Good afternoon, everybody. Good morning for those on the webcast, for anybody in New York. Thank you for joining us this afternoon. Thank you for attending the Global Industrials Conference by B of A. With us today, we've got up next John Olin, Chief Financial Officer of Wabtec. Kyra Yates is in the audience from Investor Relations. We're happy to welcome you back to the conference.
My third year in a row.
My third year. It's been a tremendous run. You know what I thought I'd do is maybe toss it over to you for everybody. I'm Ken Hoexter, B of A's Air Freight and Surface Transportation and Marine Shipping Analyst. Twenty-five years at B of A.
Yeah, yeah,
It's a long time. I'll throw it over to you, John. If you want to just start off, you know, a lot going on with Wabtec. You recently set five-year targets. Maybe just give a background about Wabtec and kind of what's going on in the current. Obviously we've got a lot of questions to jump into.
Great. I guess I typically, well, who's ready to talk about trains, huh? What's more fun than trains? We're going to talk about Wabtec. You know, you usually got to say exactly what Wabtec is, right? It's Westinghouse Company, Westinghouse Air Brakes. A lot of people, I'm not sure what Wabtec is, right? We do everything trains. We build them, we supply into the transit market. We do all the digital. Our softwares run trains and networks, dispatch systems, and all the like. We are an interesting company that's come out over time, one of the oldest companies in America, 155 years old today, or not, I mean, this year. The company that we are today and that we're going to talk about here with Ken is really about five years old. It was an aggregation of two large acquisitions.
The first one in very late 2016 that doubled the size of the company. Wabtec originally was a component maker for largely rail cars in the freight business. They also had an interesting technology called PTC, which was a GPS-based safety system. It was required in the United States, anything on the main lines. We track all the trains, whether they're ours or any competitors. They merged with a French company called Faiveley in late 2016 that doubled the size of the company. Two years later, they doubled the size of the company again to about $9 billion-$9.5 billion when they merged with GE. You know, we tell you, talk about M&A, that was an absolute grand slam in terms of an acquisition, right? It doubled the size of the company.
What it did is it brought in an installed base of 23,000 locomotives. From that installed base, all over the world is the rest of the company, the rest of the freight segment kind of feeds off of that with component sales, digital sales, services. With those, there tend to be a fair amount higher margin products. The other thing that we got in that acquisition is our current CEO, Rafael Santana, that had a view on how to move the company forward and take us into the future. That was five years ago. We've been hard at it for that period of time. With that, we've had some great success. Three years ago, we issued our long-term guidance, Ken, and it was for mid-single digit and 250-300 basis points of margin growth and double-digit EPS.
We achieved that guidance, a five-year guidance in a three-year period of time. As we finished up last year, we reissued our five-year guidance because we had already achieved it. We just recently came out in February with the next five years, which is still mid-single digit revenue growth. However, we've certainly upped the margin expectations to be in excess of 350 basis points over the next five years. EPS again, growing at a double-digit basis. Kind of interesting, Ken, as we looked at the business today and what we had in terms of margin growth versus where we were three years ago, we see a lot more opportunity today in our cost base, even though that was about 300 basis points of margins ago, our margin build. We see a lot more opportunity today.
We've gotten very good at taking these three multinationals and integrating them and getting the cost synergies, but as well as we continue to see a lot of revenue synergy between the companies.
You talked about the 155-year-old company, but you feel like a startup, you know, when we were just out at your tech demonstration, you know, some of the stuff that is futuristic technology, love to delve into that a little bit just because you're right, you're pressing, continue to press on some real great innovations. Let me start on the targets that you just talked about. You know, revenue set a revenue growth mid-single digits. Backlog was up 3%. We made it crystal clear that there was FX involved. So without that, it's 5.5%. Maybe just in this environment where we're looking at rail car loads not growing, new car builds being down, what gives you the confidence in that mid-single digit revenue outlook?
Yeah, when we look at the revenue guidance, we kind of got a ladder and you can look in some of our material. You know, kind of the drafting comes from what the industry around the world is growing. And we calculate that at about 2-3%, which is not a tremendous amount of growth, right? Not overly exciting. That's made up of probably three component pieces that are pretty important to the puzzle. The first one and the most stable one is our transit market. That tends to grow, the industry tends to grow at about 4% year in and year out, very steady, adds a very steady component to us. We've got a lot of opportunity on that business, Ken, as you know, on the margin side.
We've seen our margins expand by about 50% in a four-year period of time from 9% to just shy of 14%. That adds a very stable component at 4%. Again, I told you 2-3%, right? The other aspect of it on the positive side is the international growth. That is growing in excess of 4%. That's more in the 5% growth. That would be the international, I'm sorry, international freight side of it. What brings those two numbers down a fair amount is when you look at the industry growth of our North American market, which is the single largest market. Most of our sales are outside the United States, but it is significantly the largest market that we have.
In terms of industry as measured in terms of car load growth, how much weight they are pulling or car loads of product that they're pulling. That number really hasn't grown in the last 10 to 15 years. It's about the same. We can put a plug in and a zero for that one. As we look forward, as much as the railroads are working to grow that number, our forward-looking plans are not expecting growth on that market. That would be all upside to the mid-single digits that we talked about, Ken. That's how you get to that confluence of 2-3%. What we expect to do is grow about double that for the next half a decade, right? How are we going to do that?
We feel really good about the 2-3% because all we have to do is hold market share. Over the last considerable period of time, we have been growing our market share across all three of those segments. How we are going to do it is, number one is while the U.S. market is flat or the underlying growth is flat, we have been growing that in the double-digit range. That is partly due to the railroads' desire to update their fleets. There is a lot of productivity that comes with replacing a 20-year-old, 25-year-old locomotive with a new one. That provides railroad customers a strong return on their investment for the cost of that locomotive, whether it be a new locomotive or a modernized locomotive, which is taking a donor from 25 years ago and we replace a vast majority of that with new equipment.
With that, we would expect to drive one to two percentage points of growth over a five-year period of time as that renewal takes place. The average age of a locomotive has grown considerably over the last 10 or so years in terms of the number of years. It has gone from one of the youngest fleets in the world to one of the older fleets in the world. We would expect that. The other area, Ken, to drive again that excess growth over industry is our investment in technology. You had alluded to that, and I am sure we will talk about it. There are a lot of opportunities.
You know, I think the first thought of when you see a train go by, you don't think of a lot of technology, but there's an incredible amount of technology that goes into that, you know, that locomotive or the transit parts that we provide. I'm sure we'll talk a little bit more about that.
Wonderful. Thinking about the big picture, Rafael has talked about, the CEO has talked about more opportunity today than the past three years. You've mentioned that a couple of times when you look at the cost-cutting side. Historically, he's mentioned best backlog in five years. We saw a backlog growing. He's talked about the best M&A environment in five years. You've made two recent acquisitions. What's the setup now from your perspective? How should people think about Wabtec in that environment? What are you looking for for growth?
Ken, you mentioned a little bit earlier that we view ourselves as a 155-year-old, five-year startup. I think overall that snowball is starting to go down the hill. I'm from Wisconsin in America. A lot of snow up there, right? As we gain this momentum, we're seeing that opportunity increase and we're seeing the performance accelerate. I think if you look at our performance over the last three years, you'll see that, right? That is how we achieved a five-year plan in three years. It is continuing to do what we do very well. That is focus on the cost side of our business and integrating these three multinational programs or companies. We've got a program we called Integration 2.0, which we just finished up that delivered about $100 million of savings. We're moving on to Integration 3.0.
That is getting after some of that cost opportunity that we see as these three multinationals came together. On the revenue side and talking about those pipelines, the same thing. We are gaining a fair amount of scale and growing market share over a period of time, but a lot of international momentum. We talked about, you know, that growing installed base is growing at a CAGR of about 5% a year for the last seven years. Our sales are certainly higher than that because installed base is everything that remains, right? The other piece, Ken, when you look at some of the revenue growth as the installed base grows. We are very focused on making sure that, you know, our locomotives are out there, the best in the world, and they are running. We get a lot of ancillary benefits from that.
As a locomotive is running, especially in growing markets, they're starting to get to a scale and a level that they're investing more in services, or we can invest more in landing people in services. We provide a little bit of exponential growth on our service business there, but also on our digital business. We have digital businesses that have onboard electronics that run the trains through cruise control. They optimize all the situations on board. We have overhead systems. I had mentioned PTC that connected into those and helped drive efficiencies. As our international markets gain scale and our installed base grows with them, it makes a lot of sense for them to add some of these other products that, again, we see more exponential growth growing out of the core installed base growing.
I'm going to ask a domestic question, domestic U.S., North America. Can you just describe before I jump into that, what's the split international, domestic, and key regions for you on the international side just before I harp down on the North American side?
Right. The United States is about 45% of our revenue. North America is about 55% of our revenue. The rest of the world is the other.
Okay. When I think about the North American fleet, we were just at a Rail Equipment Finance Conference talking about just what you talked about, the oldest fleet we've ever had in the United States, right? We're topping over 26 years when you look at the total fleet. Why in that environment are replacements so low? Is it you've built a better equipment that's going to last longer, or is it delayed CapEx from the railroads? Are we getting to a point where we might see service issues because of delayed investment, or is it a better locomotive that's lasting longer?
Yeah. I think it is trade-offs that our customers have made and chosen to have an older fleet for various reasons. What I can tell you, Ken, is when they replace those old locomotives, there's a very strong return on investment for them. We typically look at that in the 15%-20% range. You're taking something off the rails that's 20 years old, 20 plus years old. It may be DC power, which is not nearly as efficient and have the tractive effort that they have today. Today's locomotives are more reliable, can haul more, are more durable, and certainly much more fuel efficient. That is a minimum of 5% more fuel efficiency from an older model. With that, given the cost of a new locomotive or a modernization and all the benefits that they get, there's a strong return on investment.
Over the past several years, we've seen double-digit growth in their purchases of either mods or combined mods or locos. We are seeing a fair amount of investment, increased investment by the railroads.
I'm going to ask you a little bit of a technical question, but maybe you want to just talk about the benefits of the mod, the FDL, the EVO, the old and the new mods, and what the advantage for the railroads of that are. Then you've talked about decelerating mods, maybe increasing new production. Is there a mix? Do you care about the mix? Is there a reason why you see the mix?
Yeah. Ken, as we've talked, there's a lot of fascination whether we're selling a mod in North America or a new locomotive. There's a lot more fascination than there is focus on it by us. I had mentioned earlier what we want is to make sure what's running on the rails are our locomotives because that spins off digital work, that spins off services and more components. When we work and plan with the railroads, we're looking at how much power they need. Then we start to get into what is best for them in terms of putting that package together for them. Every customer is different. The railroads in North America, the class ones, everyone kind of looks at them as all equal. They've got different routes.
They've got some are more hilly, some are flat, some are more intermodal, some are more heavy. All of those things play into how you would plan out a fleet, right? They have a couple of choices. One is to look within their fleet and the old stuff and say, "Hey, is there anything that makes a lot of sense from a modernization standpoint?" What I mean by makes a lot of sense is what is that return on investment? Again, is it at the right level or the right age that provides them a good return on investment? If you have that excess power that's in the park or not being used today, that might be the best alternative and the best return for that customer.
If they do not have that power or cannot spare taking something off the rails to modernize it, then a new is a good option. We have also got customers that have only bought new, and we have got customers that have only bought modernization. They are all different, all different situations. The net of your question is, do we care? The answer is no.
You've made a couple of acquisitions recently, Evident, and then another one yesterday. Evident's got about $430 million in revenues, but you've excluded that from your revenue growth target. Just to clarify, that is not in the target. I suppose that means we can see upside to those revenue targets as you get the integration.
Absolutely. Absolutely.
Okay.
When we give those numbers on the revenues, it's always organic that we provide. Next year, when we do own Evident, we'll repost our guidance. Given the fact that they in 2024 had $430 million of revenue on our $10 billion base, that would add about four percentage points of annualized revenue growth.
Great. You target 350 basis points plus of margin. You, at the tech demonstration, emphasized the word plus multiple times. Maybe just talk about why the confidence in that, what's conservative, maybe the skill set you've learned.
The snowball is getting bigger. I think that when we talk about over 350 basis points, we have a clear path to the 350, but we are seeing that snowball building, that momentum building with the company. That is on the revenue side, the cost side, and the cultural side as, again, we bring these three multinationals together. We believe that we will deliver over 350 basis points of margin. I would say that our track record's pretty good.
Now, you also like to use the concept of the analogy of the startup, but yet you're going back and eliminating portfolio optimization, getting rid of some. Maybe talk about the experience you did in the last network 2.0, integration 2.0, and your next phase of why you see the opportunity to keep going.
Good question, Ken. You know, when we talk about we're kind of a startup, right? And Rafael coming in, it's really first things first, right? What are we going to do first, second, and third? We got so many things that we can do. As I came into the company three and a half years ago, I saw a tremendous amount of opportunity, more so than I've seen in 40 years of being a CFO of what we do. What we need to do is align what's first and what's second and what's third. Coming out of the merger with GE, the first thing first was getting the $250 million that we promised and setting the tone that Wabtec delivers on what it says it's going to do. I was not there at this time.
Rafael and the team did a fantastic job, and they delivered on those synergies a year and a half, I'm sorry, a year, 15 months early. That's about the time I was coming. We sat down and said, "Well, what's next?" We looked at all this opportunity from a cost standpoint, from a revenue standpoint, from a building pipeline standpoint. On the cost standpoint, we looked at it and took a bite of the apple that we felt that we could manage and learn from. That was what we called Integration 2.0. We delivered that. That was a three-year program, and we delivered it. We overachieved what we said we were going to do. A year ago, Ken, we were ready for the next step in terms of margin enhancement. That was something that we call portfolio optimization, right?
We inherited three multinationals that came together, have different business models, have different cultures, have different plant setups, different sizes. Some are matrix, some are decentralized, and on and on and on. With that, we've also got some assets that are not going to take us to the future that we envision. On their best day, they're just not going to get us where we're going. We know exactly where we're going and taking the company, and they don't fit in. Part of it is the hygiene of making sure that we're focused on the right thing and on the things that are going to deliver the future that we envision for our shareholders, for our employees, for our communities that we work in. With that, about a year ago, we said that we would shed $110 million of revenue.
When you go back and look at that 5% mid-single digits, that's net of a point of stuff that we're getting rid of, very low margin stuff. It's funny, I was talking to all the presidents and looking at some of these things and encouraging that we look at maybe we can go forward without it. In the first $100 million, it was five entities that we got rid of. Not one person has come up and said, "Oh my God, do I miss that business?" Right? I miss the fact that I wasn't making any money on it. We're taking the second swing at that. We're taking the second swing at integration, which is a three-year program. We just announced Integration 3.0 in February. It's about 30% more savings and 20% less cost than we did three years ago.
That is some of the learning that we have done, right? Again, we see more opportunity today than we did three years ago. Partly, Ken, it is because now we know how to get after it, right? We have now consolidated a lot of facilities and we have done it very well. While Integration 2.0 was a little bit of a push that, "Hey, we should look at this, we should do this," it is now becoming a pull. People are saying, "Hey, we can do this, this, and this." Again, it is that snowball continuing to grow. The other side of it, a month ago, we introduced the second kind of bite of the apple of portfolio optimization, which is another $100 million, again, of lower margin stuff in this track to deliver 350 basis points plus of opportunity.
When you think about the 350 basis points plus, is there a division between a focus on freight, a focus on transit? Is it balanced? How do you think about within the organization?
In terms of our investment between the two?
No, return potential, increased margins between the two.
Yeah, I would say they're pretty evenly focused. Now, Integration 2.0, probably two-thirds of the money was really lodged in our transit business. A lot of opportunity in Europe, which we became very capable of consolidating some things and exiting some things. I'd say Integration 3.0 is more balanced between the segments.
All right. One more thing on the numbers and the targets, and then we'll get to some different subjects.
You can never get off the numbers and targets.
Why I'm here. You target double-digit EPS growth over the next five years on a CAGR basis. You target $8.35-$8.75 in 2025, up 10%-16% just for starting points. Should we expect a softer start given the economy? We'll talk about tariffs and other things in a minute, but just given the deceleration economy, or is it kind of well balanced through the plan just because of the backlog and the order book? How do you think we should think about that?
Yeah. You see, from a revenue standpoint, pretty balanced between the quarters in terms of the growth. The midpoint of growth is about 5%. We'd expect to see that pretty consistently across the quarters. Of course, there are going to be some quarters that are a point or two higher and some a point or two lower. In terms of profitability, we'll see that build over the year. Again, when we look at the comparable base, in 2024, we did a fair amount of hygiene on our production. We were not well balanced coming out of the supply disruptions and out of COVID. If you look back at 2023, we had $1 billion more revenue in the back half than the front half. With that, it was largely driven by our production of mods and locos.
We worked with our customers to change the timing and to become much more level loaded, which will allow us to improve quality, certainly productivity. From a labor standpoint, we'll be more consistent in keeping our folks working versus hiring and laying off. With that, in 2024, we saw some unusual things in terms of we moved a fair amount of revenue forward and those orders forward. While the underlying momentum was very consistent throughout the year, our revenues and our margins were not. Revenues were growth was much higher in the first half, as was margin growth, because we moved a lot of that revenue forward. In the back half, it was a little bit less, but came out, well, we raised guidance three times. It came out a little bit better than we started the year with.
Going forward, you're saying more consistent?
More consistent, yes. That is one of the reasons I long-winded to say one of the reasons that we did it is to bring more consistency and level loading to our factories.
Yeah, it's got to help with the factories. Yeah, definitely. Let's talk about some of the tech projects, some of the exciting new things. Maybe just talk about, you know, when we think about the, you know, you talk about a 155-year-old company, yet how do you keep pressing forward? Maybe talk about a few of the projects. I mean, we saw RailGhost, which the autonomous car inspection machine, I thought was one of my favorite things of the day. What do you see as the potential? What's the timing of some of the projects? When does it become reality in terms of reselling to the railroads?
Let me take a step back, Ken, and talk about the importance of innovation in our company. Some of you are thinking, geez, you can't invest too much. There can't be too much innovation in a train, right? As mentioned earlier, there is a tremendous amount of innovation in that. I think that when we look at it as a company, we have 30,000 people waking up every morning on how to make our customers more efficient, right? Again, when you sell a 30-year asset or a 20-year asset, you better figure out a way to make it better so that you do not have to wait a generation before you replace that thing, right? To do that, it really comes back for our customers in two areas. I am talking largely on the freight side, right? Their two biggest expenses are fuel and our labor.
When we talk about efficiencies and making our customers more productive, you want to fish where the fish are. That is in fuel efficiency. I mentioned just a minute ago that we got the most efficient engines in the world in terms of that size and scale. That delivers a lot of benefits and lower operating costs for our customers. Maybe more importantly, a lot more for the atmosphere because there is that much less carbon going on. Rail is significantly less carbon than trucks. Our customers have significantly less because of the efficiency of our engine. The other area is on labor. There is a fair amount of labor in rail yards and certainly on locomotives.
Given our expertise in digital and our leadership position in our digital business, where we focus on onboard electronics, network electronics, and systems like PTC, we've got a lot of opportunity. Ken had mentioned a month ago, we invited some folks to Pittsburgh and went through some of the advanced technologies that we're working on, haven't been commercialized yet. They're largely focused on how do we take labor out. The one that Ken mentioned is pretty cool. We set up, actually, it was an old rail station, right? We had the meeting there. It's all done kind of like this facility. We put a track up and we had, you know, not a train, but the wheels running on it. Every train that starts out in North America has got to be inspected. The regulations call for a manual inspection.
Whether it's six feet of snow or it's burning heat in the desert, somebody's got to walk the length of a train, which can be a couple of miles long, and they got to checkboard and check this off, was this done and this done. In trying to figure out how to save our customers and automate, one of the things is on doing those inspections, right? Every train, 15,000 of them, starts a morning, and that's happened several times a day. It's got to be inspected. The engineers looked at the problem and figured out a way to run on the rail between the rail car wheels. A pretty neat thing is when it gets to the wheel, these things come back up, but it rolls underneath the rail the length of a rail car.
It has all the visual inspection, and it can check a lot of those things that that human does. Also looking for the technology so that it can reach up and connect anything that's not connected. Those are the types of things, Ken, as you saw, that we're looking at. You talk about a number of people that that would eliminate. These are jobs that are not pleasant to inspect a train before it goes, crawling under a train in 100-degree heat or in a bunch of snow, you know, to check and tick something off when you could run something down between all the wheels and get that done. The other one that I like, Ken, I like them all.
One of an interesting one is, you know, when we look at automation and our path to be fully automated, we've got a lot of pieces to that, right? We continue to put pieces in place. We do not expect there to be, you know, that we're going to move into a world where everything runs on its own and there's no human intervention. Starting to think about it is, do we need human intervention to sit on a train? Why can't you recreate what's on a train in an office, right? Instead of having a crew go out to a train, get on the train, start it up, the computer can run the train and sit there and monitor things, why can't you monitor it from an office?
You do not have to worry about, you know, putting that person up in a hotel, waiting for the next crew to come, stopping the train to let them off, and so on and so forth. We have all the visual technologies and the cameras on trains that you can sit there. Ken, you saw it. It looks like your living room chair with a bunch of screens, right? With that, we could have controlled the train, or we were controlling a train up in our facility in Erie from Pittsburgh. You think about what that can do. Maybe someday we will not need two people in a cab. Maybe that will be controlled remotely from our customers' offices.
When there's a change of shift, instead of stopping a train and starting a train and trying to move two miles of it and all that kind of stuff, maybe someone steps out of a chair and another one sits in the chair, right? They've got all the controls. Our software controls, our trip optimizer controls a lot of the movements of a train. We got PTC that knows where every train is and so on and so forth. That is the world that we envision and the future that we envision. With that, it gives us a tremendous amount of opportunity to lead that, given the leadership position we are in today and how close we are to our customers, as well as the businesses that we serve.
Tremendous. You're addressing the fuel issue, you're addressing the employment issue. It's hard for the rails to hire for some of these roles that are so manual and task. I think we've had maybe a government administration change that is maybe more accommodative. You want to talk about the regulatory environment a little bit?
Sure. The best example of everyone is, again, we have a kind of a product umbrella called Trip Optimizer. It's been out for 20 years. A piece of that is just cruise control, just like your car. It starts at about 11 or 12 miles an hour and it takes over. Given we know what's in front of us, what's in back of us, we know what the engine's RPMs are. If you're on a couple percent grade, it's the most fuel efficient to take that. If no one's in front of you, you're on schedule, maybe you should take that at a slower rate and save some fuel, right? We have what's called distributed power. There's typically three or more locomotives on a train. There's nobody sitting on those other locomotives because we have software that controls them.
Then again, the computer knows a two-mile train, there may be part of it going down a hill, part of it coming up a hill, and maybe another part of it going down a hill. With that, all the algorithms say which one should be pushing and pulling, all in the name of saving that energy, but still delivering the train where it needs to be at the time it's supposed to be. It's making all those trade-offs, right? One piece of the puzzle that we haven't had, but we've developed some time ago is the front end of that, right? Is the zero to 11 miles an hour and then from 11 miles an hour back down to zero. We call that product Zero- to-Z ero, right? There's cleverness. It's a product that we've had a customer test.
It delivers on the fuel savings that have been promised. It has been sitting at the FRA and not being ruled on whether we can go forward with it or not, just kind of there. With the new administration, we have seen movement. You might ask, why was it not moving? We are not within the last administration. From our best understanding, there was concern by some of the unions that there was an impact that this technology could limit some of the employment. Our view of it is it would limit the amount of fuel that we needed to use. In any event, it was not looked at. With the new administration, we do have some movement in that area, looking at waivers and considering those types of products.
Those types of things keep putting the puzzle piece together so that we can drive that efficiency for our customers.
Let's talk about topic du jour, topic of the minute, right, which is tariffs. Maybe talk a little bit about the impact on the business, where your manufacturing is. You manufacture a lot of the locomotives or North American locomotives in the U.S. What percent, maybe if you can ballpark it, of all the parts and stuff is built in the U.S.? Where's the risk through that and the pass-through capability?
Yeah. Not in favor of tariffs right here. But we're working through a lot of tariff activity in North America and the United States. It seems like it's a thing that, you know, we meet three times a week to make sure we're keeping up with all the changes and making sure that we're able to understand the impact to us and share that with our customers. With that, what we've got, oh my goodness, 20% China tariffs, 25% Canada tariffs, 25% Mexico tariffs, less USMCA parts, 25% steel and aluminum tariffs are all initiated. I'm looking for an expectation that on April 2, there will be a fair number more of tariffs coming that would implicate various other countries as well as product lines around the country. We're keeping up with all of that and making sure that we can pass that on.
We haven't provided exactly what that is in terms of kind of how that boils down. The significant majority of our products, our locomotives, are produced in America and American parts. We do have some parts coming from other parts of the world that it's hard to get in the United States or beneficial to get in other jurisdictions. With that, we're working through it and reevaluating where those are sourced, kind of managing through it. Very similar to me is hyperinflation, right? When we had to go through that and we needed the price to collect that and so on and so forth. A similar exercise, but maybe a little bit more everyday changing.
Yep. You know, we've got just a couple of minutes left. Do you want to talk a little bit about capital allocation, right? So you've made two acquisitions, maybe toss in thoughts about the $1 billion acquisition yesterday, what the fit is, and then your thoughts on how you allocate capital this year.
Sure. Capital allocation, that's pretty straightforward. We've got a capital allocation waterfall made up of five things. I don't think that we're highly unique to any other company. The first and most important is what we call the strength in the balance sheet, right? Our definition of that is to maintain a leverage between 2 and 2.5 times. That puts us squarely in the triple B range where we're at. We feel very comfortable with it given our risk profile as a company and our resilience to some of the downturns that we have in the various businesses that have been successful in offsetting some of the volatility out in the marketplace, in particular our service business or some of our transit businesses that are very stable in terms of those growth profiles. The second one is to invest in the business.
There's not a better business to invest in for us than Wabtec. We view that in two ways. One is in terms of R&D spending. We spend more than the average industrial company on R&D. Again, maybe a surprise to some for a railroad company. 6%-7% of our revenues are spent on engineering and R&D. The other area is in capital. We spend a little bit under the industrial average in capital. We're at about 2% of revenue. Given the nature and the size of what we do and some of the highly engineered and the project work that we do, our plants are probably not as automated as some. It's not as conducive to robotics on everyday products. In any event, we spend about 2%, a little bit less than the industry average.
The third area is dividend policy, right? We are looking to continue a dividend payout ratio in the 10%-15%, which provides not a significant yield, right? The yield's at about a half a percent, so not a great yield. Given the investment opportunities that we believe we have in M&A and in purchasing our shares, we feel very comfortable with the dividend yield that we do have. That kind of takes care of kind of the top of the pyramid. That leaves us with free cash. With regards to our free cash, we're going to prioritize M&A with the proviso that we've got good, strong, strategic M&A that can hit on as many accretives as we can, right? Between accretive growth, accretive margins, accretive ROIC, and accretive EPS that we can. We've been very disciplined.
Rafael does talk about the M&A pipeline as being very strong. I think we certainly proved that over the last two months. It is something that we show a lot of discipline. We have walked away from some good assets because we did not think our shareholders would appreciate the price. We have been very disciplined. We have also been very pleased. Every December, we take our board through the returns of those. I am happy to say of all the ones that we purchased since the 2019 merger, the returns in aggregate have come out a fair amount higher than the original business case or the acquisition plan. If we do not have that good, strong, strategic M&A that is accretive, what we will do is have no problem returning that cash to our shareholders in the form of share repurchases.
Again, we are not looking to build cash on our balance sheet. It's not our money. Our shareholders can invest it the way they see fit. I think 2024 was a great example of this. We did four acquisitions, all smaller, provided great niches in our various businesses, but was less than $300 million. Our operating cash was $1.8 billion. Take out a couple hundred million dollars or $300 million for capital and dividends. That left a fair amount of extra capital. With that, we repurchased $1.1 billion a share. Now move forward a year. Here we're sitting here in March. We've signed up for two acquisitions of a bigger on the larger side. One in early January for $1.8 billion for a company called Evident Inspection Technologies. We have in our digital business, we do a lot of inspection technology.
We have a lot of shared technologies with this company. It brings more technologies to us and a tremendous amount of synergy. We believe a lot of revenue synergies, which we have not factored into the returns. Just yesterday, we announced a $1 billion, $960 million transaction with Dellner Couplers. This is squarely in our transit business. Really strong, everything. Actually, I can talk about both of them in aggregate. I am sorry, going back to the Couplers. Our transit business, what we do is we do not make transit cars. What we do is we make components for transit cars. Very similar to the product portfolio that Knorr would have. We meet Knorr in most every bid there is. That is brake systems, door systems, HVAC systems, passenger information systems, pantographs, so on and so forth. One of those is Couplers.
We have a small coupler business. We are looking to buy Dellner, which is the number one transit coupler maker in the world. It fits very well into the portfolio and has a very good margin structure. As we look at both Evident and Dellner, both of them have a sizable amount of revenue, adding about $700 million of revenue when they both close to our business. They are an accretive growth profile. They have an accretive ROIC. They have accretive EPS in the first year of ownership. They have accretive margins. The margin one is always the toughest for us to find, given the fact that our margins in the freight industry and the transit industry are at the top of the heap, so to speak. We could not be more excited about these two businesses and what they will do for us in the future.
Again, moving us toward that future that we envision. These are two big pieces of that puzzle. With that, we certainly will not be buying back the amount of shares that we did last year. We will continue to look for good strategic M&A. If we have excess cash, we will return that to our shareholders in the form of share repurchases.
To sum up, your core North American customers kind of flatline in operations, yet you're growing. They need your new locomotives or mods and getting a good return on that. So it's a good investment for them. It turns into improving margins along with your cost-cutting program. You got double-digit EPS target. You've got some new technology that continues to aid the growth. You're making acquisitions, which are enhancing your margins. Anything else you want to kind of highlight before we wrap up?
I just got to highlight that you are listening pretty damn well.
Awesome. Thank you very much, John. Appreciate the time.
Thank you. Thank you, everyone, for your interest in Wabtec. If you need any information, Kyra will help you out. We'd love to have a conversation. We love what we do, and we love what we do for the world to move and improve it. Thank you.
Thank you.