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Vertex Rail Readies To Enter Market

By Vicky Janowski and Cece Nunn, posted Mar 2, 2015
Vertex Rail Technologies CEO Don Croteau, slated to be the keynote speaker at the March 25 WilmingtonBiz Conference and Expo, stands in the facility where rail cars are expected to be built soon in Wilmington. (Photo by Chris Brehmer)
Vertex Rail Technologies might be a new name to Wilmington, but the company is also one of the youngest players in the railroad world.

The new business plans to bring more than 1,300 jobs to the Port City and invest about $60 million to get the former Terex Crane manufacturing facility at 202 Raleigh St. in shape for the production of rail cars.

For Vertex Rail CEO Don Croteau, slated to be the keynote speaker March 25 at the Greater Wilmington Business Journal’s WilmingtonBiz Conference and Expo, the firm’s Wilmington plant marks his first entry into rail car manufacturing and largest business venture to date.

But the new company, he said, is an extension of his years working in fabrication and design under strict quality requirements.

“It’s hard to break into this industry. It was almost impossible for us to do it, but we did,” Croteau said about rail cars. “I think the reason that we did it was because we had this very strange, complicated skill set blend.”

That “we” is a small team of investors on the project, which began coming together two years ago.
“We had pressure vessel experience; we had large-scale fabrication experience, which is hard to come by, and then we had one of our partners [who] is a rail person who brought the rail technology to us,” Croteau said.

Croteau’s background is in fabrication and manufacturing as well as sales and marketing. He managed Vertex Fab & Design LLC before buying the company in 2012. Massachusetts-based Vertex FD makes large vacuum chambers, pressure vessels and wind turbine towers. 

In Vertex Rail, his other partners are Scott Bauer, whom Croteau has worked with for years and is the operational partner for Vertex Rail; Katherine Perduta, a 28-year-old lawyer who worked with the company and decided to invest; and Daniel Bigda, who came to Vertex FD with the initial idea for the company to translate its work in pressure vessels to rail cars.

Though that design didn’t pan out, the pitch got Croteau thinking about rail.

“As a businessman I just saw this perfect blend of skill set and history and quality, and we just took a chance and did it,” Croteau said.

Building Revenue

Croteau did not disclose how much the group has invested in Vertex Rail, which projects revenues of $600 million to $800 million annually by the second year. The difference, Croteau said, depends on the types of oil tank cars ordered, a price tag that swings from $144,000 to $190,000 each.

The revenue estimates for Vertex Rail greatly surpass those of Croteau’s other companies – Vertex FD makes about $5 million to $6 million a year and employs 30 people, he said.

While Vertex Rail’s partners have had interest from outside investment, Croteau said, they have not made a decision to take any yet.

“We don’t need it yet. I expect that we will,” he said. Croteau said to build the company to its projected revenues, “you’re not going to do it on founder capitol or just cash flow.”

If the Vertex Rail plant reaches employment estimates, it will become one of the largest new employers in the Wilmington area in years. More than 6,000 people have applied for jobs at Vertex Rail, and Croteau said the facility would need about 1,000 welders and fabricators.

The company so far has hired directors and managers.

A Changing Industry

The rail car industry, Croteau said, is primed for a massive overhaul, and there aren’t enough companies in the market to meet the demand.

Six major companies build freight cars for rail transport in North America, said Tom Simpson, president of the Railway Supply Institute. Of that group, Vertex Rail expects to compete with four in the U.S. for buyers of tank cars, Croteau said.

Those that build tank cars have backlogs of orders, according to company and industry news reports. The same reports say the jump in demand for cars has come from an increase in oil shipments and the possibility of new federal safety regulations for existing and new tank cars.

The proposal, currently in the hands of the White House’s Office of Management and Budget, came in the wake of the July 2013 derailment and explosion of a train in Lac-Megantic, Quebec, that killed 47 people. The train was carrying the highly flammable crude oil from the Brakken Shale Formation in North Dakota and Montana in DOT-111 tank cars, according to news reports.  

A derailment in West Virginia earlier this month involved CPC 1232 oil tank cars, a newer model the industry incorporated several years ago with more safety features than the older 111 cars.

Vertex Rail already has had its designs approved for building 1232 cars. But the company also is working on design approval for two others it is calling Generation Next tank cars that Croteau said he expects to meet or exceed the forthcoming federal requirements.

The final federal regulations for cars to phase out the decades-old 111 model are due out in mid-May. Once the new rules are implemented, a surge in demand for replacement cars is expected since there are tens of thousands of them in use and few manufacturers in place. “We only have four competitors, and they’re booked solid for two years,” Croteau said.

Bringing existing cars into compliance presents the same kind of problem. Simpson said one of the major drawbacks of the part of the proposal concerning existing cars is that the modifications required will take a long time to complete.

“The modifications are going to have to be done by only a small number of shops,” Simpson said. “If that timeline stands, there will probably be cars parked awaiting access to shops to be modified.”

Parked cars “would adversely affect the movement of crude and ethanol and other flammable liquids because the tank car capacity to move them in the quantities that those materials are currently being moved would not be available,” he said.

‘Speed to Market’

The expected wave of orders for new cars is one reason why Vertex Rail officials wanted to quickly ramp up hiring and production at the Wilmington facility.

“The whole process is speed to market,” Croteau said. “It’s an interesting problem because as a pure businessman I don’t understand why I don’t have more competition.”

The final word on the DOT requirements were previously set to come out in March but pushed back.
More delay could impact Vertex Rail’s timeline for the facility’s initial ramp up and hiring, though not significantly, Croteau said. He said the plant still would start with building hopper cars.

Even before the first welder hits the line, the company already has orders to make more than 1,000 covered hopper cars, Croteau said.

He said the industry’s backlog was one reason why the company chose not to pursue tax incentives to move to Wilmington.

“It was such a small amount of money for such a significant amount of political work on our part. It would have delayed our timetable, and the money wasn’t even assured,” he said. “I said, ‘Look we made the decision to come to Wilmington. We can’t wait anymore.’ The market drives, in my opinion, your decisions, and the market is waiting for us to come here and get going.”

Players in the rail-car manufacturing industry
Name: American Railcar Industries Inc.
Year founded: 1988
Headquarters: St. Charles, Missouri
Manufacturing revenue: $111.7 million for the fourth quarter of 2014
Number of manufacturing employees: 2,663 in 2013
 
Name: The Greenbrier Companies Inc.
Year founded: 1919
Headquarters: Lake Oswego, Oregon
Manufacturing revenue: $1.6 billion for the year ended Aug. 31, 2014
Number of manufacturing employees: 7,251
 
Name: Trinity Industries Inc.
Year founded: 1933 (first known as Trinity Steel)
Headquarters: Dallas
Manufacturing revenue: $1.1 billion in the fourth quarter of 2014
Number of manufacturing employees: 9,600
 
Name: Union Tank Car
Year founded: 1891 (as Union Tank Line, originally part of John D. Rockefeller’s Standard Oil)
Headquarters: Chicago
Manufacturing revenue: A privately held company, Union’s revenues are not disclosed on its website and messages left with the company seeking more information were not returned.
Total employees: 6,140, according to Bloomberg Business
 
Name: Vertex Rail Technologies
Year founded: 2014
Headquarters: Wilmington
Anticipated revenue: $621 million-$800 million, depending on the type of cars ordered
Anticipated number of employees: 1,342

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