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

This is Justin Long with Stephens and I want to welcome everybody back to day 2 of our Nashville Conference in 2023, excited for a great lineup of companies today and kicking things off in my track is Wabtec. It's great to have them back at this conference. Thanks for your support of this event. And representing the company, up here with me is John Olin. He's CFO; Kristine Kubacki from Investor Relations is in the room as well. As a reminder, this will be a fireside chat format. So I'll start with some questions and then open it up to the audience if you have questions as well. But with that, we'll just go ahead and hop into it.

So John, I wanted to start with a bigger-picture question. As you think about a lot of transportation companies this year, we've seen some misses and guide downs and Wabtec has not been in that camp. You look at where your expectations are versus the beginning of the year, EPS is about 10% higher than what you originally thought. At the midpoint, you're growing EPS, call it, 20% or so. What do you think has driven this resiliency. Let's start with that, and then we'll get into some other questions.

Yes, so -- hello, everyone. I couldn't be more thrilled to be here representing the great company of Wabtec. So to start off, I think there's a common thought that how the railroads go, or how carloads go, that's how Wabtec goes, right? And I think that we are quite a different company from maybe when that was true. So when we look at specifically, you're talking about carloads and they're down on the railroad side, and that must mean that our equipment sales are going to be down. First, I'd point out that our North American equipment sales in terms of locos and mods are less than 10% of our total revenue. So again, I think there's this perception that it's much more. And in any event, those are growing very much and we'll talk a little bit about that. So again, I would point out, since the mergers that we've had in these 3 multinationals coming together, we sell across a spectrum of rail products. And I don't think there's one particular piece that really will push the company in a negative way, right, without some offsets and balances to that. So -- and also to that, from a diversity of customer, a diversity of products, diversity of geographies. And the geography point, 60% of our revenue comes from outside the United States. So again, looking at the rails and saying that's the way it's going to happen at Wabtec is not in the case. The other piece of it is 44% of our revenues are recurring. So they're coming to us, right? So that's the first thing. The second thing is when we talk specifically about that rail equipment and locos and mods and maybe the situation that carloads being down is you got to keep in mind that our products deliver a lot of value to our customers. It is not a straight replacement, right? This is not a cost. It is an investment. And the locomotives that we sell today are very different from the ones that they will replace that would have been out there for 20, 25 years, right? They're much more durable, reliable. They haul a lot more. You can take 2 old ones off and put one new one and get the same pulling power from that as well as the fuel efficiencies are dramatically better today than they were then. And therefore, the carbon emissions are dramatically better. So in most cases, when we look at a replacement of a loco or a mod, we're looking for a customer to have a return on that investment in the mid-double digits. So the final thing is, this isn't something that just happened this quarter, right? Carloads were down and we were up. This is something that's been building at Wabtec for quite a while. Matter of fact since COVID, we've had 10 quarters that have been up and the last 6 have been growing in momentum and each one driving higher revenue growth until we've culminated in the third quarter, which was up 22.5% from revenue and profits up over 39%. So these are things that we put in place years ago in terms of our investments in R&D, the products that we're delivering. And a lot of these things are on order of 2 and have been on order, and there's a lot of lead time, especially on the equipment side.

That's a great way to start. And I know you're not here to give 2024 guidance. But as you think about the positive momentum in the business, what feels like it's sustainable as we move into next year? Where is there additional momentum? And anywhere that you see risk or a potential for a deceleration?

Yes. Coming out of our third quarter call, we had talked about we expect profitable growth in 2024. So that's as far as we're going to get in terms of any guidance, and we'll provide more when we typically do in February. But to make that assertion, Justin, I think there's 4 things that go into that are 4 foundational pieces of that comment. The first is backlog. It's our 12-month backlog as we exited, the third quarter is up 13.1% on a year-over-year basis. We've seen that grow as well over the last 3 successive quarters in terms of momentum. So that gives us a fair amount of view into 2024, at least over half of 2024, so that's the first piece. The second one is, again, going back to that equipment. We don't want to focus too much on it because it's less than 10% in North America, it's more than that when we look at worldwide locos. But as we look at where we're at today and the orders that we have and conversion and all those types of things, we would expect our combined locos and mods to be up in 2024. So that provides another one of the foundations for the fact that we believe we'll grow profitably in 2024. The third area is international. Again, I think a lot of people gravitate to North America. Certainly, most of our volume is outside the United States. And we have been very strong internationally, as you know, for the last few years, and the installed base has been growing at clip over that period of time, and we couldn't be more bullish on our national business as we move out of 2023 into 2024. The fourth area is more focused on that profitability piece of it, right? And some of you may know, we came out with a focus a couple of years ago, called Integration 2.0, and that's an opportunity to further integrate the 3 companies that came together. And we're getting into the really the benefit lift as we move out of '23. We're seeing those rises. We've invested for 2 years and now the fruits of that investment is paying off, and we expect that to scale in 2024, so that will drive an opportunity to lift overall margins. So those are the 4 areas that we look at when we talk about profitable growth in 2024.

Well, great. And a lot of my questions aligned with those 4 areas. So maybe we could just kind of unpack each one. First, on the backlog. I know collectively, the backlog was down a little bit sequentially this last quarter, but you had the big MOU in Kazakhstan that at some point, it sounds like will convert to an order. And I think Rafael said on the call, there's a very active pipeline, some multibillion-dollar potential orders that are out there. Where are you seeing the most momentum and activity in the pipeline currently?

I think, certainly, North America, Kazakhstan, as [ Justin ] had mentioned, we -- a couple of years ago, we had a really strong business in Russia and in Kazakhstan, and we sold locomotive engines in Russia, obviously, with the sanctions that stopped. And so we did a lot of traffic that goes from China through Russia, down through Ukraine into Europe and a lot of that's moved south and with South of Russia is Kazakhstan. And that -- we have a plant there and that feeds a lot of our CIS region. So we've seen volume move to there. So we would expect the continued growth there. And obviously, the MOU for $2-plus billion of sales into the future is very exciting. But other markets, and we look at Brazil, it's another one. We would expect growth. I've talked about talked about North America, Brazil, Kazakhstan. The other key markets for us are India. In terms of locos be more steady, we've got a contract that we're working through there for 100 locos a year. And then Australia. When we look at Europe, I don't have a lot of freight side in Europe. It's not a big freight market. But from the transit standpoint, where the bulk of our transit business is. And again, we feel good about that.

We're doing a quick mic check. Okay, I think we're good.

I've never been accused of speaking too softly. So when we look at across the international markets, we feel good. Some will grow a bit more than others, but all of them, we feel like we've got a very good solid footing. Again, when you think of Wabtec and where we sell, you think of vast lands from the freight standpoint and mining, and that's where we'll be. And those are most of those international markets and then transit, of course, is Europe.

Are there any particular products that are driving some of this momentum in the pipeline as well? You mentioned a few geographies, but what about answering that same question from a product perspective.

No. The answer is nothing more so than the others, right? And you look at our 2023 results. And if you look at on a year-to-date basis, we've got all 5 of our business groups are growing between -- double digits, between the low teens up into the low 20s. So everything is moved direction. And so no, nothing jumps out, but a lot of it does start with the locomotives. And with that, when you have an installed base, we're selling into that component, we've got services, spare parts and certainly the digital assets that kind of work off that installed base of 23,000 units.

Okay. Great. So we'll check off number one. Moving to number two, combined locomotives and mods, you said there's visibility to growth next year. You've talked about being below replacement when you combine locomotives and mods in North America for years, is there a way to help us understand where we sit today in 2023 relative to replacement and how you see that recovery playing out?

Well, let's first talk about, Justin, what we mean by replacement, right? There may be other views of that. But next, we've got a great chart. I think it was in the first quarter call that we lift up the last 15 years and the combined mods and locos that we have from Wabtec. And you can see that over the last 7 years, certainly been well below the average. And when we look at the average, we've got 16,000 locomotives that are pulling North America's freight on an everyday basis. Heavy haul on the main lines, doing the work of moving freight throughout North America, 16,000 of them. And if we look and be very conservative on the useful life, used 25 years and divide that through, it's about 640, right? And not everything is the same as it was in the past, right? There's different focuses, railroads are using the assets differently and so on and so forth. But if we just do that, we're at about 640 for North America alone, not international per year. And we've been considerably under that for the last 7 years, a lot under probably in the half range. So 2023, we're seeing good growth in that, but still will be a fair amount below the 640 level. And we continue to see that growing, right, and certainly into 2024.

And I believe you're delivering, and I'll get to that question next, new locomotives in North America today. Could you talk about what the backlog looks like for new locomotives in North America?

No. Well, number one, thanks for pointing that out so when we talk about the strength of our company, right, and we started out the first question was with regards to locomotives, right? The third quarter of this year was the first time we delivered a Tier 4 or a new locomotive, Tier 4 is what needs to be in the United States sold if it's new. And the first deliveries that we had in over 2 years were in the third quarter of this year. And even with that, the company has been incredibly resilient. Going back to the first question with regards to our international business and various other products that we have that drove revenue growth over a period of the last 10 quarters. So in terms of the backlog, we don't provide and break the backlog out in that way. We certainly got the total numbers, but those locomotives are there. When we look at the last couple of years' orders in terms of locos and mods, the majority have been mods. And so I'd say about 90% have been mods. But we did start to deliver the first of our backlog in the third quarter for new.

Okay. Great. There was a question in the audience.

And what's the ASP of the locomotive and the incremental margin because you already have the fixed cost and capacity in place [indiscernible] incremental margin [indiscernible].

Yes. So number one, let me widen that out a little bit. When you look at modernization, sometimes I don't know where everyone's a with that. Modernization is a business that Wabtec started, I don't know, 2017. And basically, we take in a customer's locomotive and replace all the vital organs and update things and refurbish and whatnot. Now about half of it is brand new and the other half is kind of the structure that was there. They -- so generally think about there's all kinds of variations but $2 million to $2.5 million for that asset, right? And that's got an updated engine, and it gets 5% to 6% more fuel efficiency. It's got the digital assets and so on and so forth on it. When you look at a new and a Tier 4, that would be in a price range of, give or take the $3 million to $3.5 million range. Obviously, it's got a longer useful life, and it provides additional environmental benefits in particular, in NOx and SOx or particulate matter. And that's what the Tier 4 vehicle is focused on is reducing those. So that's the first part of your question. The second part was...

Operating leverage.

Okay. We don't break out the operating leverage for each of the component product lines. But when we do look at incremental volumes and if you look at our fixed cost structure, and that being fixed manufacturing costs of about 10 -- I'm sorry, 15% to 20% and our SG&A, which is fixed -- about 80% of it's fixed in that neighborhood, overall, an incremental dollar of revenue that goes through, all things being equal with regards to the mix and pricing and other potential variances, we would expect 25% to 30% incremental margin versus the company's average in the '16, '17. No, that's just -- that's the whole company, and we don't break out the individual pieces. I don't think it would be that far off. I mean, you're looking again at the fixed manufacturing costs, a little bit higher on some of the heavy pieces, right, locomotives than maybe some of the other component pieces, but in the same ballpark.

You said in recent years, you were running about half of the 60 -- 30-40 replacement. I thought it was less than that. I thought the rails basically didn't buy anything...

They didn't buy anything new, but they've been modernizing. And you have to look at the chart. I'm doing it from memory. I don't know specifically the numbers, actually Christine can give you a peak.

Maybe we could shift next to your 3 points. So you brought up international and the bullishness you have there. And you mentioned a few different geographies, but could you talk a little bit about the scale you've been able to build in those geographies and what the margin profile internationally looks like today versus what it once was. And that gap, I think -- I get questions all the time about North America margins versus international. I'd love to just hear your thoughts on that.

You might not like to answer, but I'll give you my thoughts on it. Why don't we start with that one, Justin. It's in a lot of businesses and a lot of businesses I worked previously, right, is you got an international margin and largely domestic margin, international is typically lower in margin. And it doesn't really work that way for Wabtec. It's really the market that we're in and the dynamics of that market more so. And so we've got markets that are lower than North America in terms of margin for locos and we've got markets that are a fair amount higher as well. And it really depends on our installed base in the market, our longevity in the market, right, the competition in the market and all those types of things. But there is not a way to say that international is higher or lower, typically, and it is really area or country dependent. And I'm sorry, the first part of your question, the scale -- so remember, I said that there was 23,000 installed base and 16,000 of them are North America. So the 7,000 are around the world. And a huge part of our business is based on the installed base of locomotives. And really, when you look at the -- whatever you want to call it, the brilliance of the merger with GET, the transportation group of [ Alvarez ], we picked up an installed base of 23,000 locomotives that with the exception of transit on the freight side, all sell into that installed base. So as you gain scale or have an installed base in a country, right, then you've got the service. And we've got people landed all over the world from technicians to people that actually fix them. Some advise, some fix it all depends on what the railroads and how they handle some of those expenses are. But the more that, that installed base is there the more it's running, the more aftermarket sales, parts sales, service that comes from that and then all the component sales that go into it. And again, remember, 60% of our revenue is aftermarket.

Got it. Great. Well, maybe we could move on to the profitability comment and we'll kind of separate freight and transit. Let's start with freight. You're at a very low level, still of locomotive deliveries. The locomotives that are being parked right now. But freight margins actually were fairly strong this last quarter. Is there anything on the horizon that could the improvement, we've seen recently in freight margins from a mix perspective, or should we expect this momentum to continue as you leverage your fixed structure?

Actually, Justin, I can't believe you asked that question. So just in the last couple of years, we've had COVID, we've had interest rate skyrocketing, we've had supply disruptions and I think...

Just take out the black swan events.

Black swan events that happen every 6 months. So let's talk about the third quarter, right? And margins were strong in the Freight segment, up 1.3 percentage points. And a couple of things you might say is, well, your equipment volume was up a whole lot and aren't your equipment margin is lower than the average, and they absolutely are driven by, obviously, locomotives. And so we still posted some pretty strong margins. But prior to that, we've been talking about mix headwinds for the last 4 quarters, and that was more acute given some of the international business that we had that was the contract over 4 quarters. And that put a fair amount of headwinds even more so than you would get naturally with Equipment Group growing faster than the rest. So that kind of went away in the third quarter and provided mix favorability, which for the last 4 quarters has been unfavorability. And right now, we wouldn't -- right now, we don't foresee that changing from where we're at in the third quarter. The other piece of it is we had mix lease some drawback to that margin given the strength that we had in our Erie facility. It was a 10-week strike, and 7 or 8 of them fell in the third quarter. So that was kind of a little bit of an offset to it. But other than that, -- we're very happy with the margins that we have. And again, as you pointed out, in terms of the overall capacity utilization, it's pretty low from historical standards. We have plenty of capacity to continue to see that level of locomotive and mods sales increase, and that will leverage those fixed costs that we have in that side of the business.

Okay. Great. And then on the transit side, you have the Integration 2.0 game plan that you've outlined. Could you just give people an overview of where we sit today in the savings that have been realized and how that could be a tailwind into next year?

Yes. So going back to the first quarter of 2021, we talked about Integration 2.0. And that was really when we were coming off of the synergies that we got out of the GE acquisition, we signed up for $250 million of synergies, ended up on a 4-year program, getting them 1.5 years quicker. And at that time, looked at our organization and 135-plus plants that we had, and came out and said we're going to invest a fair amount of money, mostly noncash in terms of $135 million to $165 million to consolidate, integrate and tighten the system. And with that, we would -- we expect $75 million to $90 million of ongoing savings on a run rate as we -- in 2025 run rate. So the first 2 years, we're -- I guess, we're 7 quarters in the first 2 years. And with that, we've spent about $99 million of the $135 million, Again, a lot of that noncash as we've written off and consolidated things. And in 2022, we had savings that were just starting out and had $5 million of ongoing savings as we exited the third quarter, those had grown to $15 million. And again, we're on a ramp that are just, what, 9 quarters away for being at a run rate of $75 million to $90 million. And again, it goes back to the comment that I made as we look at '24 and '25 is when those investments will pay off the most we'll see the biggest ramp in those savings getting from where we're at today of $15 million up to the $75 million to $90 million.

Okay. Great. And as you think about those savings, are they volume dependent, or do you feel like these could be realized in the absence of...

No, not particular. Yes, most of it is footprint consolidation, and we'll take out in the neighborhood of 15 sites for those $135 million.

Okay. That's helpful. I'll pause for a minute. Are there any questions from the audience? If you do have a question, feel free to raise your hand, and you can chime in for sure. But maybe we could shift back to North America and locomotive utilization. That's a question I get a lot on in terms of what we're seeing on that front, there's not a lot of publicly available data to track so could you comment on what you're seeing today and what's baked into the forecast into the fourth quarter?

I would assume, Justin, you're talking about the active locos and the parked locos and...

Correct.

Okay. So again, any given day, there's around 16,000 locomotives that are running, right? There's others that are in the what's called the parked or just set aside. Some of them are operable, some of them are not. Some of them we buy and modernize and whatnot. But -- the more that we have running on a year-over-year basis, the more we would expect our service revenue to grow, right? And we have 2 types of revenue that comes off of the servicing of those locomotives with that installed base. One is what we'd call an MSA, a master supply agreement. And that is where we get paid every day that locomotive runs, we get paid. And we guarantee that it will run at certain outcomes, right? And we're very good at that. The other way is that, and we fix them and take care of the locomotive. The other way is some of the railroads have their own employees that maintain the fleet. And with that, we would sell in replacement parts into that. So with that, and you look at on a worldwide basis, that's about 75% of our service revenue. And then when you take that on the entire company, it's somewhere in the ballpark of 20%. So North America would be lower on both counts and Justin right off the top of my head, I don't know the splits of that. But in any event, as a locomotive gets put to the side, we don't get paid on it and it sits there. And when we bring it out of the park, -- there's typically more work that goes into it, more service work. A lot of times the ones that go into the park are in need of an overhaul. So a lot of times that they come out and -- not a lot of time, sometimes when they come out, they need the overhaul, which is very large expense for a railroad to overhaul the engine. In any event, what we've seen in the first quarter, we actually saw the park go down. So more we're operating and it came down a little bit and then not a lot, let's call it slight. Sequentially, in the second quarter, that reversed a bit, and we saw more in the park. But again, probably in the term would be a slight increase, again, increased in the third quarter, again, more set aside. And I would say that was probably more a modest increase -- but overall, well below what we had forecast for the year and some of that outperformance that you mentioned. But the question is how impactful is that, right? And you start to take the part measure typically in movements of hundreds in and out and they go up and down. When you wash that over 16,000 base and further take that it's only 20% of the company's revenue. Those moves are manageable. I don't like them, but we'd like to see more locomotives running. But it's something that's part of the business, and there's a flow, again, in and out.

And what's your view on parkings into next year based on the feedback you've heard from your customers?

I don't have a view at this point. We haven't talked about a view at this point. And if we do, we'll share that in February. And part of it is just trying to understand where our customers believe carloads are going to be and what the needs come out of that are. But we haven't talked about at all at this point.

Okay. The EPA has come out and proposed some rules on locomotives. There was some -- there were headlines on that last week, could you just provide a brief overview on what's been said so far, what the impact could be for your business and just provide a little bit more color?

Justin to wind that out a little bit, I think that over the last year or 2 years, we've started to see some shift of those headwinds that we talked about, COVID interest rates, that of [ cyber ] and so on and so forth. Turn more into tailwinds. And I think the tailwinds that are coming are somewhat on the regulatory side. And I guess when you're equipment manufacturer, sometimes regulation is an opportunity. And we're seeing more regulation on the safety side and the service side with the reciprocal switching and the bigger one or the more pronounced one, depending on what happens is on the carbon emission side. So if you dial back about a year ago from this time, CARB, you're familiar with CARB. Does a lot of regulation of auto and emissions in their state, came out and put out some proposed rules for [ comment ]. And I think it was in April time frame. They finalize those rules. Now those rules were kind of not exactly congruent with the EPA's view of the world, which was EPA has the right to regulate the rails. And I'm going back the EPA is that a couple of instances signaled that they would be open to revisiting that and about 2 weeks ago -- I'm sorry, before we get to that, that final legislation had several key things in it. You go back and take a look. But by and large, it said by 2030 that things operating on the rails in California couldn't be over 23 years old, right? The average fleet in North America is around 23 years old, right? So you can do the math on that. And they also said they wanted to create a fund and the railroads would pay into. And by 2035, anything that was sold or new on the rails would be zero emissions, right? And so those are some pretty big things. There was lawsuits and various other things filed, I think, filed and retracted and whatnot. I dial forward to 2 weeks ago, the EPA came out and said that the states have the right to petition the EPA -- in terms of regulating within their state, things that are on the rails that are existing technology, those are my words, not their words, you have to go back and read it. But they didn't give up the right or give up -- yes, we'll not give up the right to the next technology, whether that's a Tier 5 or whether that's zero emissions and so on and so forth. So some of what California said it seems like it's still a little bit incongruent with the EPA. But it was a couple of weeks ago, and CARB said that they were going to petition the EPA. And as far as I know, that has not happened as of yet. So a lot of people are waiting to see what that says. What it all means is really, I think we're going to have to wait to see what the regulation says, what other states might follow CARB, a lot of them found the auto side follow CARB and what the response might be from the industry. So we'll see. The original the regulations that are out there now that were issued in April had a start date of January 1, 2024. So we'll see what CARB does, and we'll take it from there.

But it sounds like at this point, they're putting the ball in the court of the states to make a decision on how to proceed with some of these changes.

They're allowing the states to petition them. They would still have to grant that petition them to regulate. But yes, it feels like the momentum is moving toward the states being able to regulate the rails.

Is there any feedback that you could share from your customers about some of these proposed changes? Have you had people inquire about locomotives, either new or mods because of what could happen?

That's not my end of the business, but our salespeople are located with a lot of the railroads, and we're talking every day. I don't not privy to those conversations, but there's conversations with regards to -- regardless of whether it's EPA or CARB in terms of what their needs are and how we can help satisfy those needs. So I don't have any additional insight into that.

Okay. Maybe you could talk a little bit about the competitive dynamics. And I know it's probably different across all the various geographies. But North America, international, how Wabtec is positioned from a competitive standpoint.

Most of our products that we sell were #1 or #2 in terms of market position. Most of the products and freight are #1, and most of the products in transit are #2. So most of the competition is a couple larger players and then some smaller players that are involved in them. There's a lot of competition across every product line that we have. And when there are tenders, there's multiple people involved in them. And so we haven't seen a big change in the overall level of competition. But I'm not sure if I'm getting quite at your question, but certainly competitive markets.

Okay. One other thing I wanted to ask about was the freight and the transit businesses and how they complement each other. Obviously, you have diversity in the top line and earnings stream. But are there other operational efficiencies or synergies between these 2 segments that benefit the business?

Yes, certainly. Some of it is on the production side. We've combined some of the production assets that were traditionally transit are producing some rail stuff and vice versa. So we've got crossover in terms of production. I think the other area is certainly on technology, right? We share some of the same technologies. And certainly, the engineering expertise to solve problems is available on both sides, right? Brakes, for example, are one of the largest revenue drivers in transit and the largest revenue driver in our components business. So we've got them on both sides there. And again, technology standpoint at product standpoint, not the same product, but very much the same technologies. Digital is area that we have in both in PTC and whatnot. So there's a fair amount of crossover in that respect. And also, it's very complementary from a revenue standpoint. And the revenues don't in unison, freight and transit revenues don't typically move in unison, right? And again, we get into that international and domestic don't move in unison. But anyhow it provides a more -- probably a more stable revenue growth profile that maybe on the freight side.

Okay. Any questions from the audience? I just wanted to check in again. If not, I wanted to ask about the battery electric locomotive opportunity. Could you talk about kind of where we sit in terms of the timing of Version 2.0 and delivery of those units as we move into next year and beyond?

No. So one of our strategies is to lead the world of decarbonization of rail across the world. And investment that we've been making for the last 10 years is on the battery side of the business. And a few years ago, we tested a battery electric heavy haul locomotive. And I think it was 2.3 megawatts of power. And in the route, it was on, it never needed to be charged, it self charges. And so you can think about buying a locomotive and getting the fuel for free, right, if you're on the right routes and down around hilly routes. Anyhow dial forward a couple of years and going back 2 weeks from right around today yesterday, yes. We revealed the first of those and what I think you'd call, your 2.0 version, the next version, which is 7.3 or 4 megawatts in power. So we can do a lot of things that a diesel locomotive can do. And we unveiled it for a customer called Roy Hill, which is a mining customer in Australia. And oddly enough, and one of the things that made it a little bit unique is the mining color -- the colors of the mining company of Roy Hill are pink, and it's been pink for many years in recognition to bring awareness to breast cancer. So we unveiled it at our Erie site, and we couldn't be more excited about that being the first, and so we've got other orders out there that we're working on, and we'll begin delivering that 1 will be in service in the spring time. And we've got others following in '24 and '25.

When do you think this business could get to the point where it scales in a meaningful way and becomes a meaningful percentage your overall locomotive deliveries. Are we 3 years from that, 5, 10 years from that?

I think it's hard to tell. And how regulation may or may not play in that. Other than that, in terms of the product, I think that we're seeing a wide number of customers getting involved in it, right? For example, the application that Roy Hill has is they've got mines at one elevation, and they're bringing it down to port at sea level. So as their expectation is using the FLXdrive as that goes down, it will charge and they'll unload the ore that they have. And on its way up, it will discharge batteries. It's way up to the top and get -- and you load it and come back down. So tremendous savings in emissions as well as energy or the cost of energy. So I think the applications are different being than explored across a number of our customer set. But there's going to be a period of validation, right? And we, Wabtec don't want to go too fast and make sure that we've got the product right. And so we've had one out -- a test vehicle out, and it did fine. There was no instances. There was no failures. But we'd like to see more and so I think it's going to take a while for our customers to test it, find out how it fits into their operations and how it can benefit them, then I think we'll start to see another wave of orders and excitement over the product. But that's -- people are going to have to -- or the railroads are going to have to get used to it and understand where are the right applications for it.

Okay. Maybe we could shift to the balance sheet, just because in the third quarter, there was a significant amount of cash generation. The guidance implies...

You noticed it.

I did. I saw it. And fourth quarter should be better based on the guidance. And the balance sheet is in pretty good shape. So when you think about the uses of that cash or stock buybacks kind of increasing in the rank order of capital allocation priorities.

Well, let me take you through the priorities. So we've kind of got them lined up of 5 tier priorities. The top 1 being is to protect the balance sheet and to protect the company. And with that, it's -- what we believe is a net debt leverage ratio of 2 to 2.5x. And right now, as we exited the third quarter, we were at 2.1x, feel very good, feel good to be at the lower end of that given some of the macroeconomic concerns and some of the industry concerns. But we're in that range. So having said that, we feel great about the balance sheet. We don't need to invest in repayment of debt. So that's the first one. Check that off, that's the most important. The second one is to invest internally. We got a lot of tremendous opportunities from a capital standpoint as well as a technology standpoint. In terms of most other industrials, our capital spend is a little bit below. We typically target 2% as a percent of revenue. In the last couple of years, we've come in more on 1.75% range, again, under most -- some of our other industrial brethren. On technology, we spent 6% to 7% of revenue, which is a little bit over with most technology -- industrial company spend. Anyhow, a lot of opportunity to continue to drive great returns with that cash. The third is the dividend, and we're looking to grow the dividend in line with our earnings -- our adjusted earnings and to stay in the dividend payout ratio that we currently have kind of between 10% and 15%, not a high dividend payout ratio, and we feel very good about the other uses for that money. And that leaves us to #3 and #4. And with that, it take some broad strokes, we deliver about $1 billion of cash a year, and you take out dividends of 120, 130, and CapEx of 150-ish. You're still left with in the [indiscernible] billion of cash. And with that, the next prioritized item would be M&A, provided the right M&A. And we're looking for bolt-on M&A that we can certainly drive synergies with and that complements our capabilities or our product lines. And I think a great example of that was a couple of months ago, we purchased L&M. L&M makes radiators for mining equipment. And we make 4 or 5 other vital organs on mining trucks, and this is just another one. So it complements the same customer base and all the like. So M&A would be prioritized there, provided it's a right M&A. And then the last one is to return all excess cash to our shareholders in the form of share repurchases. So if we just look on a year-to-date basis, I think our operating cash at that point was $515 million. Of that, I believe, $92 million was paid in dividends, $230 million of it was for L&M and another $250 million -- $252 million was in share repurchases. And cash has been pretty constant all year long. So we're not looking to build cash. But any excess cash we have, we don't have good M&A, we'll return it in share repurchases.

Okay. So it sounds like after CapEx and dividends on an annual basis, $750 million of cash, if you can't find the right valuation, you're not going to sit on.

Absolutely not. That's not our money.

Okay. Well, last question for you. As we go into next year, I think there's a lot of uncertainty about where the economy is headed, where -- how the freight cycle progresses. You've got nice visibility in the backlog. We talked about that earlier. Is there any risk of delays or cancellations? Do you have clauses in the backlog that would protect you from that?

Yes. We seem to be getting that question a lot. I don't -- I wasn't here during COVID, if we got it a lot as well. But when we talk about the business that we're in being a little bit longer cycle or maybe mid-cycle, I'm not sure how you describe it. We've got a significant portion of our revenue comes in the terms of long-term contracts. And with that, we have a contract that spells out all the terms of that transaction and the timing of deliveries and all those types of things. Sometimes there's penalties built in or LDs. Sometimes they're for us if we don't deliver on time sometimes they're if a customer doesn't pull from us on time. But all contracts are different. They don't have all the same things. When we look at a year, and actually, last year was a pretty good example. We typically start a year that has got 70% to 75% of our revenue, the midpoint of our revenue guidance that is backed up by those contracts. So we'll be able to talk about that in a few months here. But the question of is the contract I don't know, but the contract is a contract. So it's got the all legal -- all legal remedies that any contract would have. So again, we went through COVID and didn't see customers backing off. Remember, a lot of these lead times are a fair amount of time, and they're looking to get them and we're looking in to deliver them.

Okay. Great. Well, we'll keep things on time, wrap it up there. But John, thank you so much for being here today.

All right. Thank you, and thank you all for your interest in Wabtec.

Thanks, everyone.