quarter? Thank you.

What I'll tell you there is we continue to see on parking. We're back to numbers that are comparable to the third quarter of 2019. So that's, I think, a good - a positive for the business. Some of those fleets are on part, they've been parked for quite a bit of time, and they demand some level of investments. But I think most importantly, when you look at the fluidity, the velocity and the network, I think the demands for really reliable power and continued investment for our customers in order to continue to improve those metrics. I think that's something that we certainly have, I think, a lot of the solutions for it.

Our next question will come from Courtney Yakavonis with Morgan Stanley. Please go ahead.

I hate to belabor Russia, but just a couple of quick follow-ups. I think you had mentioned at the Analyst Day that the majority of the impact was supposed to hit 1Q from Russia. So I just wanted to confirm that, that and so the majority or the rest of the year will be less impacted from that headwind? And then secondly, if you could just comment at all on freight versus transit exposure. And I think you also mentioned that you had removed Russia from the backlog. So just any impact to those - to the segment level backlogs?

Hi Courtney, this is John. Courtney, what we had talked about in Investor Day is that, we would be a little bit older shared in the first quarter in terms of earnings expectations. We did not say the majority of our earnings would be in the first quarter. On a full year basis, we had planned for $0.25. In the first quarter, we probably, $0.03 or $0.04 we shipped before the conflict began, but it was just a little bit overweighted versus an even split across all quarters. And the other piece is, yes, Russia is out of the backlog and we took that out during the quarter - this quarter.

And then just on share repurchases, I think that was a little bit higher than we were expecting. I think you had a $750 million reauthorization that you had announced and now it's close to halfway done. So just as we think about the pace for the rest of the year any guidance you can give to that? And if that was a key offset as well in maintaining the guidance?

That was not a key offset to maintaining the guidance, but we're very pleased to have purchased $300 million. And largely Courtney, it's going back. We came out of what we believe is the trough in 2021. And we feel confident in the future. We want to get off to a good start to the year, and we're able to repurchase 300 million shares. As we look forward, I think I would go back to what we had said at Investor Day with regards to capital allocation. that we are going to focus on making sure that we have a strong balance sheet. We invest in the business in terms of capital and technology spend, which you saw in the first quarter and the dividend and protecting the dividend. Then from there, we would prioritize and continue to prioritize acquisitions as long as they are strategic and accretive over share repurchases. And finally, barring that any excess cash, I'll come back to our shareholders in the form of share repurchases.

Our next question will come from Chris Wetherbee with Citi. Please go ahead.

This is Eli Winski on for Chris. Maybe we can start with the OEM side. We saw that revenues were higher in this quarter than the prior quarters in 2021 and 2020. Could you talk about what the cadence of the growth in that segment might look like given some of the congestion and some of the supply chain issues there.

Are you referring to the transit segment?

I am.

Right. What we're seeing as far as transit is overall revenues were down 6.5% and - as we had mentioned, 5.1 percentage points of that is due to currency. The other drag that we had with regards to revenue is about - well, not about a year ago, first quarter, we exited a lot of our UK operations on the service side, so an aftermarket, that was basically our brush product line. By the time we exited that business, it was the end of the third quarter. And right now, we're lapping those higher revenues from a year ago as we exit that business and that's roughly about the same impact that currency had on our transit business. The third element, obviously is the supply disruptions continue to hit that business a little bit more than others. But excluding those, we would have seen good underlying growth in the transit business.

And then maybe jumping up to services and the acquisition of Nordco. How is the - how are the expenses coming out of that business now with some of the synergies from that acquisition? It's probably likely that you should be seeing that start to fade off here more now and some of the first quarter, correct?

Right. During the acquisition, we had looked to take $10 million of cost out of that business over the next couple of years, and we are tracking with that. I mean that's coming out certainly in operational efficiencies that would hit gross margin as well as a lot of duplicate SG&A expenses are coming out as well. This will be the last quarter that we're lapping that acquisition. And with that, we did see higher SG&A in the quarter, as you'd expect.

Our next question will come from Rob Wertheimer with Melius Research. Please go ahead.

So I had, I guess, two on transit, one short and one long term. Just short term, just any comments on -- it seems like backlog is progressing pretty well. But on transit customer sentiment on uncertainty in Europe, if that affects anything, perhaps stuff has been delayed and it's pent up. But just any comments on that short-term demand picture around the backlog? And then second, just a more structural question just as you've narrowed focus over the years on transit, what is the feeling on wins, on market share on just how the competitive balance is playing out? And I will stop. Thanks.

Yes. I'd say, ridership trends to continue to be uneven across various markets there. We're not seeing any signs of slowdown of the market. And I think to some extent, the current crisis favors rail the energy intensity of rail is a fraction of -- if you were to compare to either passenger cars or well, even trucking into the freight segment. I think the other element I'd mention is certainly Europe, but other parts of the world, the hybrid work model may also increase demand for intercity trains. So on one side, infrastructure spending continues to be a positive with governments investing in rail. So, you'll see that in the short term. We could continue to see some delay in project execution due to supply chain disruptions. But largely, the fundamentals of the business remain the same, remain strong, consistent of what you might have heard from auto customers and OEMs in that sector.

And then just any comments on competitive balance if your backlog is growing in line, market shares holding, growing, contracting?

I think we have largely been holding market share positions. It, of course, varies product line by product line. I think 1 of the things we made a clear upfront was really working towards the quality of the backlog, which has improved over the last couple of years. And that comes down to also making some of those choices and working in that direction. So, we're continuing to improve those numbers.

Our next question will come from Allison Poliniak with Wells Fargo. Please go ahead.

Just want to go to digital electronics. Obviously, the shortage is certainly impacting your growth there. Is there any way to quantify what that headwind to growth has been for digital electronics? And then as you look through, obviously, a volatile supply chain environment still. But do we expect those chip shortage start to ease, are you building inventory there? Just any color that can help?

Yes. So Allison, two things. I think we've made some decisions last year in terms of while trying anticipate some of this, but the lack of computer chips have had a significant impact for the business in the year. We still expect that business to grow. I think some of the good signs are tied to the double-digit order growth you saw last year. Some were really multiyear agreements we saw again a strong book-to-bill in the first quarter, which was above two for the business. I think, again, a focus area for our teams to make sure that we continue to drive convertibility into 2022 with additional orders. And I think the other comment, I would make is North America continues to be slow, despite of some of the announcements here with May. But we're continuing to gain momentum internationally. I think there's some significant opportunities tied to PTC adoption internationally and some of the other technologies that we have.

And then just a high-level question. One of the pushbacks we often get with this local in parking and the storage number for the railcars coming in is that it's just being mass or any improvements being masked by the rail service challenges, like that's why we're seeing those numbers. just any high-level color from your perspective, what you're seeing? Is there a real demand behind what's going on? Or does this feel like a temporary surge at this point? Just any thoughts there.

Yes. Let me start with what we're saying, and this is broad, and it's more than the North American market. If you think about freight internationally, I think across our key geographies, we see demand are really tied to commodities flow. So think about volume dynamics are positive. If you look at some of the data that we shared in both Kazakhstan and India. I think we have inquiries for new equipment to be delivered in Africa. We have a number of projects under discussion in Australia, in Asia as well as a function of that. Even despite of the volume drop you saw in Brazil, I'd say trends are positive tied to the mid, long term and new concessions. You mentioned North America. I think we see sequential improvement of unparking of both freight cars and locomotives I think the expectation there is that the investment will continue in terms of customers needing reliable and efficient power to solve through some of the things that we described. And we certainly expect Carlyle to continue to improve throughout the year. So that's maybe just with regards to that part. I think I've made some of the comments on transit. But this is broader than I think North America and I think that goes into some of the comments I made around really the momentum that we saw in the quarter, again, with regards to the growing backlog.

Our next question will come from Matt Elkott with Cowen. Please go ahead.

Good morning. Thank you. Rafael, I think the average content in locomotives, freight locomotives in North America prior to GE might have been around $100,000 range. Can you give us an update on where you see the content opportunity going once there are orders in North America, again, as it relates to diesel locomotives? And then also on the FLXdrive, can you remind us how much of the component content on the FLXdrive is actually from Wabtec legacy versus outside suppliers?

Yes. So I'll start with the FLXdrive, which I think as being a new product really provides data opportunities for us to bring the full integration of the suite of products we have and translate that to ultimately value for the customer. So, we have a very significant opportunity of expanding that number there. When you think about, I'll call our -- I'm going to use the word legacy products. We have the opportunity to grow that as well. We've been doing that in the international markets. Some of that is going to be dependent on sizes of fleets customers are looking at and really making sure that as you introduce some of these components, it comes with scale, it comes with, I'll call the right support from a service capability behind it. And - but you'll see that ultimately reflected on digital opportunities, which will continue to grow here, and you've seen some of the numbers we've highlighted in terms of the momentum in orders for that business?

And then one other question on the consolidation front. I think before GE, the rate was two or one to three bolt-on acquisitions per year. Should we expect you guys to ease yourself back into that kind of pace eventually? And can you give us an update on any potential opportunities you're eyeing right now? Is there a pool of potential targets that you're examining? Just anything on the M&A front or the consolidation front would be helpful?

I'd say we're continuing to explore acquisitions. We're going to be opportunistic here. It's got to come with the right returns on investments. So. this is not about the number of acquisitions that we do. This is about really value creation and really very consistent with the capital allocation framework that we shared with you guys during Investor Day.

Right. Matt, I think we've got a very robust process looking at the opportunities. And again, it's not one to three or how many, it's the quality, how accretive they are and how on strategy they are? I think Nordco, which we did about a year ago at this time is a great example of the value that we can drive through our M&A activity. And more recently, we just had one with Beena Vision and certainly MASU at the end of the year. So, we feel very good about where we're at, as well as our pipeline as we look forward. And it certainly is a priority for the company to continue to do accretive M&A transactions.

Is it safe to assume that freight is the priority when it comes to evaluating M&A?

I think the priority is to find good quality, accretive deals that we can grow beyond what the previous owner was able to do to drive overall value for the company.

This concludes our question-and-answer session. I would like to turn the conference back over to Kristine Kubacki for any closing remarks.

I'd like to thank everybody for your participation today and we look forward to speaking with you next quarter. Thank you. Goodbye.

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