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

All right. I think we're going to go ahead and get started. Good morning, everyone. Welcome to the first fireside chat of the day. My name is Brady Lierz. I'm an associate on the Transportation Research team here at Stephens and happy to be joined by the Wabtec team. John, Kyra, thanks for joining us.

Absolutely. Good morning, everyone.

John, I thought it'd be appropriate to just start with a big picture question. We've been in a prolonged period of weakness across the transportation sector for over 2 years now. Rail volumes kind of struggled to grow. But at the same time, you've continued to grow the business pretty meaningfully. I think the midpoint of the guidance for this year has earnings essentially doubling from 2020 levels. Could you just take a minute and talk about WAB's portfolio businesses, kind of the key areas of the business that you think drive this resiliency and your growth during this cycle?

Sure. First of all, I'd probably take a step -- even one step back further and look at what our business model is and it is to drive efficiency, productivity and reliability for our customers. So any time they buy an asset, at times a little bit much. When they buy an asset from us, there's typically a very good return on their investment associated with it, whether it's a locomotive or some of the components that we sell. And so every morning, we've got thousands and thousands of engineers waking up, figuring out how to make an engine more efficient to take out a little bit more fuel. And with that, we have the most efficient engines, most productive -- productivity in terms of the fuel efficiency, reliability and durability than any of the competitive products out in the market. So with that, even in times of a downturn, there is a strong return on their investment to either replace their assets or expand them. We haven't seen an expansion of the assets in North America for a while probably over a decade, a decade or longer. So we need to make sure that we are the very best to get them to replace a 20- to 30-year asset, because it is a good business decision for them, not because it's gratuitous or they want newer stuff. So with that as a backdrop, you can start to see why we might still perform pretty well in a downturn, even though there's some tightening of capital, we want to make sure that we are driving a good return on the capital that they are spending. So I think that is a big part of the backdrop. And I'm sure as we get into more questions, that's going to continue to come up. But that is our business model is to make sure that we are delivering value to our customers, and again, you need to do that when you have a long-term asset, if you want to keep selling them. So other than that, if you compare it to 2020, I think there are several things that have driven it. One is, again, this concept of we provide a good return on asset, a good return on their investment. Remember, especially when you look at the railroad business, there's essentially 2 things that really make up a railroad. That's a track and that's a locomotive. So you don't have to -- you can sweat them out a little bit, but eventually, you need to replace that power. That is a core part of the business. And what we've seen over those last 3 years, 4 years is a build of that momentum, and our backlogs have been growing up, right? And we moved more into longer-term contracts. So we've got visibility to see what's coming. So that's a piece of it. The other piece, when you look at doubling the profitability is certainly on the cost side. We've had a great opportunity to reduce costs. And again, to understand that, you have to take a step back again and see how we came together. So we are only a 5-year-old company given how we came together. And we're a born of 3 multinationals in a very short period of time. And with that, I always think of the company as a 155-year old, 5-year start-up, right? And that explains a whole lot of what you see in terms of our maturation with regards to cost or various other things in technology and whatnot. And so on the cost side, it is -- the pushing together those assets is left what I'd say is a tapestry of opportunities from the cost standpoint. I mean, we still got a fair amount of our revenue -- a significant amount of our revenue on plants that are generating our products that are not subscribing to transformational lean. We've improved that by 20 percentage points over the last 3 years, but we've got another 40 to go. And so you look at most industrial companies, you say, how could that be? It's been 20 years of lean. But again, we came from a family company in Europe to the original Wabtec and GE kind of push together, 3 different business models. And there's just been a tremendous amount of opportunity. And we've been getting at it from several ways, continuous improvement, which is certainly to lean also taking, what I call, bites of the apple at integration. And we've got a program today called Integration 2.0. And when you look at that model, first, you want to ask what's Integration 1.0, right? And that was really the synergies that the company promised when they bought GE and delivered those 1.5 years early, $250 million. And this is just the next step on that path to getting to be the world-class company that we can be. And so we looked at Integration 2.0, we felt we could execute those in a 3-year period of time. And we're certainly seeing the fruits of that investment that started 3 years ago this year, and we'll see a fair amount of it next year as well. And when we look forward, is there an opportunity for another bite of that apple and the answer is absolutely, right? We've got 150-plus plants around the world, and we've got enough capacity. We don't need what we have. And we're always looking to make it better and tighten it up. And then you've got the absorption, right? Putting a little bit of growth against the fixed asset base that we have provides a lot of margin expansion, and you're certainly seeing that in the last 3 years. So those are the biggest pieces of it.

Got you. As we sit here today, we're a little less than 45 days from 2025, kind of hard to talk about the -- so it's hard for investors to not start to look ahead. And I know you haven't given any specific guidance on 2025. But could you just talk about some of the areas of the business where you see positive momentum? And then maybe some of the areas where you see risk or slow momentum?

Probably to understand my answer to this, you got to understand us as a company a little bit better. We are a company that works off of a backlog. So we have a very good view into the future. And when you ask about 2025, a lot of it's, I don't want to say, done, but a lot of it's booked for us, right? And so we're constantly working in advance of that backlog. So we feel very good about when we look at 2025 based on the backlog that we have. We measure a multiyear backlog, which doesn't provide a tremendous amount of information. It's $22 billion contracts anywhere from 1 year to 10 years old in there, [indiscernible] not old, 10 years to come on it. And on the 12-month backlog and so we're constantly working on what that is. So most of our efforts now are placed on filling up the 2026 time frame. And as we exited the third quarter, our 12-month backlog was up 7.5%. So kind of in that swim lane that we talked about being in mid-single digits. So number one is, as some of that work is done, and we got to execute against it, which is always easier said than done. But -- so we like that. Some of our flow businesses, maybe a little bit of more of a struggle when we look at some of the railcar components pieces, railcars are projected to be down from, I think, the current estimate of 41,000 cars to 38,000. So there will be a little bit of headwind there. But other than that, it's all the hard work that we've already put in and starting to shape our 2025.

Got you. I think Rafael mentioned on the third quarter call, the international locomotive order pipeline is the strongest it's ever been or I guess, in the last 5 years. Could you just talk what are the key drivers -- right, could you just talk about some of the key drivers behind the strength? Are there specific initiatives that you've implemented that you're seeing these results from just...

Maybe in answering that, maybe we'll contrast a little bit to North America. But I had mentioned earlier that carloads in North America haven't grown for over a decade, right, up a little bit this year, which we're thrilled to see. But over a period of time, they haven't really grown. And what we've done is, we've been able to grow our market share in North America, right? And the replacement opportunities that there are, even in a market that doesn't grow. Those assets get old, they got to be replaced. And so that's been a very good business for us and growing business over the last 3 years. However, when you look at international, it's a little bit different in that those markets are growing carloads, right, and we're growing market share. So with those 2 elements, yes, the international markets have been very good to us. And I mean, when we look around the world, when you think about us and on the freight side, on the transit side, you think of vast lands and mining, we'll be there, right? And so when you look at Brazil, we're seeing new concessions being awarded by the government, certainly got the mining down there. So we've had strong business there. Australia, the mining has been strong. And then our other markets, India, a very big market for us, both on the locomotive side as well as components in transit. And then probably the fastest-growing has been the CIS region. And a little bit about us. We used to sell engines into Russia, into the [ Napoli ] and Russia or [ KMH ] in Russia. And they used our engines across what they call the BAM line that brought goods from China into Europe and a grueling, a really long stretch and our engines are the best in the world, and they bought them from us. Sanctions came, we lost 5% of our profit. However, we've always been in Kazakhstan. We've had a plant there -- we got a plant there for quite a while. And so we've seen where we were selling engines to now we're selling locomotives in the CIS region in Kazakhstan and making them in our plants there. So we're seeing a lot of growth as that route between China and Europe moved south, the Trans-Caspian route.

How should we be thinking about the growth for runway -- or runway for growth internationally? Are you building into new countries? If so, is there capital needs there to kind of get this growth going or just talk a little bit?

Our footprint around the world is pretty strong. There's not, "Hey, we haven't thought of that country, right?" But there's areas that are growing off a smaller base. One is Africa. Africa is a great example, and I didn't mention it the first thing, mining there, I'm going to say, the largest mine project ever, called Simandou in West Guinea. And we were able to win that award, which is very exciting for us. It's a Chinese owned consortium with Rio Tinto. And so that would be an example of really growing in a new area on a continent that we've been, but very strong there and the incredibly important projects. Not only have we sold the locomotives, but also some of the components for the mining trucks that will be Chinese made and some of our mining components will be in those. So that would be an example of that. Three years ago, we put an investment into Egypt. And so we've got a nice installed base in Egypt now. And so all those types of things matter. When we look at overall international, we're growing the installed base by 4.5% CAGR over the last 7 years. It's grown like clockwork incredibly steady. And again, that's not only -- when that installed base grows that annuity grows because of all the parts that need to be serviced, all the service work -- and in a lot of our international markets, we're getting to the level where the scale is becoming very beneficial to us with regards to service. The other is on digital products. So as our units propagate some of these markets, opportunities for PTC and certainly, our onboard electronics and Trip Optimizer are now being picked up, whereas before, when there were smaller markets and smaller fleets, we didn't see as much of that. So we're getting that kind of scaling on and snowballing effect, in particular, in the international markets.

Maybe turning to North America. One of the things that's had us positive on the Wabtec story for so long has been just like you talked about earlier, how depressed the locomotive cycle has been in recent years. But at the same time, we've heard some of the rails say they're not looking to buy new locomotives or looking to delay some locomotive capital. Could you just give us an update as to where we are kind of in the North American locomotive cycle today?

So again, I'll go back to the only 2 things that make up a railroad. One of them is locomotives. So when they say they're not going to buy locomotives, those are some of the biggest buyers of our mods. And we don't look at a big difference between a new locomotive and a modernization. It is a unit of power. And once that's out in the marketplace, it's in the installed base and we make money for as long as that thing is operating. So yes, there are some railroads that are not looking to buy new. They have plenty of donors to mod. And again, some of our largest contracts are doing those and adding those. So overall, we have seen when you look at combined locos and mods, we've seen over the last 3 years, the industry sales, which is largely us growing over that period of time, even though we've seen the recession on the freight side. But again, the railroads need power. They're all in different positions. The other thing we like to do is kind of throw it all into one and say, well, the [ park's ] got this amount and that amount. Each railroad is different. They have different needs in terms of their power, different things they're pulling, their ESG targets, all the different things that kind of come into that. So they're all a little bit different. But yes, when you hear that some might not buy new, that's absolutely true, but they're all buying power.

Got you. Maybe just to go a little deeper on the modernization front there. It's obviously been a pretty successful product for Wabtec and not only just for you, but the increased reliability and efficiency that the customer sees. Could you just talk about the remaining opportunity in North America there? I know you've talked about modernizing the EVO engine as well, kind of just talk about the modernization opportunity.

Well, maybe to kind of start off on what a modernization is. So it was developed, invented by Wabtec probably about 7 years ago. And there was -- the EPA forced to move from Tier 3 to Tier 4 locomotives in 2016. And at that time, the regulation stated that as long as over 50% of it is that -- sorry, if under 50% of it is new, you can continue on with the Tier 3 engine. And the difference between a Tier 3 engine and the Tier 4 engine is not a lot on the greenhouse gases, a little bit of an edge to the Tier 4, but it wasn't designed for greenhouse gas. Tier 1, 2 and 3 certainly were, it was designed to reduce the pollution. And so the reduction in pollution is quite substantial, and that's NOx, SOx in particular matter. And that's a reduction of 85% to 90% of that. But in any event, that's how modernization started. And it started at the same time when there's a lot of focus on PSR and capital spending. And so you can get the same level of power, the same greenhouse gas emissions, not have to change the technicians and the engine out and deliver and drive more reliability from the older fleet that you had. And by the way, the fuel efficiency is quite dramatically different and technology that we came out with, which we call FDL Advantage, which is a 5% lift on fuel. So with that technology and with rebuilding and using half the locomotive as was and everything else is new or completely refurbished, it gives us the opportunity to sell to a railroad at $1 million less per unit and for them to get a lot of the core benefits. They don't get the longevity out of that asset, but when you're running an IRR model, after 10, 15 years, it doesn't have a huge impact. So those also would provide a very strong return on investment for the customer. So we started to see those take off and folks that have our railroads that have a lot of donors for that or wants to be moded, we've seen a lot of great activity on it. So I'm sorry, you asked the second part to that question. That was kind of the setup. What was your question?

Yes. I just wanted to know a little bit about that. I think you've -- like you said, you started doing the EVO mod. Is there any early feedback on that, what are the customers saying?

When we look at our engines going back, I think before 2004, when FDL and then EVO came in, in 2004 or '05, and we've been doing those up until the Tier 4 engine. So the FDL is what we've been modernizing. There's 2 flavors of FDL. There's AC power and DC power. So we've moded both, and they have different returns and some are too old to get the financial returns. But so that's what we've been focused on in that pool of assets, I don't remember the exact number, but it's certainly in the thousands. And we've been modernizing those and still have a lot more to go on that front. But now we get this whole other engine EVO, which now those are turning 20 years old on the older side. And with that -- and I'm sorry, going back to -- we talked about before, when you look at FDL, one of the things that really drove the case there is being able to reduce the amount of fuel consumption quite a bit. And with that, we called it FDL Advantage. So when you brought it in to get moded, we would mod it and rebuild the engine and we would add the technology called FDL Advantage that drives a lot of fuel efficiencies, that drives a lot of return on investment and kind of makes it work real well. Well, on EVO, it's the same thing. Now we still need -- it's a different engine. So we still need to figure out how to drive that and drive efficiencies to make sure that this works for everyone, for our customers to get a very strong return on their investment and certainly for Wabtec to pay for our investment in the technology. And so with that, a similar concept with a very different technology called -- we're not marketers, but called EVO Advantage is often being tested now. The railroads are testing it, and we believe that will yield up to 7% fuel savings. And that will start to open up another wave of modernization on the EVO engine. We still have a lot left to do on the FDL, but now you start to get the older part of the EVO fleet in that swim lane of providing a very good return. So as we look forward in terms of modernization business, there's many, many years of opportunities there to continue to mod those for our customers. And then obviously, the opportunity for new is there.

Got you. Maybe just on those. Is there any way to help investors kind of size up the opportunity between FDL, EVO? Is it an EVO mod likely more expensive than FDL mod? Is there anything that can kind of help them size up that opportunity?

Well, right now, we haven't come out with any pricing. We would expect to be commercialized in late 2025 or early 2026. So that we haven't discussed, but I guarantee there will be a very nice return on their investment. And again, that is the complete business model. If there isn't, we don't have a sustainable model, actually.

Maybe just one quickly on the near-term outlook. On your most recent earnings call, you talked about a double-digit year-over-year increase in equipment and a double-digit year-over-year decline in services that you expect in the fourth quarter. Can you just talk about the drivers behind that mix shift and how you expect that to kind of impact margins in the near term?

Yes. Well, first of all, we expect the fourth quarter margins to be above a year ago but below the run rate we've seen for the last 3 quarters, which has been about 19.5%. The reason for that is just -- we're working to level load our factories, and we pulled more volume into the front half of this year compared to last year, and that's moved revenue up to the front half and allowed us to more level out our local production in North America, which is very important when you look at quality, productivity and our labor force. So with that, we've always expected the back half to be lower in margin. And now we look at the fourth quarter, it will be lower. And when we look at that, we've got within -- even though we're level load in the plants, the modernizations flow through our Services business, right, our Services P&L and the new locomotives flow to our Equipment business. And we run the same units on the same line in our plants in North America. So in the third quarter, we ran more modernizations and we saw that service revenue up 16.3%. And the equipment side weighted because we want to run a customer order as much as we can together for the quality aspects of it. And so we saw that down 17%, and we're just going to see the reverse of it in the fourth quarter. There's nothing more than that as the line will be more consumed by new locomotives, which would be either Tier 4s in the United States or Tier 3 around the world.

I want to take a moment, see if there are any questions from the audience. If not, I can keep going. Some of the Class 1s have spoken more vocally about investing in new train technology, locomotive technology internally. Could you talk about just some of the viabilities of these alternative power solutions, where you or Wabtec investing to kind of stay ahead of that trend?

Well, Wabtec's -- well, first of all, a lot of people are investing in things like hydrogen because there's a lot of government money that pays for it. So that's one. But when we look at our strategy, it's two-pronged. Number one is to get our customers to near zero. And then secondly is to be the industry leader of zero emissions technology. So let's start with the first one. What is getting them near zero. It means that they don't have to replace the 23,000 Wabtec locomotives that are running out around the world, right, a massive investment to replace all those locomotives, many, many billions of dollars. So how do we take the existing assets that help our customers get decarbonization that we can out of an internal combustion engine and that they're looking for and the world needs, right? So that's the first piece of it. The other thing is this concept of getting near zero was also a concept, what we call reversibility. So once you kind of cut over to the fully decarbonated units, if you don't have hydrogen or you don't have electricity, they don't go. Whereas in the near it is reversible, and I'll explain what that means. So number one, how do we get to near zero, which is an over 80% reduction in carbon. One is through renewable fuels, which we can do up to -- we can burn 100% in their engines, biofuels up to 20%. We're qualifying them for liquid hydrogen, right, to burn in an internal combustion engine, the recent ruling by the EPA, liquid hydrogen is considered zero emissions. Now we need to have some diesel in that internal combustion engine to get it to go, right? It's the way it was designed to spark and all that kind of stuff. So you need some level of it, but we believe that we can reduce the amount of air emissions by 80% by a combination of those, and our engines already take natural gas. So it's making our engines to be more agnostic to the amount of fuel that you have. So if you're passing through Denver, and they've got a lot of renewable fuels fill up with that. And if you're in Kansas City, and they don't have what you need, you can fill up with diesel and you'll get less on the emissions front, but you'll be able to complete the mission. So we're finding a significant amount of interest from the railroads and that concept and we're well on our way to qualifying our engines. We know they'll burn it, but what we got to do is find out at what cost. And because we service a lot of those, we need to understand the engines get a little bit more love and care and you're not running diesel through them. And so there'll be a kit too that helps enable this. But anyhow, that's trying to get them to near zero and realizing to replace all those assets in a short period of time is not realistic and certainly not financially valuable. On the other side is to make sure that we're leading the world as we believe we are today and zero emissions technologies, and those right now come in 2 flavors. One is battery electric. I think I don't know -- everybody knows, but a train is electric. So this is not a huge leap. It's not like a car that you had to come up with electric motor. All our motors are electric. All we use the diesel is to run it through an alternator to create electricity. But electricity and the traction that -- and the power that it drives through the wheels are dramatically more than driving it through a diesel engine. So the question is, can you replace that diesel engine with batteries. And the answer is absolutely. So we just issued our first commercialization of a heavy haul locomotive and that went to a customer in Australia called Roy Hill. And with that, the route that they have is they've got lines up in the hills and they bring it down to port, unload the iron ore and then bring the locomotive back up and do it again. The unit that we sold them will charge on its way down. And on the way up, we'll expend about 80% of that energy. So there will never be any fuel needed. Now a battery electric costs a little bit more -- a fair amount more than have on a diesel electric locomotive. But with that, it's buying the locomotive and get the fuel for free. And so that's a particular route. Other routes we're looking at is, especially in the mining industry, mining is certainly at the highest level of interest for battery electric as their alternative is to electrify the whole line, which means putting the catenaries up. Now when you have a longer route than Roy Hill does, you can put up a moving charge and only have to put a little bit of infrastructure in versus electrifying the whole line. And when the locomotive passes under it, you catch it, power it enough to get you where you need to go, right? But when you're coming downhill and you got all that weight, the batteries charge very quickly so you do need hills. Otherwise, you need to run, if you're going across the planes on a battery electric, you need to have -- most trains have a consist of 3 locomotives and you need a couple of diesel-electric, right, because it's just not going to make it in flat lands that far. So all of those things are right now being commercialized. The other opportunity for Wabtec is in rail yards. Our locomotives are very large, and they're not ideally suited for switchers. And here this would open up business to us. Now the economics there are tougher on a switcher yard, because you don't have -- those you're going to have to charge because you don't have the downhill to make them run. And so we're working on those as well. And a lot of those sales are somewhat being subsidized in the areas. But we've got the most pollution is certainly in a rail yard and battery electric is a great way to clean that up. So that's on the battery electric. The other is certainly hydrogen fuel cells. So a lot of people are investing in that. I think we're the only ones investing in it for heavy haul. And again, when you hear that, well, we're putting hydrogen and that's great. But the duty cycle to have these things run 24 hours a day and not breakdown. That's a whole different story. And then a lot of the investment is also in the tender car how to handle the hydrogen. So certainly hydrogen is a little bit more volatile. So it is an incredible amount of engineering. But when we look at -- well, right now, the battery electric is there, a great product, but it's a niche product. We don't expect to see battery electric trains running fully out on the tracks. Hydrogen is a different story. We do see a world where that would be, but it's still a fair ways off. So a lot of people are doing a lot of stuff, and we are as well, but it's still a ways off. And the infrastructure that would be needed for that is pretty significant.

Maybe just on freight margins, you've seen some pretty strong year-over-year margin expansion in 2024. But as we look out to 2025, you haven't given any guidance, but can you just help us think about the puts and takes as it relates to freight margins. It's heavily influenced by the mix of business, whether that's new or mods. But are there still costs or efficiency opportunities for you and freight to drive margin expansion?

I talked a little bit about it earlier, Brady, but we'll look at margins, look at 3 buckets. One is the cost bucket, right? Three elements: continuous improvement, in particular, focus on lean and further propagating our facilities with lean. The second one is integration. There is more integration to come. And again, Integration 2.0 is what wasn't the total -- the sum of all the projects we've had, and it's sum of all the projects that we thought we could execute. And again, I think we've learned a tremendous amount on how to go about executing those projects in various jurisdictions around the world, right, and we've done very well. We've done it ahead of plan. And so that would be -- the next step is to continue down that path. And then the third one is with volume growth. There is a free [indiscernible] in terms of margin. We do not need capacity in any significant way. We have plenty of capacity, especially when you look at the locomotive side. So we'll always have bottlenecks that we need to invest in. But we don't see any big capital investments on the path. So all of that is in the area of goodness as we continue to move into the 2025 and beyond. The second area is what we would call portfolio optimization, right? Again, going back to this concept of 155-year-old, 5-year start-up, we just got to last year, earlier this year of eliminating $100 million, $110 million of revenue that had very little profit, right? Why didn't we do it earlier? It's a great question, but we are -- hands were full with Integration 2.0, driving the backlogs and all of the things that we were doing to put this company together to start up together. And so we've got opportunity there just to shed ourselves of the complexity that comes with various other parts of the business. We would expect there's opportunity to continue to do that, which will improve margins, doesn't improve revenue, it improves margin and more so than the margin improves focus. And the third area is what we would call pricing for value. We're not looking to straight price increases, but we're looking to always deliver more value. And for that, we're looking to expand our opportunities in our margin. And a great example of that is what we talked about as EVO Advantage. And if we can bring to the world a 7% fuel reduction, that will certainly be able to price for that and again, help expand our margins. So that's the way we think about the opportunity that we have along margin, and we don't see that going away any time in the near future.

Maybe switching gears away from the equipment side of the business. I wanted to talk a little bit about digital intelligence. It seems like a big growth opportunity for Wabtec in the coming years, just given your installed base. Can you just talk -- summarize your current digital intelligence portfolio? Where do you see the biggest opportunities? What are your customers asking you for?

When we look at digital, it's about $800 million, $900 million business. I think about it in 3 big buckets. One is onboard electronics, right? And the core product there is Trip Optimizer, there's LOCOTROL. There's various other aspects of it. But basically, it runs the train. There's distributed power. So I told you there's more than one locomotive. There's nobody sitting in those other locomotives that are all run by computer system, and we develop that. A train can be a couple of miles long. And part of the train is going up the hill and some is going down. And that particular software tells who should be pulling and what RPM they should be pulling at versus idling the other engines. And Trip Optimizer is simply a cruise control, just like it was in your cars years ago, it kicks in at a certain speed and it's around 11, 12 miles an hour it kicks in, and it runs the train, and we can do it better, certainly much more efficient than a human. So all of these products -- there's also remote control when it gets in a yard, you can move the train by remote control and which is a big productivity and saves on some of the labor costs of train operators, again, going back to the concept of how do we drive a good return on investment. When we look at all the digital products, the savings on fuel is well into the teens from those assets in addition to what we talked about in the engines, right? And then there's further savings based on our traction, motors are more efficient. But all of that drives a fair amount of value to our customers. So that's the onboard. The opportunity there is for new products. So we've got very strong penetration in North America and our onboard electronics. Internationally is a big opportunity, which I mentioned earlier for digital and you'll see our recent digital results. So after the last 5 or 6 quarters has been driven by international opportunities as they gain scale, we'll start to take on stuff like onboard electronics. But there's opportunity to continue to widen that portfolio. So I said Trip Optimizer starts in at 11 miles an hour, well, why can't you start it at 0, well, we can, and it's a product called Zero-to-Zero. However, that hasn't been approved in the United States. And the reason being is probably more political than anything or jobs related, but we're selling that product now internationally. And I'm sure there'll be a time where we'll sell it here and that drives a tremendous amount of fuel efficiencies, another 6% of fuel efficiency with that product. So that's the onboard piece of it. And again, wake up every morning on how to make our customers more efficient. And that means taking fuel out of the system. The second area is what we call -- a product called PTC, and that's on positive train control. And what that is, is it's an anticollision system that we have a contract for in the United States. So we monitor all trains, our trains and everyone else on the mainline, and we can communicate with each train and we can slow a train from our center in Erie. So great opportunity there now to expand that internationally. And so think of some of the countries that maybe aren't as developed, and they can, in some cases, leapfrog some of the signaling that's on the ground by doing it on a GPS-based system. So we're looking at putting in it in various countries for railroads around the world. So that's the second bucket. The third bucket is what we call network optimization. We do dispatch systems, things called Movement Planner. So once you have plan in the morning, right? When you start out, something goes wrong, it's got to be replanned. So we have the optimization software that reroutes trains and again to optimize the situation that you have at hand. So all kinds of optimization softwares, again, dispatch systems that help the railroads run their businesses. So those are the 3 main areas of our digital business, and we do see a strong growth in the future. It is an area, though, that when there's more capital constraints, we probably feel it first in the digital area, while the digital products provide probably the strongest return on investment to our customers, it is also the most discretionary. And so if you don't have the capital, we tend to see it first in digital products. And that's what we've seen in the last 4 to 5 quarters. And with our last -- in North America, we've seen a little bit of softness there, and that's been made up by our international growth.

On that point, so within those 3 buckets, and I can definitely see how onboard electronics [indiscernible] I would love to know kind of [indiscernible].

Yes. So there's a fair amount of investment upfront on putting together a dispatch system or a Movement Planner. And so what we do is we invest and actually about a year ago, we talked a lot about investment in the next-generation dispatch systems. And so we'll invest in those. And then the best that we can is leverage that across various customers to recoup that investment. Those are much longer-term investments, right, involve a lot of programming and then the opportunity to sell it is further down the road. So that's all part of our R&D budgets that we have in terms of developing or moving in next-generation product of some of those assets that we have.

Just to put a finer point, you have -- within that $800 million to $900 million bucket for digital, do you have a rough estimate on what percentage you would consider to be more recurring versus what we consider to be more transactional?

The recurring is in the -- but for overall company, it's 46% recurring revenue. And oddly enough, digital is below that average. And when I say oddly enough, that would be the one that would seem to be the easiest rate on a subscription basis or a SaaS basis. And we're doing our best to move in that direction. But given the historical nature of the industry and products that's always been sell a product, and we maintain it for 20 or 30 years. And now with obsolescence happening so quickly, we're going to move more to SaaS models, which would be more recurring versus event-driven.

That's helpful. So in theory more of this business over time could be more recurring but because of a lot of this is [indiscernible] legacy in place that is not [indiscernible] for diesel, for software [indiscernible] and at what time...

Yes. And then we continue to maintain it and update it until we just can't anymore. And then there's an upgrade. And now when we do that, we try to move a system that is -- allows us to do that much easier than the current methodology.

Are you having success [indiscernible]?

Yes. I wouldn't say it's as rapid as we would like, but changing is somewhat tough.

Maybe we just have 1 minute left here, but I just wanted to ask, given the new incoming administration, could you just talk about the impact you think that has, if any, on the pending CARB EPA regulations and any update there?

Yes, everybody kind of level loaded. Well, about a year ago this time, CARB said that they -- I'm sorry, prior to that CARB said they wanted to regulate the end-use locomotives in their state, somewhat similar to the auto side of it. And about this time a year ago, the EPA came out and said that they would consider petitions for states that wanted to do that. So CARB did that. They came out with their petition, I don't know, in February, maybe of this year. And in April, the EPA held hearings and everyone kind of said their thoughts on this is good or bad and so on and so forth. We kind of expected that there would be a decision by the EPA in May. There was not, and there has not been since then. So it's just kind of sitting there. The industry has certainly filed lawsuits against CARB ruling that and the judge has stayed that waiting for the EPA to make a decision. So I haven't had a decision on the EPA, not exactly sure why, but right now, it's just kind of there. When we look at the changing administration, I don't know what that means for the changing administration. And the most important part is that -- and I'm sorry, what CARB wanted to do was to regulate the end use, and they wanted to not allow anything older than 23 years on the rails. So that would force some quicker replacement of those assets. And while we've got West Coast rails and East Coast rails, they all end up going through California at some point, not to the same magnitude, but there's there. So it implicated a lot of locomotives. So from an equipment manufacturer standpoint, that would have probably been good. CARB also asked for a whole lot of things that the EPA has never given up. And so those are the right to decide a new technology, which is, again, something that we couldn't support and can support states in determining the investment and pulling that together is huge. So right now, it's all kind of at bay. I don't know how the administration will change or affect that. But at the end of the day, it really doesn't matter. As long as we have a good return on investment and the economics on our side, it will happen. It won't happen as fast as the regulatory body saying it's going to happen. But the most important thing is to make sure that every time we sell something, there's a good return for a customer and the economics will always prevail. So none of that is baked into our plans looking forward. So like last night at dinner, so we have even done an analysis of what it would mean if it did happen. And if it does, great. And if not, we've got plenty of opportunity to continue to drive this business to greater success.

Awesome. Well, I think it's all the time we have. John, Kyra, thank you so much for coming.

Thank you, Brady. Thanks, everyone, for your interest in Wabtec. And if you need any more information, please reach out to Kyra here, and we'll get you everything you need to know about us. Thank you.