Westinghouse Air Brake Technologies Corporation (WAB) Earnings Call Transcript & Summary

Thank you very much. Good afternoon. My name is Nicholas Heymann, and I'm the research analyst here at William Blair, who covers Wabtec. I'm required to inform you that a full list of research disclosures and substantial conflicts of interest are available on our website, www.williamblair.com. Today from Wabtec, we have Rafael Santana, President and Chief Executive Officer; and Kristine Kubacki, who's Vice President of Investor Relations. Wabtec is a leading global manufacturer of high value-added technology-based products and services for the freight and passenger rail sectors as well as select industrial markets. The company following its acquisition of GE Transportation in 2019, is also the world's leading producer of locomotives, with revenues expected this year to be slightly less than $8 billion. Together with GE Transportation's Digital Solutions business, Wabtec has become the leading provider of global freight rail, logistics and digital predictive analytics. Wabtec expects to complete its integration of GE Transportation later this year. Earlier this year, it acquired Norton, a leading right-of-way maintenance equipment supplier, offering railroads around the world, a highly cost-effective solution to maintain the safety of their rail lines. So here to discuss Wabtec's increasingly right equipment and service and solutions outlook has wrapped the out.

Thanks, Nick. And well, good afternoon, everyone. It's good to be here with you today. I thought I'd share some beef brief background on Wabtec. We are the global leader in freight and transit rail technologies. We have been at this for more than 150 years. For those who are not familiar with the industry, rail is, without question, what I called, really the safest, the most efficient, the cleanest way of moving both freights and people overland. It's often called the most sustainable way of moving things over land. And as the world's largest freight locomotive manufacturer, our locomotives move more than 20% of the world's trade. And our digital solutions help track more than 30% of all products that are moved through our nation's shipping ports. When it comes to passenger transit, our reach is equally vast. We've got products on virtually every transit system globally. So in addition to our reach, our strong portfolio of businesses that really deliver a diversified, and what I call a resilient revenue base that cuts across multiple segments. It cuts across multiple regions. We have a very strong aftermarket business. And if you go to next slide, we have continued to position the company to drive long-term profitable growth. We have been really laser-focused on differentiating ourselves through innovative and sustainable solutions cut across our customer base, and it drives productivity for dams. It also reduces carbon emissions. It drives reliability of their fleets and ultimately also improves safety. We continue to have opportunities to expand into the space. We've got some profitable adjacent growing markets. Well, there's a recent acquisition we did of Nordica, it's one of those areas. And at the same time, we're taking on what I'll call a significant transformation of the company by really building a continuous improvement culture, one that is based on lean principles. I think the synergies we've been able to really deliver over the last few years despite of the downturn that we went through are really a great example of what our teams will continue to accomplish through lean initiatives. We have a strong financial position, which is supported by a robust cash generation. We're going to continue to balance investments in really high return opportunities, along with paying down debt and returning cash to shareholders. Finally, I think very much aligned to our commitment to sustainability. As we highlighted in our sustainability reports, more recently, we established a green bond financial framework. We're very successful through that. We completed a $500 million aero green bond offering. This will fund strategic projects and new products that will ultimately reduce emissions across both the freight and the transit segment. In the next slide, we're constantly looking at innovation, innovation to help our customers find new ways to increase efficiency, to help our customers reduce costs, to help them with their carbon fruit brands. And we are investing and we're delivering in the next generation of products. This will drive long-term growth for the company. This includes things like Trip Optimizer, which is an intelligent cruise control system for trains, that has saved over 400 million gallons of fuel. And it has reduced carbon by over 500 tons annually. We're continuing to building on the success of Trip Optimizer. We recently signed a significant order in North America, for what we call Trip Optimizer Zero-to-Zero. This is really advanced technology that allows the customer to start a train from 0 miles per hour and stop the train automatically, really utilizing the various controls, which are ultimately integrated with PTC, Positive Train Control. I think another area that Wabtec is leading the disruption in energy management. A good example here is the flag strive locomotive. This is the world's first heavy haul, 100% battery electric locomotives. This locomotive just completed a rigorous 3-month demonstration. We did that with Carb, the California Air Resources Board and with BNSF. We ran the locomotive for over 13,000 miles of track and through this pilot, we are able to reduce both fuel consumptions and emissions by more than 11%. This is a game changer in the carbonizing rail. This is equivalent of more than 6,200 gallons of diesel fuel that were saved and nearly 70 tons of CO2. We're not done here. The FLXdrive, we're working to next-generation in which we should overall reduce fuel consumption and emissions by the order of like 30%. And there's a significant interest in this next-gen technology. We're working with customers in North America, but also internationally. And we really expect the battery electric locomotive to be an important area of growth for the company over the long term. This will help our customers bridge into really a much cleaner footprint. On the next slide, you're going to see that we're also adding a lot of value here into the transit industry with high-value solutions that also deliver in what I'll call innovative, low carbon technologies. This ultimately reduces energy consumption and reduce waste for our customers. A good example of that is Metroplex. It's a braking system that really helps reduce the weights. It helps reduce life cycle costs. And ultimately also the braking distance of a train, making it lighter for greater fuel efficiency. We've got innovation around air quality, [ bullet future ] filtration system, 1 that improves the quality of the air inside transit cars. This will be of increasing importance especially as economies open up post pandemic. Finally, we're harder reducing greenhouse gas emissions. In particular pollution for our customers with our green Air refrigerants and advanced friction materials for breaking. So a lot of innovation here, ones that bring high-value solutions for our customers and for ourselves. The last point here, really, as we go forward, we will continue to lean in into the long-term fundamentals of this industry and the company. We remain committed to executing on our strategic plan. We're very much -- really continue to invest in technologies that will help us both transform and disrupt the rail industry. Customers are really at the center of what we do. We're strongly positioned to build further momentum with them. We'll always be looking for ways to improve our business, that speaks to this continuous improvement mindset through in, which will ultimately make Wabtec even stronger by driving margin expansion across our segments. We're laser-focused on driving strong cash generation. We will continue to invest in high-return areas of opportunity, returning capital to shareholders and ultimately delivering on improvement in our return on invested capital. I'm confident that Wabtec is well positioned to drive long-term profitable growth and to create significant shareholder value. With that, Nick, I'm ready to answer any of your questions.

Okay. Well, that's a really good overview of FPL. We got one question that came in here while you were talking, and it related to the infrastructure tangible infrastructure bill that's currently being considered by Congress and proposed by President Biden that has significant funds for both the transit side impact and local rail as well as break, could you comment on how that might impact your business?

Nick, I think we will benefit from the infrastructure bill, along with the ecosystem. We're glad to partner with a number of companies to really help drive and increase utilization of rail. At the same time, we make rail even more sustainable. So we're excited about the opportunity here to accelerate a lot of the elements of the technologies that we're working on. And we see significant opportunities to create speeds for our customers to create better predictability on where freight is moving, giving really a broader visibility as freights coming to ports, and we can't do that alone. And we are working on a number of partnerships. And this is something that we will all benefit from.

Okay. We got another question, and that was if you could discuss your international locomotive pipelines? And do you expect any material new orders this year?

It's exciting to see some of the opportunities we have there, Nick. In fact, we're talking to some customers to increase some of the numbers associated with -- by units they had in mind. That speaks to the strengths of the exports of some of the geographies that we serve. But what if I talk about South America, what if I talk about Russia, CIS, I think we're seeing increasing demand. And that's very positive in that regard. So I think more announcements to come on that front.

Okay. I know that you have been expanding your efforts to increase the rail competitiveness versus trucking. And we have the localization of the North American freight and logistics system. And do you think as you go forward, you're going to be supplying these solutions yourself or in partnership with third-party logistics companies? How do you see that evolving?

Nick, I think there's a number of areas that we have the expertise, we have the depth, and we have the capabilities to deliver solutions. But reality is, as we saw for really more share of freight to be moved through rail, we've got to be partnering, and we are exploring some of that. So ultimately, we're looking at the entire ecosystem and enabling [ folks ] to solve for different sets of variables. Sometimes you're selling for speed, but sometimes you're selling for costs. Sometimes -- it's really a balance of the 2, and you can very often these days, especially be solving for, "hey, what's the path for last emissions as you look into this?" So we are ultimately looking at partnering with a number of companies to look at the different modes and make sure that, that transparency and visibility is there. At the same time, we'll make sure we continue to work that rail is the most efficient and the most sustainable way of moving things over land.

Okay. That's great. And could you give us a little state of the union update on the current utilization for North American rolling stock and locomotives. I think we've had significant excess capacity that started to come down. And how does that look to you in terms of both railcars as well as the locomotives, some of those are being modernized below those.

Right. Nick, I think we've seen significant progress from the trough that we saw in May of last year. I think freight traffic has improved. We've seen locomotives and rail cars come out of storage to really meet sequentially improving demands. Railcars and storage today are below pre-COVID levels in the low 20s. So I believe, like 22% of the fleet parts with some car types like -- especially intermodal flat cars being almost all out of storage. So positive news there. On the locomotive levels, I think we've also seen significant improvements. We're still slightly above what I call pre-COVID levels for the industry going through a transition there, but I think the indications are positive on that regard. I think another element that it's relevant to say North America today, when I look at the past couple of decades, we sit at the oldest stage of the fleet ever. And yet, when you think about the demand for reliable and available power, that continues to increase. So this, I think, directly drives a lot of the need for aftermarket services, modernizations, they look into new as well. The locomotives are running out there. They're running hard. One of the things we're able to really follow-up is the hours being put on that equipment. It's at the highest levels it's ever been when I look at the average of the fleet. So the industry is currently [ alcohol ] consuming surplus power available. And some railroads are really getting to the point of having to look at consume some of the power that it's out there. So looking forward, I think the combination of the fleet age, and the listening good of available power, I think, will ultimately drive customers to continue to invest in their fleets. So that's how we're seeing it. The last comment maybe just on the international markets. There -- we're very positive. We're seeing strong support. Deals tend to take a little bit longer, but I think there is continued positive momentum there.

Okay. We had a question about how is India trending given the more significant COVID disruption and challenges for that economy and your significant presence in that market?

Right. Nick, I think we spoke during earnings. That was one of the areas of concern we had. We still have concerns around India. I think things have significantly improved. When I last spoke during earnings, we had some real challenged scenarios in some plants with less than 30% attendance, that has changed significantly. I'd say the team is performing much better than we expected. With that, I mean, there's certainly going to be elements of challenges in the quarter associated with India. We believe we have the plans to manage that through the year. And we've also been able to accelerate some things that were maybe going to take place in the third quarter, make them happen earlier. So overall, I'd say, moving very much aligned with the framework that we have laid out. So we're very much committed to delivering on the things we said we would.

So everything is still on track?

Things are on track.

Okay. We got another question here and said you're working to create the freight rail innovation Institute in the U.S., are there similar efforts globally where there is a path for government funding of Wabtec's clean rail initiatives?

Nick, we do engage in work with governments globally. So that's really part of what we do. We have strong relationships, especially with the fact that we're local, we're really able to work with both the elements of all key stakeholders to move that needle forward. We have here an opportunity to lead us from the U.S. There's a number of international customers that have been engaged with us in order to support this initiative. So we want to make sure we don't fragment the efforts but really concentrate debt. So we're able to really accelerate this transition -- this energy transition into a rail. And I think we're very well positioned when I think about the installed base that we have there. Some of the work that was started earlier on with biofuels, renewable fuels, now with battery electric, which I think we're really proud to see some of the results we have. And we're certainly going to be pushing to move into orders here. The interest is broad. And I think we're also working with hydrogen and the fuel cells as part of that. So we look at this as a portfolio of really solutions to help our customers transition into more efficient and cleaner ways of moving both freight and ultimately move passengers as well.

Okay. And I guess along those lines a little, one of the things we've all thought about was that the transition ultimately probably to a hydrogen economy for energy might take as long as 2050 to become economically viable. But there's been significant breakthroughs recently, particularly from H2Pro out of Tel Aviv, that is looking at bringing a whole new process. They call it water splitting instead of electrolyzers with membranes to bring $2 a kilogram by 2023 and $1 kilogram by 2030, which would be like 20 years earlier and half as expensive as originally thought by the Hydrogen council. How do you see the industry moving as you work with FLXdrive and your battery electric solutions and your biofuel solutions? How do you see it transitioning? Are you able, if, in fact, green hydrogen becomes available sooner rather than later to be able to accelerate the shift towards hydrogen-powered locomotives?

I think you know that, Nick, we're not -- we're in the business of making sure we accelerate some of these in an economic fashion. So the short answer is yes, we are. I think there is alternatives along this bridge I described to you, which could include burning hydrogen directly into our engines. So that's the thing we would be able to do it. We have LNG today operating in locomotives and trains here in the U.S. So that's something that we've got experienced on. You're going to need batteries in order to ultimately move into fuel cells being hydrogen based. So it's really making sure that not just you solve for the set of solutions, but you've got to bring some partners along the way. We're not going to be doing all the elements of this. So we're working with companies that have the electrolyzers and have some of these auto alternatives. We are seeing an appetite to actually sign up for some pretty, I would say, aggressive numbers that would enable this to go faster. So I think we can move faster here. And it's going to be a bridge. So it's not going to be a total flip overnight. And I think we're well positioned to do that.