Wabtec Pricing Spineometer: 2 of 5 Vertebrae

Wabtec, a global locomotive and related systems and services company, had a positive Q3 2023. Revenue rose 4.4% to $2.66 billion and earnings before interest and taxes rose 17% to $433 million over the same period last year.

A review of Wabtec’s 23 October 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

Price itself was not discussed in the earnings call. Margins however were. Positive margin growth was detailed in a directional gross margin bridge. For the latest quarter, volume, price/mix, and other manufacturing costs contributed positively to margins while currency fluctuations contributed negatively. Raw materials costs were relatively unchanged.

Their annual report provided much clarity regarding Wabtec’s business operations.

• Wabtec divisions include Freight Segment and Transit Segment. Their customers are freight rail and passenger transit companies across the globe. Significant marketing efforts in freight are underway in Australia, Brazil, Egypt, India, South Africa, Kazakhstan, and other areas within the Americas, Europe, and Asia. Transit is more focused on Europe and India.
• Business activity depends on economic conditions, traffic volumes, and government policy. Wabtec often participates in high-profile decarbonization, public transportation, and high-speed rail initiatives.
• Wabtec sells a wide variety of offerings. Major equipment offerings include diesel-electric and battery-powered locomotives. Digital offerings range from transportation intelligence through the Internet of Things (IoT) to optimization software for railyard management. Component offerings cover brakes and air compressors as well as ventilation systems and passenger windows.
• While no customer of Wabtec contributes more than 10% of revenues, the top 10 customers constitute 30% of revenue.
• The industry is highly concentrated. Competitors include Knorr-Bremse AG, Amsted Industries Corporation, Electro-Motive Diesel, a subsidiary of Caterpillar, and sometimes CRCC Corporation.
• Wabtec is active in acquisitions of both heavy equipment manufacturers and software solutions providers. In addition, Wabtec holds many patents and is actively engaged in new product development.
• A little over half of all sales are in the aftermarket.

These factors define the pricing capability that would benefit Wabtec.

1. Industry benchmarks suggest Wabtec employ 20 to 100 professionals dedicated to pricing. The complexity of their business and the anticipatable customization of their customer offers suggest Wabtec should be at the upper end of this range.
2. Their digital offerings would face fast industry evolution suggesting several professionals dedicated to constructing new price structures around add-ons, Good-Better-Best versioning, price bundling, and SaaS price models.
3. Wabtec’s engagement with new product development, and the nature of their customer base being large but relatively concentrated to government agencies and freight operators, suggest that a portion of their pricing professionals would be dedicated to conducting Economic Value to Customer studies along with some limited Gabor-Granger or Van Westendorp Price Sensitivity market research.
4. Competitive price intelligence would be needed to both inform new product development pricing and ongoing price management.
5. Price management would benefit from having pricing professionals working with commercial teams globally to provide price guidance (statistically defined price capture expectations and ranges), win/loss analysis (prices offered on won and lost contracts to clarify the role of pricing in capturing business), and price by segment studies (price captured by order size, customer type, geography, and other variables), and other statistical studies.
6. Similarly, price capture at Wabtec would benefit from profit-based incentives for salespeople to align their negotiation goals with the company’s.
7. Commercial policy would likely vary across the globe and benefit from annual re-evaluation of commercial policy incentives (discounts and rebates) to effectiveness (increase in sales volume, retention, or mix improvements.)
8. The significance of Wabtec’s aftermarket activities indicates a need for frequent price reviews across many thousands, if not millions, of items to address input cost inflation, competition, and customer retention. While some companies with significant aftermarket revenue can consistently raise prices on aftermarket items for multiple years in a row, it is possible that Wabtec has already done much of this repricing and is facing customer betrayal on aftermarket items and brand challenges on new orders. It can be difficult to distinguish stated customer intentions from actual customer behavior, which returns us to the issue of having a strong pricing analytics effort underway.
9. While Wabtec reports that macroeconomic conditions and government policies are relatively stable today, we live in a time of uncertainty and possible tariff increases or new armed conflicts. Either of these factors can dramatically impact pricing and market access.

Research into the investment by Wabtec in pricing yielded underwhelming results.

1. The team size was well below expectations.
2. Titles included leader and manager. A vice president of pricing at Wabtec was not identified.
3. The responsibilities of pricing professionals appeared to be focused on bids and proposal writing. Much of the potentially valuable analytics identified above do not appear to be reliant on a pricing team. We have little evidence that this type of analysis is regularly executed.
4. Professionals who are engaged in pricing at Wabtec are in finance, product development, sales, or strategy.

Given the importance and capability of pricing at Wabtec as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of December 2024.

Wabtec Pricing Spineometer: 2 out of 5 Vertebrae. The financial reports indicate that executive management is astute regarding the importance of pricing however a review of their pricing team itself implies that pricing decision-making is highly dispersed across the organization leaving the potential of

developing valuable expertise on pricing and price capture or aligning pricing decisions across the organization as an untapped and underexploited opportunity.

WAB (Westinghouse Air Brake Technologies Corporation doing business as Wabtec) was flat at 190 between the day prior to their earnings call and one week later. FY 2023 revenue of $9.7 billion with a 13% operating margin and P/E ratio around 30.

For FY 2023, a 1% improvement in price would yield a 7.6% improvement in operating profits holding all else constant at Wabtec.