I'm delighted to have with us, from Wabtec, John Olin, CFO, and we also have, Kristine Kubacki, Head of Investor Relations. John, Kristine, thank you so much for joining us.
Thrilled to be here.
We're gonna run the conversation in a fireside chat format. John, I want to start the conversation, you know, just to follow up on your analyst day, you know, not long ago, but, you know, a couple of interesting developments...
Mm-hmm.
You know, a big write down at your biggest competitor really stands out. Can you talk about any changes at the margin to the opportunities and strategic priorities from what you folks outlined in the vision that you rolled out just last year?
Yeah. About a year ago, we presented our next five-year view, and with that, we really encapsulated the strategies that'll take the company into the future. As Jerry mentioned, 2022 was an interesting, maybe watershed year in a lot of ways. Tremendous number of headwinds that we worked through. The question being is has anything fundamentally changed from then? The answer is absolutely not, right? The five core strategies that are taking us into the future are, is bit as important as they were a year ago, maybe further validated by some of the things that we saw in 2022. Some of the things that we're seeing here in 2023, whether it be regulation and those types of things.
Those five things are: One is to lead the world in decarbonization of rail. This is coming, and we are at the lead of it today, and we and expect to be there at the end of the day in making sure that we have the products to take the world to a zero carbon world in terms of greenhouse gases and the bridges to get there. These are very long-term assets. It's not gonna happen overnight. The second is to lead in digital technologies. We are there today. We run and manage most of the trains that move on the face of the planet in terms of the speeds at which they do, making sure that we optimize fuel use.
We've got software that goes between locomotives on a, in a consist as well as, you know, at one point, a train's coming up over a hill, one's pushing, one's pulling, and at what RPMs it should run to save that fuel. With that technology, we deliver about 18% fuel savings versus a locomotive that don't have those digital assets. The third area is to leverage the install base. 4 years ago, we bought GE Transportation, and with that we bought 23,000 install base of locomotives. The company feeds off of, with the exception of our transit group, those assets and making sure that all of our parts and those types of things are on those locomotives. The fourth area is the focus on recurring revenue.
We had a great year in 2022 with regards to that. It grew from 42% to 44% of our revenue is recurring. Finally, a focus on continuous improvement. I think that what 2022 did is showed the resilience of the company. I think we were into our plan about 55 days when the invasion of Ukraine took place, and we lost 5% of our revenue overnight. We held our guidance and figured out how to deliver on the commitments that we had, and that was really just the start of the year. Currency went, fuel costs skyrocketed, metals went for the second lift, at that period of time. A very challenging year that made us stronger in the end.
The core direction's the same and the core strategy's the same.
John, can we expand and pull on a couple of threads there? In terms of the competitive landscape, so Caterpillar.
Mm-hmm.
is out of Tier 4 final engines. Can you talk about what you're seeing from there internationally? You know, when Christine and I were catching up, I was surprised to hear that you're still bumping up against them.
Mm-hmm.
In international tenders. Can you just expand on what that looks like?
Yeah. Again, a lot of the question is probably directly for Progress Rail or Caterpillar. From what we understand, they took a write down about 4 months ago, I think in the December timeframe. They talked about exiting their investment in Tier 4 locomotives. Tier 4 is required in the United States if it's new. It needs to be Tier 4. They had been struggling with that product. We had about 90% of the assets running in North America were our Tier 4s, and they chose to exit that business. That does not mean that Progress Rail is not a great competitor and a very formidable competitor, but in Tier 4, it appears they won't be competing going forward.
Anything that's new in the United States from here on out, they would not be an option for a customer. Given the competitive dynamics, we're the only other competitor that supplies Tier 4. When you talk about around the world, Jerry, we do not sell Tier 4s around the world. There's not a requirement for them to buy that technology. Again, Tier 4 is really focused on NOx and SOx. It reduces 70% of the emissions on NOx and SOx versus a Tier 3 locomotive. In any event, to answer your question, Progress Rail is continuing to sell the same products they sold internationally as they did before their announcement with regards to Tier 4.
John, is there a timeframe for major markets to shift towards Tier 4 off-highway outside of the U.S.?
No. No. There is not any other markets that require compliance with Tier 4. We don't see a lot of momentum in that area. More focus on the greenhouse gas emissions, which Tier 3 is close to do what Tier 4 delivers.
In terms of, in the U.S. on the awards for next generation, you know, battery-electric, and other technologies, the rails have been splitting it 50/50 with you folks and Caterpillar.
Mm-hmm.
Is that still continuing post the exit from Tier 4?
Yeah. To give you a little bit more information around that, we started developing a battery-electric technology years ago. Actually, GE did before we acquired them. We are at the point now where we're taking orders, and us and Progress Rail are the two largest or the only players in the battery-electric field. We're still in the process of commercialization. The first ones that we will deliver will be about this time next year. We've had orders of, to your point, about the same number of orders for each. Right now we're just looking for the next phase, which is delivery, and monitoring how well they operate. We believe that we're much further ahead in terms of the core technology of battery-electric.
We have certainly taken two different approaches to the technology. Time will tell as we roll these things out.
Really interesting. Can you say more about the difference in approach?
I'm a finance guy, not an engineer at heart. Wabtec has got a much more integrated approach, just like our other locomotive technologies. Everything's integrated. More of a modular approach by Progress Rail, is my understanding. We believe that having everything integrated, in particular the digital assets, what we believe we have a significant advantage over because of all the other digital aspects that we have. Completely integrating those will deliver a better product to our customers.
Interesting. I wanna dig into battery-electric more in a moment, but just continuing down the competitive landscape lens, can you talk about in international bids, who are you folks coming up against in addition to Caterpillar? Has the competitive landscape evolved at all in terms of who you're seeing internationally?
Looking overall internationally, there's very few competitors for freight locomotives, right? Progress Rail is who we would run into in most markets. Other than that, every once in a while we would run into CRRC, which is a Chinese manufacturer, but again, those are smaller, obscure markets around the world. Then from time to time, TMH, which is a Russian provider of locomotives. Both of those are rare. What we're looking at is largely between us and Progress Rail.
Fair enough. In terms of the pipeline of opportunities, you've had a couple of conquest countries, if you will, in terms of where you've set up manufacturing base. What's the opportunity for follow-on orders, and what's the broader pipeline?
Yeah. When we take a spin around the world, certainly North America, we've got about an 80% share of what is running on the rails of heavy haul locomotives in North America. When we talk about Tier 4 or new sales of locomotives, it's a much higher percentage of that. It was 90% until Progress Rail's announcement. When you think about vast lands and mining, that's the time to think about diesel-electric locomotives. Brazil, and Kazakhstan, we have the, a vast, or the lion's share of share. Australia, probably more balanced. Then there's markets such as India, Egypt, South Africa, that are key markets for both of us.
Mm-hmm. Super. Thank you. Can we talk about the battery-electric solution, really interesting path potentially out of California?
Mm-hmm
...in terms of new regulations, that would presumably drive a new build cycle. Can you talk about your views on how likely is it that the standards will be passed, and what the opportunity is for you?
First you want me to be a lawyer and talk about the technology. Now you want me to, I'm sorry, to be an engineer and talk about the technology. Now a lawyer to talk about where we're at. What Jerry's talking about is most recently, well, there's kind of a one-two or the yin and the yang of regulation is, the EPA came out and talked about autos. They allowed states to regulate some of the emissions or have tighter constraints than the EPA did and allowed that for states. I don't know, Kristine buried, I think you said on page 500 or well into that, there was a few paragraphs with regards to the rail industry, where it talked about the same thing.
That kind of opened things up that, wow, if states could regulate. At the same time, CARB had been talking about potentially regulating some of the aspects of the rail business. They kinda worked hand in hand, and this all really unfolded in the last few weeks. I think it was last week CARB came out with their with their recommendation and that will, I'm sure, be challenged by the rail industry. The gist of what they had said is that by 2030, anything that is older than 23 years old would not be allowed to operate on the rail system. By 2030, largely passenger would need to be zero emissions and by 2035 that the freight side would need to be at zero emissions.
To your point, Jerry Revich, that's where the battery-electric would come in, and that's the furthest technology at this point. We're certainly working on hydrogen as well, but the battery-electric is again, gonna be commercialized in an operation a year from now. Those applications would be capable of replacing a diesel-electric locomotive. Those things certainly bode well for an equipment manufacturer, but this is, you know, there will be, I'm sure a lot of discussion about it. I think the other interesting thing was, is that of the 16,000 or so trains that we have, that 12,000 of them pass through California in some way, shape, or form in a year.
It's a, it's a big deal for the industry and, so we'll have to see how it, how it all plays out.
you know, John, the upside of asking a finance guy engineering and lawyer questions is.
Can't be wrong.
... I can understand the response. Well, that too, but-
Fair enough.
... we speak the same language. Thank you. That, that's very clear. You know, the other area of potential opportunity for you folks is, you know, unfortunately after the series of accidents, you know, maybe there's an upside for adoption of your technology and, you know, that's what I was hoping to expand on the conference call and, you know, glad we get a chance to understand what that might mean-
Right
... for Wabtec because, you know, you folks have a series of.
Mm-hmm
... and semi-autonomous solutions that, correct me if I'm wrong, but could have prevented the accidents that we have seen. I'm wondering if we saw your technologies adopted across the board, how big is that pie for-.
Right
... for Wabtec?
You got a lot there. Number one, I don't know if what we have would've ever prevented what happened. It was a tragic derailment in Ohio, right? They've got investigators are looking at it, and we'll find out what the final report is. You know, the preliminary stuff said no one did anything wrong versus the regulation or protocols. I think that what you're referring to is there are various safety products that can help in these situations or to minimize or to help in that situation. Again, we can't say that anything would've changed what happened there, and that's what the investigators will look at. Having said that, it has put a spotlight on the safety and in particular on derailments, right?
In that conversation, various things have come up as they do when these things happen. They run anywhere from, you know, early detection, and there was a lot of detection on what they call hot boxes that monitor the temperature of the bearings. Again, everything was from my understanding in the preliminary report done according to protocol and the accident still happened.
Mm.
Having said that, the other part of the conversation that comes up is on the braking systems. Right now the core braking system is pneumatic, which means one car triggers and it goes down the line and they trigger electronic brakes, which we happen to offer, does it more quickly, does it all simultaneously. Would that have prevented it? The answer's probably not. Would it have minimized it? We don't know. But those things are all now up in conversation and I think the point being is that all the equipment that we make has got safety features on it and we've got a suite of products and a lot that monitor. Actually, we had an acquisition, but about mid-time, almost a year ago, a company called Beena Vision. We've got...
We don't make those hot boxes. We make a much more sophisticated monitoring system, and they don't need to be every 10 or 15 miles. They tell a railroad a lot more about what they see, and they do that through acoustics, they do it through vibration, and they do it through photos. All of those things are in conversation. I can tell you we've seen more activity in parts of our company around safety, and more inquiries and interest. We're there to serve and we wake up every morning to try to figure out a better way to do things to make sure that we're driving productivity and certainly safety. We do have a fair number of products that could be of interest.
In terms of the early detection electronics, the.
Mm-hmm
... braking systems, is that a default on everything that comes out as a mod or, in, Tier 4 or is that an higher ASP versus the base model?
No, on electronic brakes. Okay, now we're getting into it. The first tier question is always the easy one. It's the second, third, and the fourth one. There are reasons that electronic brakes are not on a lot of rail cars. One is it's a significant cost, but the biggest piece of it is that for that to work, there can't be any break in the chain. If you've got a train with 200 cars on it, they all have to have electronic brakes. Because rail cars are interchangeable, for a railroad or the industry to move to electronic brakes, you'd have to change out almost every rail car made so that they all had it. Because if one car in that line doesn't have it defaults to a pneumatic brake.
It is a very big deal for the industry in total to take the 1.5 million rail cars and require that. They have to be put on each rail card, and every locomotive would need a package to be able to operate them as well. It's not as simple as, you know, starting to migrate that way in conversation. That's at this point, there's no requirements, nothing being required of electronic brakes. That's some of the complication of it.
In terms of some of the other safety systems that you spoke about, John, in terms of early detection, is that something that is the default on every mod that goes out?
There are various safety features that are on board on a locomotive, but what I was referring to is more monitoring, and those are wayside. Those are stationary, setups alongside the railroad.
Mm-hmm.
They either take pictures, listen, or feel vibration and report back to what they see. We've got all kinds of monitors on a locomotive. We got a set up in Erie, Pennsylvania, where we monitor every train, every one of our locomotives out there. Those monitors and sensors send back millions of signals a year. With that, we try to deliver the better service, the best service that we can. We're by far the best service provider and have the best reliability, and that's why it reflects in our market shares. We use all that data that is sent back from the products that we make, to make sure that we catch things before they become catastrophic and stop a train, right?
To understand where we need to do more preventative maintenance. A lot of that service revenue, the $2.5 billion of our service business, a lot of that is either in MSAs, where we get paid by the day that train operates to keep it running, and it's on our nickel to make sure that it runs, or we're selling the parts necessary for the railroads to, you know, to maintain the equipment that we've sold them.
In terms of the stationary monitoring, systems that you folks offer.
Mm-hmm
If you were to have that across, the U.S., what's the potential revenue or number of stations?
Oh, that's fun with math at this point. They don't need to be as close. Everyone's a little bit different at what they're looking for and wanting. I think to throw out a number, again, it's fun with math. What we are seeing is more interest in those products. They're fantastic products. They're installed around the world. The aim is to, again, make the railroads more efficient and more knowledgeable about the assets that are running on their rails.
Good.
It would be a big number.
It would?
Yes.
Can we shift gears and talk about the US freight cycle? Big boom in spending, 2014, 2015. You know, we've been digesting it ever since.
Mm-hmm.
Are we at a point where we've digested the equipment investment over the past cycle? I know you got one major new build order. Do you think there's more to come?
I guess, Jerry Revich, what I would say is instead of focusing on that aspect of it, I think that at least what we wake up every morning to do, and we got thousands of people to do it, is to make sure that we are innovating and creating the products that have a customer want to trade up. They wanna trade up because of the economics are there. We have seen a period of less spending in the last, what, 6 or 7 years by the railroads, probably about 40% less than we saw on the, that period before that. Is there opportunity for more investment in that area? The answer is absolutely. We need to win that by having an economic solution for the railroads, and we believe we do.
Whether they modernize the units that they have, which is basically taking an old, 20-year locomotive off the rails, giving it to us for a few weeks or 10 weeks. What we do is modernize it and put the latest technology and engines and whatnot. It drives a tremendous amount of fuel efficiency. You're adding all the digital assets on it, to purchasing a new Tier 4 locomotive. In both cases, when we're looking at the old versus the new, there is a strong investment proposition to our customers that is over their cost of capital to invest in that facet of their business. The last time, Jerry Revich, that I looked, there was only 2 things that make a. Well, that's probably too simplified.
Two very important things of a railroad is one is the track and the other is that locomotive. I think that we'll see a period of more investment by the railroads, as we move toward the 2030 date. Why I say 2030 date is they've all got targets in terms of emissions in 2030. As they replace older assets, there's certainly a strong benefit to the environment. And that is driven by the fact that the newer ones use less fuel, which drive that return on investment. It's not gratuitous at all, you know, for them to continue to invest in the technology has a very good payback.
That's a really interesting comment because, you know, these are really long-lived assets, and it sounds like over time they wanna get towards battery-electric. Are they willing to buy, you know, 25, 40-year-old assets, even though it'll help near term? The question is, does it become a drag on their CO2 numbers, you know, 5 years later?
Well, I think that is, you know, part of the reason that we have a modernization business. The modernization business is very strong. Out of the locomotives that we sold last year, about 90% were modernized units versus new. We're somewhat indifferent in that one's got a different ASP, but the margins are not far apart. The modernization's a little bit higher margin but a lower revenue, and the new is higher revenue, a little bit lower margin. We're somewhat indifferent. It does provide an opportunity for the railroads to make a decision too. Probably about $1 million less to modernize a unit versus to buy a new. The opportunity for railroads to be able to modernize more with the same dollar amount.
They won't last as long, because it's already had one turn at it, right? I think it's just, again, providing a solution and a choice. Does that factor into the fact that most of them are being sold at this point are modernizations and not knowing what exactly the technology and how that'll land, I would say probably certainly.
John, what's the expected useful life out of mods produced today? Has that increased at all?
Yeah, I would just think in terms of a mod of 10-15 years and a new locomotive of 20-25 years.
You know, when looking at your 5-year outlook, you folks are looking for a mid-single-digit revenue CAGR.
Mm-hmm.
How much of that is driven by higher ASPs because of the higher content versus, we need a spending uplift to get there?
Yeah. When we look at mid-single digits, first you start out with the core growth of the industry. The core growth of the rail industry or rail and transit, the industries that we participate in, not huge, right? We're probably talking in the 2% to 3% range. What we look to do, said another way, is to double the industry growth rate. A lot of that is driven, Jerry, by that replacement cycle that we see coming, right? One, first and foremost, from our previous conversation, is because it is a good return, good use of their money, is to invest in those assets. Secondly is maybe because there hasn't been as much investment over the last 7 years, we need to work toward that. Third is getting to those 2030 goals that will help.
That will drive that kind of the doubling of the growth rate that's underlying in there. You know, I've talked about 2030 a couple times. This is not gonna end in 2030. We've got 23,000 locomotives around the world, and they're all gonna end up being zero emissions at some point, right? It's our aim to lead in that technology. Again, we believe we have a strong lead in the battery technology and working on hydrogen. Over the next couple decades, it, you know, got the wind at our back in terms of providing the assets that'll drive the world's freight in a more carbon friendly way.
In terms of the opportunity to drive new sales, outside of the U.S., John, can you talk about what the pipeline looks like for locomotives?
In terms of battery-electric?
Just overall.
Oh.
Yeah.
Yeah.
Including mods.
When we look at an international business, it has been strong and steady. In, in COVID in North America, we saw, you know, a move away from new, matter of fact, a fall off for 3 years. We didn't, I don't think we shipped a new in 3 years with COVID. We were doing a lot of modernizations at that time. Internationally is mainly new, and again, typically Tier 3 and not Tier 4. That business has been marching along very, very well over the last 5 years, and we've seen the install base grow at about 4.5% over the last 5 years. We don't see any dramatic change to that, the drum beat and the need is there.
Given the size of those markets, you know, it's more an aggregate, and various markets are within that. Overall, we see a constant and a steady good growth rate coming from our international business.
In transit, you folks, appear to have turned the corner just, given the margin performance. Are we at a point where the business has earned a right to grow? How comfortable are you on, having completed, the prior generation?
Mm-hmm
... projects that, the folks in transit-
Yeah
... have been working on?
A little bit of background on transit. Since 2019 or the acquisition of GE, we've had, and with that, Rafael coming in, and having a strong view on how to move these three multinationals forward, been a fair amount of focus on all our businesses, but in particular in transit. We've seen our margins grow from 9% to 12% in a 4-year period of time. We're on our way to what we would believe is in the 15% range over the next or throughout our, you know, 5-year horizon.
A lot of that is through really tightening up the system, and integrating various pieces of our transit business, as long as some of the components business that we have on the freight side. So we see a lot of, a fair amount of more opportunity in terms of margin. In terms of the sales side, you know, I talked about, the overall, you know, company's growth in that 2%-3% range. What we've seen, year in and year out, you know, for well over a decade, is a stronger growth, levelThe transit side, and that's more in the 3%-4% range. Jerry, we never saw that go away, the underlying strength of that business. We saw it last year in, 2022.
That was certainly masked by, 10-point disadvantage, due to currency, some self-inflicted pain on a cyber, incident, issue that we had. Underlying it, that growth has been there. We see that continuing on and the drumbeat of the industry growth at 3%-4% as we move forward with that business. I think it's more of moving away from some of the things that masked that in 2021 and 2022, largely currency. In the first quarter, hopefully is the last quarter we had to talk a lot about currency.
As we look on a year-over-year basis in the second quarter, currencies will be much more aligned, you know, from a year-to-year standpoint, instead of the significant strengthening that we've seen over the last four quarters.
Let me pause there and see if anybody has any questions. Yes, right here, please.
No engineering or legal questions.
I'm not an engineer, not a lawyer. Now curious to have your thought about, you know, a lot of what you have talked required a lot of investment, and not only from the railway company but also from their client, if we wanna go into more technology. Is there any big push by you guys to sort of put together around all the people around the table and to work on standards? We cannot go to all these technology investment if only the railway company do it because the rail track, you know, are most of the time are owned by their client. What is really happening on the ground?
We hear all these regulations coming, but if all the players don't sit on the table and standards are agreed, nothing is going to happen.
That's a good question. There's not an overabundance of players that we need to organize within the equipment side of the business, right? We kinda talked about what some of those competitors are. I don't think there's any part of any differences between us and the competition that are driving issues within the industry in terms of lack of standards when we talk about battery-electric, right? We're both in the phase of really learning and improving on the technologies that we have. I guess what I'm saying is that I don't see a ton to be gained for us to share the technology that we have with one or other two players around the world, right?
We're focused in on driving the best outcome for our customers. I think the biggest area of focus is how do we develop our products so that it doesn't change or require a lot of change in the way that railroad or mining companies manage their locomotive assets, right? We're very cognizant of wayside investments that might need to be made. I think that's some of the hesitation, in particular on hydrogen, is how much extra costs need to go in to facilitate the use of that. Those are things that we work very closely with our customers on. I would say we certainly don't work closely with our competitors on that.
We believe that's the advantage that we bring, and the knowledge that we have of the 154 years that we've been in business, and the products that we drive. We do are incredibly close to our customers in understanding what their needs are so that we're not designing something for the future that might accomplish a zero emissions but then leave a big problem, or a another investment there. They don't always work like a hand in glove, but it's something that we are got all of our sights on, is how to drive and make our customers more productive, efficient, safe, and their ability to haul more product in an efficient way, is paramount to us.
Super. Please join me in thanking John and Kristine, for joining us. Thanks, everyone.
Thank you. Appreciate your interest in Wabtec.