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

Good afternoon, everybody. Good morning for those on the webcast for anybody in New York. Thank you for joining us. this afternoon. Thank you for attending the Global Industrials Conference by BofA. With us today, we've got next John Olin, Chief Financial Officer of Wabtec. Kyra Yates is in the audience from Investor Relations. We're happy to welcome you back to the conference.

My third year...

Third year. It's been a tremendous run. So what I thought I'd do is maybe toss it over to you. For everybody, I'm Ken Hoexter, BofA's air freight and surface transportation and marine shipping analyst, 25 years.

So I'll throw it over to you, John, if you want to just start off, a lot going on with Wabtec, you recently set 5-year targets. Maybe just give a background about Wabtec and kind of what's going on in the current. And then obviously, we've got a lot of questions to hop into.

Yes. Great. I guess -- well, who's ready to talk about trains, what's more fun than trains. We're going to talk about Wabtec. Usually got to say exactly what Wabtec is, right? It's Westinghouse company, Westinghouse Air Brakes. A lot of people, I'm not sure what Wabtec is, right? We do everything trains. We build them. We supply into the transit market. We do all the digital, software, run trains and networks, dispatch systems and all the like. We are an interesting company that's come out over time, one of the oldest companies in America, 155 years old today or, I mean this year. And -- but the company that we are today and that we're going to talk about here with Ken is really about 5 years old. And it was an aggregation of 2 large acquisitions, the first one in very late 2016 that doubled the size of the company. So Wabtec originally was a component maker for largely railcars in the freight business. And they also had an interesting technology called PTC, which was a GPS-based safety system and it was required in the United States, anything on the main line. So we track all the trains, whether they're ours or any competitors. They merged with a French company called Faiveley in late 2016 that doubled the size of the company. And then 2 years later, they doubled the size of the company again to about $9 billion, $9.5 billion when they merged with GE. And I tell you -- talk about M&A, that was an absolute grand slam in terms of an acquisition, right? While it doubled the size of the company, what it did is it brought in an installed base of 23,000 locomotives. And from that installed base all over the world is the rest of the company, the rest of the Freight segment kind of feeds off of that with component sales, digital sales, services and with those that tend to be a fair amount of higher-margin products. The other thing that we got in that acquisition is our current CEO, Rafael Santana, that had a view on how to move the company forward and take us into the future. And that was 5 years ago, and we've been hard at it for that period of time. And with that, we've had some great success. So 3 years ago, we issued our long-term guidance and it was for mid-single digit and 250 to 300 basis points of margin growth and double-digit EPS. We achieved that guidance, 5-year guidance in a 3-year period of time. And as we finished up last year, we reissued our 5-year guidance because we had already achieved it. And we just recently came out in February with the next 5 years, which is still mid-single-digit revenue growth. However, we've certainly upped the margin expectations to be in excess of 350 basis points over the next 5 years and EPS, again, growing in a double-digit basis. So kind of interesting, Ken, as we looked at the business today and what we had in terms of margin growth versus where we were 3 years ago, we see a lot more opportunity today in our cost base, even though that was about 300 basis points of margins go, our margin build, we see a lot more opportunity today. We've gotten very good at taking these 3 multinationals and integrating them and getting the cost synergies, but as well as we continue to see a lot of revenue synergies between the companies.

So you talked about the 155-year old company, but you feel like a start-up when we were just out at your tech demonstration some of the stuff that is a futuristic technology. I love to delve into that a little bit just because you're right, you're pressing -- continue to press on some real great innovations. But let me start on the targets that you just -- you talked about, you set a revenue growth mid-single digits. Backlog was up 3%. We made it crystal clear that there was FX involved. So without that, it's 5.5%. Maybe just in this environment where we're looking at rail carloads not growing new car builds being down. What gives you the confidence in that mid-single-digit revenue outlook?

Yes. When we look at the revenue guidance, we kind of got a ladder, and you can look at some of our material. The kind of the drafting comes from what the industry around the world is growing. And we calculate that at about 2% to 3%, which is not a tremendous amount of growth, right? Not overly exciting, but that's made up of probably 3 component pieces that are pretty important to the puzzle. The first one and the most stable one is our transit market. That tends to grow -- the industry tends to grow at about 4% year in and year out, very steady, adds a very steady component to us. We've got a lot of opportunity on that business, Ken, as you know, on the margin side. We've seen our margins expand by about 50% in a 4-year period of time from 9% to just shy of 14%. But that adds a very stable component at 4%. But again, I told you 2% to 3%, right? The other aspect of it on the positive side is the international growth. And that is growing in excess of 4% that's more in the 5% growth. And that would be the international -- I'm sorry, international freight side of it. But what brings those 2 numbers down a fair amount is when you look at the industry growth of our North American market, which is the single largest market. Most of our sales are outside the United States, but it is significantly the largest market that we have. In terms of -- industry is measured in terms of carload growth, how much weight they are pull in or carloads of product that they're pulling. And that number really hasn't grown in the last 10 to 15 years. It's about the same. So we can put a plug in at 0 for that one. And as we look forward, as much as the railroads are working to grow that number, our forward-looking plans are not expecting growth on that market. So that would be all upside to the mid-single digits that we talked about, Ken. But that's how you get to that confluence of 2% to 3%. Now what we expect to do is grow about double that for the next half a decade, right? So how are we going to do that? We feel really good about the 2% to 3% because all we have to do is hold market share. And over the last considerable period of time, we've been growing our market share across all 3 of those segments. So how we're going to do it is, number 1 is while the U.S. market is flat or the underlying growth is flat, we have been growing that in the double-digit range. And that is partly due to the railroads desire to update their fleets. And there's a lot of productivity that comes with replacing a 20-year-old, 25-year-old locomotive with a new one. And that provides our railroad customers a strong return on their investment for the cost of that locomotive, whether it be a new locomotive or a modernized locomotive, which is taking a donor from 25 years ago, and we replaced a vast majority of that with new equipment. So with that, we would expect to drive 1 to 2 percentage points of growth over a 5-year period of time as that renewal takes place. The average age of a locomotive has grown considerably over the last 10 or so years in terms of the number of years, and it's gone from one of the youngest fleets in the world, one of the older fleets in the world. So we would expect that. The other area can to drive, again, that excess growth over industry is our investment in technology. And you had alluded to that, and I'm sure we'll talk about it but there's a lot of opportunities. I think the first thought of when you see a train go by, you don't think of a lot of technology, there's an incredible amount of technology that goes into that. That locomotive or the transit parts that we provide. And I'm sure we'll talk a little bit more about that.

Wonderful. So thinking about the big picture Rafael has talked about, the CEO has talked about more opportunity today than the past 3 years. You've mentioned that a couple of times on the -- when you look at the cost-cutting side. But historically, he's mentioned best backlog in 5 years. And we saw backlog growing. He's talked about the best M&A environment in 5 years. You've made 2 recent acquisitions. What's the setup now from your perspective? How should people think about Wabtec in that environment? What are you looking for growth?

Ken, you mentioned a little bit earlier that we view ourselves as a 155-year old 5-year startup. I think overall, that snowball is starting to go down the hill. I'm from Wisconsin in America, and a lot of snow up there, right? And as we gain this momentum, we're seeing that opportunity increase, and we're seeing the performance accelerate. And I think if you look at our performance over the last 3 years, you'll see that, right? And that's how we achieved a 5-year plan in 3 years. So it's continuing to do what we do very well, and that is focused on the cost side of our business and integrating these 3 multinational programs or companies. We've got a program we called Integration 2.0, which we just finished up that delivered about $100 million of savings, and we're moving on to integration 3.0. And that's getting after some of that cost opportunity that we see as these 3 multinationals came together. And on the revenue side and talking about those pipelines, the same thing. We're gaining a fair amount of scale and growing market share over a period of time with a lot of international momentum. We talked about that growing, an installed base is growing at a CAGR of about 5% a year for the last 7 years, and our sales are certainly higher than that because the installed base is everything that remains, right? And the other piece, Ken, when you look at some of the revenue growth as the installed base grows. So we're very focused on making sure that our locomotives are out there, they're the best in the world and they're running. We get a lot of ancillary benefits from that. So as a locomotive is running, especially in growing markets, they're starting to get to a scale and a level that they're investing more in services or we can invest more in landing people in services, and we provide a little bit of exponential growth on our service business there but also on our digital business. We have a digital businesses that have onboard electronics that run the trains through cruise control, they optimize all the situations on board. We have overhead systems. I had mentioned PTC that connect into those and help drive efficiencies and so as our international markets gain scale and our installed base grows with them, it makes a lot of sense for them to add some of these other products that, again, we see more exponential growth growing out of the core installed base growing.

I'm going to ask a domestic question, domestic North America. Can you just describe before I jump into that? What's the split international, domestic and key regions for you on the international side? Just before I harp down on the North American side?

So United States, about 45% of our revenue. North America is about 55% of our revenue, and the rest of the world is the other.

Okay. So when I think about the North American fleet, we're just at a rail equipment finance conference, talking about just what you talked about, the oldest fleet we've ever had in the United States, right? We're topping over 26 years when you look at the total fleet, why in that environment are replacement so low? Is it you've built a better equipment that's going to last longer? Or is it delayed CapEx from the railroads? Are we getting to a point where we might see service issues because of delayed investment or is it a better locomotive that's lasting longer?

Yes. So I think it is trade-offs that our customers have made and chosen to have an older fleet for various reasons. What I can tell you, Ken, is when they replace those old locomotives, there's a very strong return on investment for them. We typically look at that in the 15% to 20% range. So again, you're taking something off the rails that's 20 years old, 20-plus years old. It may be DC power, which is not nearly as efficient and attractive effort that they have today. So today's locomotives are more reliable, can haul more and more durable and certainly much more fuel efficient. So that a minimum of 5% more fuel efficiency from an older model. And so with that, given the cost of a new locomotive or a modernization and all the benefits that they get, there's a strong return on investment. And over the past several years, we've seen double-digit growth in their purchases of either mods or combined mods or locals. So we are seeing a fair amount of investment -- increased investment by the railroads.

So I just got a little bit of a technical question, but maybe you want to just talk about the benefits of the mod, the FTL, the EVO, the old and the new mods and what the advantage for the railroads of that are? And then you've talked about decelerating mods, maybe increasing news -- in new production. Is there a mix? Do you care about the mix? Is there a reason why you see the mix?

Yes. So Ken, as we've talked, there's a lot of fascination whether we're selling a mod in North America or a new locomotive. There's a lot more fascination than there is focus on it by us. And again, I had mentioned earlier what we want is to make sure what's running on the rails are our locomotives because that spins off digital work that spins off services and more components. So when we work and plan with the railroads, we're looking at how much power they need, and then we start to get into what is best for them in terms of putting that package together for them. Now every customer is different. And the railroads in North America, the Class 1s, everyone kind of looks at them as all equal. They've got different routes. They've got -- some are more hilly, some are flat. Some are more intermodal, some are more heavy. All of those things play into how you would plan out a fleet, right? But they have a couple of choices. One is to look within their fleet and the old stuff and say, "Hey, is there anything that makes a lot of sense from a modernization standpoint?" And what I mean by makes a lot of sense is what is that return on investment. And again, it is at the right level or the right age that provides them a good return on investment. So if you have that excess power that's in the park or not being used today, that might be the best alternative and the best return for that customer. And if they don't have that power or can't spare taking something off the rails to modernize it, then new is a good option. We've also got customers that only bought new, and we've got customers that have only bought modernization. So they're all different situations. But the net of your question is, do we care the answer is no.

So you've made a couple of acquisitions recently Evident and then another one yesterday. Evident's got about $430 million in revenues. But you've excluded that from your revenue growth target, just to clarify, that is not in the target. So I suppose that means we can see upside to those revenue targets as you get the integration...

Absolutely, absolutely. Yes. So when we give those numbers on the revenues, that's always organic that we provide. But next year, when we do own Evident, we'll repost our guidance. And given the fact that they, in 2024, had $430 million of revenue on our $10 billion base that would add about 4 percentage points of annualized revenue growth.

Great. You target 350 basis points plus of margin at the tech demonstration, emphasize the word plus multiple times. Maybe just talk about why the confidence in that, what's conservative, maybe the skill set you've learned?

And the snowball is getting bigger. I think that when we talk about over 350 basis points, we have a clear path to 350, but we are seeing that snowball building, that momentum building with the company and that's on the revenue side, the cost side and the cultural side as, again, we bring these 3 multinationals together. So we believe that we will deliver over 350 basis points of margin. And I would say that our track record is pretty good.

And you also like to use the concept of the analogy of the startup and -- but yet you're going back and eliminating portfolio optimization getting rid of some. Maybe talk about the experience you did in the last Network 2.0, Integration 2.0 and your next phase of why you see the opportunity to keep going?

Good question, Ken, when we talk about we're kind of a start-up, right? And Rafael coming in, it's really first things first, right? What are we going to do first, second and third, we got so many things that we can do. And as I came into the company, 3 and a half years ago so a tremendous amount of opportunity, more so than I've seen in 40 years of being a CFO of what we do. So what we need to do is align what's first and what's second and what's third. So coming out of the merger with GE, the first thing first was getting the $250 million that we promised and setting the tone that Wabtec delivers on what it says it's going to do. And I was not there at this time. Rafael and the team did a fantastic job, and they delivered unload synergies 1.5 years -- I'm sorry, a year or 15 months early. And that's about the time I was coming, and we sat down and said, well, what's next? And we looked at all this opportunity from a cost standpoint, from a revenue standpoint, from a building pipeline standpoint. And on the cost standpoint, we looked at it and took a bite of the apple that we felt that we could manage and learn from. And that was what we called Integration 2.0. And so we delivered that, and that was a 3-year program, and we delivered it. We overachieved what we said we were going to do. But a year ago, Ken, we were ready for the next step in terms of margin enhancement, and that was something that we call portfolio optimization, right? We inherited 3 multinationals that came together, have different business models, have different cultures, have different plant setups, different sizes, some are matrix, some are decentralizing on and on and on. And with that, we've also got some assets that are not going to take us to the future that we envision. And on their best day they're just not going to get us where we're going. And we know exactly where we're going and taking the company and they don't fit in. And so part of it is the hygiene of making sure that we're focused on the right thing and on the things that are going to deliver the future that we envision for our shareholders, for our employees, for our communities that we work in. And so with that, about a year ago, we said that we would shed $110 million of revenue. So again, when you go back and look at that 5% mid-single digits, that's net of a point of stuff that we're getting rid of, very low-margin stuff. And it's funny, I was talking to all the presidents and looking at some of these things and encouraging that we look at maybe we can go forward without it. And we, in the first $100 million, it was 5 entities that we got rid of. And not 1 person who's come up and said, "Oh, God, do I miss that business, right?" I missed the fact that I wasn't making any money on it. And so we've taken the second swing at that. We're taking the second swing in Integration, which is a 3-year program. We just announced Integration 3.0 in February. Again, it's about 30% more savings and 20% less cost than we did 3 years ago, and that's some of the learning that we've done, right? And again, we see more opportunity today than we did 3 years ago. Partly, Ken, is because now we know how to get after it, right? And we've now consolidated a lot of facilities, and we've done it very well. And while Integration 2.0 was a little bit of a push that, hey, we should look at this, we should do this. It's now becoming a pull. And people are saying, "Hey, we can do this, this and this." And again, it's that snowball continuing to grow. And then the other side of it, a month ago, we introduced the second kind of bite of the apple of portfolio optimization, which is another $100 million, again, of lower-margin stuff in this track to deliver 350 basis points plus of opportunity.

When you think about the 350 basis plus, is there a division between a focus on freight, a focus on transit? Is it balanced? How do you think about within the organization?

In terms of our investment between the 2?

Return potential, increased margins between the 2.

Yes. I would say they're pretty evenly focused. Now Integration 2.0, probably 2/3 of the money was really lodged in our transit business and a lot of opportunity in Europe, which we became very capable of consolidating some things and exiting some things. And I'd say Integration 3.0 is more balanced between the segments.

One more thing on the numbers and the targets and then we'll get to some different subjects?

You can never go up the numbers and targets.

Why I'm here. So you target double-digit EPS growth over the next 5 years on a CAGR basis. You target $8.35, $8.75 in 2025, up 10% to 16% just for starting points. Should we expect a softer start, given the economy. We'll talk about tariffs and other things in a minute. But just given the deceleration economy? Or is it kind of well-balanced through the plan just because of the backlog and the order book? How do you think we should think about that?

Yes. And you see from a revenue standpoint, pretty balanced between the quarters in terms of the growth, the midpoint of growth is about 5%. We'd expect to see that pretty consistently across the quarters. Of course, there's going to be some quarters that are a point or 2 higher and some are point or 2 or lower. In terms of profitability, we'll see that build over the year. And again, when we look at the comparable base, in 2024, we did a fair amount of hygiene on our production. We were not well balanced coming out of the supply disruptions and out of COVID. And if you look back at 2023, we had $1 billion more revenue in the back half than the front half. And with that, it was largely driven by our production of mods and locos. And so we work with our customers to change the timing and to become much more level loaded, which will allow us to improve quality, certainly productivity. And from a labor standpoint, we'll be more consistent in keeping our folks working versus hiring and laying off. So with that, in 2024, we saw some unusual things in terms of we moved a fair amount of revenue forward in those orders forward. While the underlying momentum was very consistent throughout the year. our revenues and our margins were not. Revenues growth was much higher in the first half as well as margin growth because we moved a lot of those that revenue forward. And in the back half, it was a little bit less, but came out. Well, we raised guidance 3x. So it came out a little bit better than we started the year with.

And so going forward, you're saying more consistent.

More consistent. Yes. And that's one of the reasons -- long-winded to say -- one of the reasons that we did it is to bring more consistency and level loading to our factories.

Yes. It's got to help with the factories, yes, definitely. So let's talk about some of the tech projects, some of the exciting new things. Maybe just talk about when we think about the -- you talk about a 155-year old company, yet how do you keep pressing forward. Maybe talk about a few of the projects. I mean, we saw RailGhost, which the autonomous car inspection machine, I thought was one of my favorite things of the day. What do you see as the potential? What's the timing of some of the projects? When does it become a reality in terms of selling to the railroads?

Let me take a step back, Ken, and talk about the importance of innovation in our company. And some of you think, geez, you can't invest too much or can't be too much innovation in a train, right? And as I mentioned earlier, there's a tremendous amount of innovation in that. And I think that when we look at it as a company, we got 30,000 people waking up every morning and how to make our customers more efficient, right? Again, when you sell a 30-year asset or a 20-year asset, you better figure out a way to make it better. So that you don't have to wait a generation before you replace that thing, right? And to do that, it really comes back for our customers in 2 areas, and I'm talking largely on the freight side, right? Is their 2 biggest expenses are fuel and our labor. And so when we talk about efficiencies and making our customers more productive, you want to fish with the fish hour, and that is the fuel efficiency. And I mentioned just a minute ago that we got the most efficient engines in the world in terms of that size and scale. And that delivers a lot of benefits and lower operating costs for our customers and maybe more importantly, a lot more for the atmosphere because there's that much less carbon going on. Now rail is significantly more less carbon than trucks, and our customers have significantly less because of the efficiency of our engine. The other area is on labor. There's a fair amount of labor in real yards certainly on locomotives and given our expertise in digital and our leadership position in our digital business, where we focus on onboard electronics, network electronics and system like PTC. We've got a lot of opportunity. So Ken, I had mentioned a month ago, we invited some folks to Pittsburgh and went through some of the advanced technologies that we're working on, haven't been commercialized yet. But they're largely focused on how do we take labor out. And the one that Ken mentioned is pretty cool. We set up -- actually, it was an old rail station, right? We had the meeting there. It's all done kind of like this facility. But we've put a track up, and we had not a train, but the wheels running on it. And what every train that starts out in North America has got to be inspected. And the regulations call for a manual inspection. So whether the 6 feet or snow or it's burning heat in the desert, somebody's got to walk the length of a train, which can be a couple of miles long, and they got a check board and check this off. Was this done and this done. And so I'm trying to figure out how to save our customers and automate one of the things is on doing those inspections, right? Every train, 15,000 of them starts a morning, and that's happens several times a day, has got to be inspected. And so the engineers looked at the problem and figured out a way to run on the rail between the railcar wheels, a pretty neat thing is when it gets to the wheel, these things come back up. But it rolls underneath the rail -- length of a railcar, and it's got all the visual inspection and it can check a lot of those things that, that human does and also looking for the technology so that it can reach up and connect anything that's not connected. But those are the types of things, Ken, as you saw, that we're looking at. Now you talk about a number of people that, that would eliminate and these are jobs that are not pleasant to inspect a train before it goes, crawling under a train in 100-degree heat or a bunch of snow to check and tick something off when you could run something down between all the wheels and to get that done. The other one that I like, Ken, I like them all. But one of an interesting one is when we look at automation and our path to be fully automated, we've got a lot of pieces to that, right? And we continue to put pieces in place but we don't expect there to be -- that we're going to move into a world where everything runs on it owns and there's no human intervention. But starting to think about it is, do we need human intervention to sit on a train. Why can't you recreate what's on a train in an office, right? Instead of having a crew go out to a train, get on the train, start it up, the computer runs -- can run the train, and sit there and monitor things, why can't you monitor it from an office? And then you don't have to worry about putting that person up in a hotel, waiting for the next crew to come, stopping the train to let them off and so on and so forth. And we've got all the visual technologies and the cameras on trains that you can sit there. And Ken you saw it, it looks like your living room chair with a bunch of screens, right? And with that, we could have controlled the train or we were controlling a train up in our facility in Aerie from Pittsburgh. And so if you think about what that can do and maybe someday, that we won't need 2 people in a cab and maybe that will be controlled remotely from our customers' offices. And when there's a change in shift instead of stopping a train and starting a train and trying to move 2 miles of it and all that kind of stuff, maybe someone steps out of a chair and another one sits in the chair, right? And they've got all the controls and our software controls, our trip optimizer, controls a lot of the movements of a train, and we got PTC that knows where every train is and so on and so forth. So those -- that's the world that we envision in the future that we envision. And with that, it gives us a tremendous amount of opportunity to lead that given the leadership position we are in today and how close we are to our customers as well as the businesses that we serve.

Tremendous. You're addressing the fuel issue, addressing the employment issue, it's hard for the rails to hire for some of these roles that are so manual in task. And I think we've had a maybe a government and administration change that is may be more accommodative. If you want to talk about the regulatory requirement a little bit?

Sure. The best example, everyone is, again, we have a kind of a product umbrella of called Trip Optimizer. It's been out for 20 years. But a piece of that is just cruise control, just like your car, and it starts at about 11 or 12 miles an hour, and it takes over. And given -- we know what's in front of us, what's in back of us. We know what the engine's RPMs are if you're on a couple of percent grade is what's the most fuel efficient to take that. And if no one is in front of you, you're on schedule, maybe you should take that at a slower rate and save some fuel, right? Or we have what's called distributed power. There's typically 3 or more locomotives on a train. And there's nobody sitting on those other locomotives because we have software that controls them. But then again, the computer knows on a 2-mile train, there may be part of it going down a hill, part of it coming up a hill and maybe another part of it going down a hill. And with that, all the algorithms say which ones should be pushing and pulling, all in the name was saving that energy, but still delivering the train where it needs to be at the time it's supposed to be. So it's making all those trade-offs, right? One piece of the puzzle that we haven't had, but we've developed some time ago is the front end of that, right, is the 0 to 11 miles an hour and then from 11 miles an hour back down to 0, and we call that product 0 to 0, right? There's cleverness and it's a product that we've had a customer test and it delivers on the fuel savings that have been promised and it's been sitting at the FRA and not being ruled on whether we can go forward with it or not, not just kind of there. And so with the new administration, we've seen movement. And you might ask, well, why wasn't it moving? And well, we're not within the last administration. But from our best understanding is there was concern over -- by some of the unions that there was an impact that this technology could limit some of the employment. And our view of it is it would limit the amount of fuel that we needed to use. But in any event, it wasn't looked at. And so with the new administration, we do have some movement in that area and looking at waivers and considering those type of products. But those types of things keep putting the puzzle piece together. So that we can drive that efficiency for our customers.

Let's talk about topic to your topic of the minute, right, which is tariffs. And maybe talk a little bit about the impact on the business where your manufacturing is, you manufacture a lot of the locomotives in -- North American locomotives in the U.S. But what percent, maybe if you can ballpark it of all the parts and stuff is built in the U.S.? And where is the risk through that and the pass-through capability?

Not in favor of tariffs right here. But we're working through a lot of tariff activity in North America and the United States. And it seems like it's a thing that while we meet 3 times a week to make sure we're keeping up with all the changes and making sure that we're able to understand the impact to us and share that with our customers. So with that, we've got, Oh my goodness, 20% China tariffs, 25% Canada tariffs, 25% Mexico tariffs, less U.S. MC parts, 25% steel and aluminum tariffs are all initiated and looking for an expectation that on April 2, there will be a fair number more of tariffs coming that would implicate various other countries as well as product lines around the country. So we're keeping up with all of that and making sure that we can pass that on. We haven't provided exactly what that is in terms of kind of how that boils down. But the significant majority of our products, our locomotives are produced in American and America parts, but we do have some parts coming from other parts of the world that it's hard to get the United States or beneficial to get in other jurisdictions. So with that, we're working through it and reevaluating where those are sourced, but kind of managing through it. Very similar to me is hyperinflation, right, when we had to go through that, and we needed the price to collect that and so on and so forth. So a similar exercise, but maybe a little bit more every day changing.

Yes. We've got just a couple of minutes left. Do you want to talk a little bit about capital allocation, right? So you've made 2 acquisitions, maybe thoughts about the $1 billion acquisition yesterday, what the fit is and then your thoughts on how you allocate capital?

Sure. So capital allocation is pretty straightforward. We've got a capital allocation waterfall, made up 5 things. I don't think they were highly unique to any other company. But the first and most important is what we call is the strength in the balance sheet, right? And our definition of that is to maintain a leverage between 2 and 2.5x. That puts us squarely in the BBB range where we're at. And we feel very comfortable with it given our risk profile as a company, and our resilience to some of the downturns that we have in the various businesses that have been successful in offsetting some of volatility out in the marketplace, particularly our service business or some of our transit businesses are very stable in terms of those growth profiles. The second one is to invest in the business. There's not a better business we invest in for us than Wabtec. And we view that in 2 ways. One is in terms of R&D spending. So we spend more than the average industrial company on R&D. Again, a surprise for -- maybe a surprise to some for a railroad company. 6% to 7% of our revenues are spent on engineering and R&D. The other areas in capital. Now we spend a little bit under the industrial average in capital. We're about 2% of revenue. And given the nature and the size of what we do in some of the highly engineered and the project work that we do, our plans are probably not as automated as some, and it's not as conducive to robotics on everyday products. But in any event, we spend about 2% there, a little bit less than the industry average. The third area is dividend policy, right? We are looking to continue a dividend payout ratio in the 10% to 15%, which provides not a significant yield, right? The yields at about 0.5%. So not a great yield. But given the investment opportunities that we believe we have in M&A and in purchasing our shares, we feel very comfortable with the dividend yield that we do have. So that kind of takes care of the kind of the top of the pyramid. That leaves us with free cash and with regards to our free cash, we're going to prioritize M&A with the proviso that we've got good, strong strategic M&A that could hit on as many accretives as we can, right, between accretive growth, accretive margins, accretive ROIC and accretive EPS that we can. And we've been very disciplined, and Rafael does talk about the M&A pipeline has been very strong. And I think we certainly proved that over the last 2 months. But it is something that we show a lot of discipline, and we walked away from some good assets because we didn't think our shareholders would appreciate the price. So we've been very disciplined. And we've also been very pleased. So every December, we take our board through the returns of those. And I'm happy to say of all the ones that we purchased since the 2019 merger, the returns in aggregate have come out a fair amount higher than the original business case or the acquisition plan. And so if we don't have that good, strong strategic M&A that's accretive, what we will do is I have no problem returning that cash to our shareholders in the form of share repurchases. Ken, we are not looking to build cash on our balance sheet. It's not our money, and our shareholders can invest it the way they see fit. And I think 2024 was a great example of this. We did 4 acquisitions, all smaller, provided great niches in our various businesses. But was less than $300 million, and our cash -- operating cash was $1.8 billion, take out a couple of hundred million dollars or $300 million for capital and dividends and that left a fair amount of extra capital. And with that, we repurchased $1.1 billion a share. Now I'll move forward a year, and here we're sitting here in March, and we've signed up for 2 acquisitions of a bigger -- on the larger side, one in early January for $1.8 billion for a company called Evident Inspection Technologies. We have -- in our digital business, we do a lot of Inspection Technology, and we have a lot of shared technologies with this company, and it brings more technologies to us and a tremendous amount of synergy and we believe a lot of revenue synergies, which we haven't factored into the returns. And then just yesterday, we announced a $1 billion -- $960 million transaction with Dellner Couplers. And this is squarely in our transit business, not really strong everything. Well, actually, I can talk about both of them in aggregate. I'm sorry, going back to the Couplers, our transit business, what we do is we do not make transit cars. What we do is we make components for transit cars and very similar to the product portfolio that [ Kenora ] would have. And we meet Kenora in most every bid there is. But that's brake system, door systems, HVAC systems, personal information systems, pantographs so on and so forth. And one of those is Couplers. And we've got a small coupler business, and we are looking to buy Dellner, which is the #1 transit coupler maker in the world. So it fits very well into the portfolio and very good margin structure. So as we look at both Evident and Dellner, both of them, a sizable amount of revenue, adding about $700 million of revenue when they both close to our business. They are an accretive growth profile. They've got an accretive ROIC. They've got accretive EPS in the first year of ownership, and they've got accretive margins. And the margin one is always the toughest for us to define given the fact that our margins in the freight industry and the transit industry are at the top of the heap so to speak. So we couldn't be more excited about these 2 businesses and what they'll do for us in the future, and again, moving us toward that future that we envision. These are 2 big pieces of that puzzle. With that, we'll certainly won't be buying back amount of shares that we did last year. And we'll continue to look for good strategic M&A. And if we have excess cash, we'll return that to our shareholders in the form of share repurchases.

So to sum up, your core North American customers kind of flatline in operations, yet your -- you're growing. They need your new locomotives or mods and getting a good return on that. So it's a good investment for them. it turns into improving margins along with your cost-cutting program. You got double-digit EPS target. You've got some new technology that continues to aid the growth. You're making acquisitions, which are enhancing your margins, anything else you want to kind of highlight before we wrap up.

I want to highlight that you are listening pretty damn well.

Awesome. Thank you very much, John. Appreciate your time.

Thank you. Thank you, everyone for your interest in Wabtec. If you need any information Kyra will help you out. We'd love to have a conversation. We love what we do and we love what we do for the world to move and improve it. Thank you.

Thank you.