WAB - NYSE

Good morning. And welcome to the Westinghouse Air Brake Technologies Corporation's First Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. By pressing the star key. After today's presentation, there will be an opportunity to ask questions. To ask a question, 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 Westinghouse Air Brake Technologies Corporation's first quarter 2025 earnings call. With us today are President and CEO, Rafael Santana, CFO, John Olin, and Senior Vice President of Finance, John Mastellers. 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 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. 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 the 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. 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 that in mind, sales were $2.6 billion, 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 million. The twelve-month backlog was $8.2 billion, 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 of international market activity in our current pipeline of opportunities across geographies. However, we are cautious with regards to our North American business as the current tariff activities play out over the remainder of the year. Despite this traffic growth, the industries and Westinghouse Air Brake Technologies Corporation'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 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. Internationally, activity is strong across core markets such as Africa, Asia, and CIS, supporting a robust international locomotive backlog, significant investments to expand and upgrade infrastructure, 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. 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 million multiyear service agreement to increase the availability, reliability, and productivity of KTC's locomotive fleet. In North America, we secured a $140 million 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 million for new equipment and service contracts. 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 segments, TransitOne won two multiyear platform door contracts valued at $85 million for the Madrid Metro and the new Hamburg Metro U5 line. And finally, we secured a $50 million order to provide brakes and couplers for servicing the New York City transit authority. These wins signify 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 Westinghouse Air Brake Technologies Corporation 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 continues to be strong. 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 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. The Sub-Sahara Africa region is benefiting from new mining projects and volume growth. New equipment orders for the Siemundu mining project were secured in 2024 and 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. 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, PTC2.0, 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 Westinghouse Air Brake Technologies Corporation continuing to convert 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?

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. Drivers of the first quarter's operating margins were due largely to favorable timing of expenses and 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 $2.61 billion, which reflects a 4.5% increase versus the prior year. 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 million. The increase was driven by higher sales, improved gross margin, and proactive cost management. Adjusted operating margin in Q1 was 21.7%, 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 two-tenths of a percentage point. GAAP earnings per diluted share was $1.88, which was up 22.9% versus the year-ago quarter. During the quarter, we had net pre-tax charges of $9 million restructuring, which were primarily related to our integration and portfolio optimization initiatives to further integrate and streamline Westinghouse Air Brake Technologies Corporation's operations. As you may recall in our Q4 earnings call, we introduced integration 3.0 of run rate savings as we exit 2028. And another round of portfolio optimization initiatives that are expected to eliminate roughly $100 million 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, Westinghouse Air Brake Technologies Corporation delivered another strong quarter demonstrating the underlying strength of the business. 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 away and a freight distribution business to our components group from our services group. 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%. Services sales were up 16.9%. This was driven by the timing of modernizations and overhauls. During the first quarter, we allocated additional capacity to our mods production, which was a 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. 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. 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 which accelerates the need for investments in sustainable infrastructure. Now moving to Slide ten, 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. 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 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. Turning to Slide eleven, for the first quarter, GAAP operating margin was 18.2%, which was up 1.7 percentage points versus last year. Adjusted operating margin improved 1.9 percentage points to 21.7%. GAAP and adjusted SG&A and engineering expenses were up versus the prior year with adjusted SG&A slightly lower as a percentage of revenues. Engineering expense was $46 million, 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 an industry leader in fuel efficiencies and digital technologies that improve our customers' productivity, capacity utilization, and safety. Now let's take a look at segment results on Slide twelve. Starting with the Freight segment. As I already discussed, Freight segment sales were up 4.2%. GAAP segment operating income was $420 million, driving an operating margin of 22.1%, up 1.9 percentage points versus last year. GAAP operating income included $3 million of restructuring costs primarily related to our integration and portfolio optimization initiatives. Adjusted operating income for the Freight segment was $488 million, up 11.2% versus the prior year. 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, and improved productivity. Finally, twelve-month segment backlog was $6.07 billion. Our twelve-month backlog was up 9.1% on a constant currency basis. While the multiyear backlog of $17.85 billion was up 1.4% on a constant currency basis. Turning to slide thirteen, transit segment sales were up 5.3% at $709 million. When adjusting for foreign currency, transit sales were up 7.9%. GAAP operating income was $90 million. Restructuring costs related to integration and portfolio optimization were $6 million in Q1. Adjusted segment operating income was $103 million. 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 $2.13 billion, which was up 2.2% on a constant currency basis. The multiyear backlog was up 5.1% on a constant currency basis. Now let's turn to our financial position on Slide fourteen. First quarter cash flow generation was $191 million. We continue to expect greater than 90%. Our balance sheet and financial position continue to be strong as evidenced by first, our liquidity position which ended the quarter at $2.54 billion and our net debt leverage ratio which ended the first quarter at 1.5 times, leverage ratio was below our stated range in anticipation of funding the acquisition of Evidence and Inspection Technologies division we announced on January thirteen. 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. We continue to allocate capital in a disciplined and balanced way to maximize returns for our shareholders. During the quarter, we repurchased $98 million of our shares 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.

Thanks, John. Now let's turn to Slide fifteen to discuss our 2025 outlook and guidance. As you've heard today, our team delivered a good start to the year. Our international pipeline remains strong, and our twelve-month and multiyear 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. Now let's wrap up on Slide sixteen. 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 horizon, 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. 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&A portion of our discussion. Kyra?

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.

To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, the first question today comes from Rob Wertheimer with Melius Research. Please go ahead.

Thanks and good morning everybody. Rafael, you called out in your opening remarks just some of the obvious around North America. Wanted to ask just how that shows up in your business or in your pipeline or your pre-pipeline, whether it's less appetite for new logos, more than expected, more for mods, less for mods, more just kinda talk about what you meant by those comments and what you're saying. Thank you.

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. We're continuing to convert. So it's good to see. We're seeing some other elements types 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. With that, there's always going to be elements of lumpiness quarter to quarter. On both the elements of how we cut up those orders, but how we go about delivering on down. 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 2025 guidance, but most importantly, make sure that we're driving profitable growth into 2026 and beyond.

Perfect. And so you're saying, basically, both the profitability and the order flow from international is currently anyway offsetting any hiccups or weakness or softness or hesitation 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? Stop there. Thank you.

It's very customer specific at the end of the day. I think what we're seeing 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 in some new fleets. So we've certainly seen tier four locomotives growing. In North America. I think the other elements here to keep in mind is very often we're focused on North America and dynamics between new vocals 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 that perspective. And I go back to the comments I made, which is taking every action to deliver on the 2025 guidance, which we've just given you and making sure that we're driving profitable growth. Into 2026 and beyond.

Thank you.

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

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

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 that would include, Adam, 25% in Canada, 25% in Mexico, 25% steel 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 into our forecast, both the impacts on cost as well as revenue. 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 in kind of the forward look at those tariffs, whether they'll be on or off. And as you mentioned, Adam, there's a ninety-day reprisal on lifting them higher. So we're gonna continue to read that situation. Now those tariffs don't won't start to affect us financially until the end of May because there's an on-water exemption for them to hit. So we're gonna take some more time and understand where they land and the impact that they'll have on the economy.

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

Adam, again, 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 and 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, a 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 be the same level in the second quarter. Remember, our first quarter revenue mix I'm sorry, 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 being 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 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 is we had mentioned there's some timing items that impacted our first quarter that we'd expect not repeat in the second quarter. Thank you.

The next question comes from Jerry Revich with Goldman Sachs.

Yes. Hi. Good morning, everyone. And congratulations on the strong start to the year. I wanted 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? And as you think about integration 3.0, 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 plant, to what extent does the tariff situation impact your planning process?

Yeah. Sure. A couple of things. I mean, there's clearly what I call a balancing act here. It's 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 call the reliability and availability of our customers' fleets. That's key. 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 labors, things like USMCA. We've looked at alternative sourcing strategies. Of course, you got to evaluate inventory positioning. And broader supply chain adjustments. But at this same time, I think we've taken cost. You asked specifically with regards to integration to the auto and 3.0. We do have the offering to accelerate those, and those are the kinds of things that we're gonna actively and proactively manage it. And we've taken pricing actions that help offset additional pressures we're facing there. And Jerry, you also asked about any pivot on integration 3.0. Or our strategies direction there. And the answer is no. Our strategy remains the same. There's plenty of opportunity for us to reduce cost by that $100 to $125 million. As we get into the execution piece, we'll look at we do an IRR on every project that run. And as the economics change, you know, some of that may change. But overall, the direction remains the same, and our ability to take out $100 to $125 million is not gonna be affected by the tariffs.

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 2025, 2026 what do your models tell you as those fleets age?

Jerry, we certainly see an acceleration of that. The way I would answer you there, if 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 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. 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 any change on that.

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

Dan. Maybe 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 it was a few million dollars of a gross margin headwind. Quarter. But can you maybe expand on how many of your freight components are imported, what that import you know, map looks like, and what the actual packs will be starting on May one.

Thanks, Daniel. Hey, Daniel. We're not gonna disclose the impact of the tariffs on the business due to the fact that timing, volatility, uncertainty continues to change on a 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 I'm not gonna provide any of that guidance at this point. 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. I think as you mentioned, I mean, with Dundas 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, but we'll continue to navigate these challenges and continue to really make sure that we drive profitable growth over time. For the business.

Great. That's helpful. Appreciate it. And then maybe my second or a follow-up on just free cash flow. The first quarter, I think it was down year over year, John. I think the receivable securitization slowed if we read that right. Was that just a timing issue or something in the ABS market different or it was less receptive given the volatility? Just any thoughts on how this should trend through the year? You reiterated the 90% free cash flow conversion guidance, but just curious what's gonna make that get better given the timing there?

Thanks. Yeah. Daniel, thanks for the question. 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 million of outstanding securitization. In this quarter, the first quarter of this year, we have zero. So with that, you're seeing that that change. And that's driving the $143 million 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. 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 a prior year quarter that we'll 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, Ian, cash.

Great. Thanks for all the detail. Appreciate it.

The next question comes from Vincent Andrews with Morgan Stanley. Please go ahead. Hello? Your line is open. You can answer your question.

Hello? Good morning. I guess, go ahead.

Can you can you hear me?

Yes.

Hey. This is Angel Castillo. I'm on from Morgan Stanley. I'm not sure why it came up as Vincent Andrews. Anyway, just thank you for taking my time. Just wanted to ask about the margin backdrop. You talked about the two q dynamic. Hoping you could quantify that a little bit better just in terms of you know, how much of that mix favorability, how much of an impact that is maybe on a sequential basis? And same thing with the timing dynamic that you talked about and any other kind of factors that may be surprised on the first quarter, if you could kinda help quantify the magnitude of the move.

Thanks, Angel. And Joe and I not going to quantify in terms of percentage points, I think that we'd like to do is make sure the understanding of you know, we had four dynamics that really drove our first quarter margin. And certainly came in over our expectations. Mix being the biggest piece of it. And we would expect that not be the same in the second quarter. On a full-year basis, you know, mix is more of a timing element on the full-year basis. The other one is we talked about some timing of expenses. And again, that's just more the way the timing works out. I 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 led by integration 2.0 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. So some of that favorability is what we're taking our guidance up for as well.

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, were there still a little bit of uncertainty and as we go into kind of the May first time frame. 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, is meaning should we expect somewhat of a lag in terms of any kind of your ability to kind of pull levers beyond, you know, 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 first of immediately as soon as we know?

Like I said before, I think it's going to be a balancing act here with 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, it's really making sure that we're managing the business here, most importantly to drive profitable growth into 2026 and beyond. And there's an element of shift 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. We'll always be some element of variability quarter to quarter, but we're taking every measure here to continue to drive profitable growth over time.

Hey, Andrew. I've been checking a couple times, May first. The reciprocal tariffs won't start hitting us or we won't be charged at the border until the end of May.

Sorry. Yeah.

The earlier of that or May twenty-sixth. An on-water exemption. So we got a little bit more time before the financial impact start to hit us.

Got it. Very helpful. Thank you.

Thank you.

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

I understand the concern about being too precise on the receivables tariffs when a lot of that is still influx 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, you know, for example, some of the locomotives you're assembling internationally and Kazakhstan or maybe India. You know, how much of that content do you support with, you know, kits and engine and other key components? Shipped out of the US. Just, you know, understanding the back and forth of what's coming from the US, if those negotiations end up in escalation rather than the Thank you.

Let me start with just North America. I mean, we 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. And at the same time, you gotta 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 franchization.

But, you know, your term balanced. Or 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 US just wanna understand how literally we should take the word balance when we think about you know, the puts and the takes of what's coming from each direction in some of your international supply chains.

I'm being generic here because some of this is gonna depend even on the maturity of some of this supply chains and the scale that we use them. Internationally. But take for instance, like in Kazakhstan, we only have a lot of the fabrication, a lot of the elements tied to the platform and all of that. It's done locally. I mean, why do you ultimately shift to some of the very specific controls some of the onus tied 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 at the same time. You leverage the scale of concentrating some of these specific components well balanced from that perspective. in certain markets. And I think we're very well, we don't we wouldn't expect a huge amount of we haven't seen much retaliatory tariffs at all around the world with the exception of China. Our biggest impact continues to be in North America. From that perspective.

I'm asking we didn't catch that.

I'm sorry, I said thank you.

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

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 like in international margins being higher than North American margins. So I just wanted to understand when did the crossover occur like, and what are, like, primary, like, drivers behind, like, that shift? Is it, like, mixed pricing, like or structural, like, cost advantage? And kind of, do you expect, like, international to continue to outpace, like, North America on margin basis?

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. This 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. And we would expect that to certainly continue on into the future. I think if you go back five years ago into business towards a number of markets, that we were still at the stage in some cases of developing a platform to compete. You're still on 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 think John's comments that it hasn't changed overnight I mean, this is something we've been working at it. And it's good to see reflected in the business. That it's more profitable internationally than in North America.

Great. Yeah. 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 2.0 and 3.0 efforts? Or will they kind of reverse once kind of uncertainty and, like, inflation and everything kind of?

Yeah. This is certainly in addition to that, 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 glass holding positions open. Again, scrutinizing all investments. I'm accepting higher return capital projects and so on and so forth. What we're doing is again to provide a more opportunity and a certainty that will hit those guidance that we delivered today. But I wanna 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.

Got it. Thanks for the color.

Thank you.

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

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?

I think it's consistent, the growth we've seen in our market. Internationally. Of course, it'll 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 this. 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. Even on the most recent opportunities like any, we were able to ultimately adapt some of the existing platforms to be able to competitively compete in these products, which I have ultimately translated into I think really positive margins on the equipment side of the business.

That's great. And I know it's an uncertain environment. You don't wanna 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?

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 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 are some other ones that 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 how we really have this balancing act on looking at supply chains and making sure we are being constructive and proactive with our customers.

Thank you.

Thank you.

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

Hi, guys. Thanks for having me on. Just a quick one from me on pricing pass through. Just as a comment you made earlier about passing through or maybe just actually repricing for tariffs and I'm correct, your contract is able to pass that through to customers. Just wondering how customers are reacting to that pass through. Is there a risk that perhaps they wanna keep their CapEx budgets flat and maybe they extend their delivery cycles? Thanks.

Well, I'd go back to really the posture we've been having, which was want to make sure I meant that 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 needs to make sure that you're supporting those fleets is there. 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. 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're also taken pricing actions. So it's not a one-way stream of cost and price 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. That context as well.

Thank you.

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

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

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 hole and margins intact and deliver the margins that we've signed up for.

I'm sorry, the guidance that we've signed up for.

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

Again, I'm 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. Thank you.

The next question comes from Tami

Hi, good morning. Thank you so much. I actually appreciate all the comments you gave on Terrence earlier. Given how fluid the situation is. I think I heard you talk about pricing. 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?

Again, I'm not going to go into specifics, I mean, as I said, we do have a basket of business. We do a customers, those involved not just sometimes new locomotives, modernizations. There's a number of multiyear agreements that sometimes we have. We've got customers who are more transactional in nature in terms of the parts. So this is ultimately about managing that basket of business and making sure that through that process we're both were fair we're smart as we're looking to 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 to the year, but more importantly make sure we're constructing profitable growth into 2026 and beyond. I think those were really some of the comments here John made.

Understood. That's fair. That's very helpful. 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?

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

Got it. Thank you.

Thank you.

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

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