Earnings Call Transcript - WAB Q1 2024

Operator, Operator

Good morning and welcome to the Wabtec First Quarter 2024 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Kyra Yates, Vice President of Investor Relations. Please go ahead.

Kyra Yates, Vice President of Investor Relations

Thank you, operator. Good morning, everyone, and welcome to Wabtec's First Quarter 2024 Earnings Call. With us today are President and CEO, Rafael Santana; CFO, John Olin; and Senior Vice President of Finance, John Mastalerz. Today's slide presentation, along with our earnings release and financial disclosures, were posted to our website earlier today and can be accessed on the Investor Relations tab on wabteccorp.com. Some statements we are making are forward-looking and based on our best view of the world and our business today. For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables carefully as you consider these metrics. I will now turn the call over to Rafael.

Rafael Santana, President and CEO

Thanks, Kyra, and good morning, everyone. Let's move to Slide 4. I'll start with an update on our business, my perspectives on the quarter, and progress against our long-term value creation framework, and then John will cover the financials. Last quarter, when we met, we talked about the strong momentum that we had when we exited 2023. Well, that momentum continues. Sales were $2.5 billion, which was up 13.8% versus the prior year. Revenue growth was driven by strong performance, largely from the Freight segment, and adjusted EPS was up 47.7% from the year-ago quarter, driven by increased sales and margin expansion. Total cash flow from operations for the quarter was $334 million. The 12-month backlog was $7.7 billion, up 11%, signifying continued momentum and visibility across the business. In total, multiyear backlog was $22 billion. Overall, we had a strong start to the year. The underlying strength and momentum across the business is evident. We remain confident in our ability to execute and deliver for our customers and to continue to make progress against our long-term growth strategies. Shifting our focus to Slide 5, let's talk about 2024 and market expectations in more detail. While key metrics across our freight business remain mixed, we are encouraged by the strength of our business, the strength of our international markets, and our robust pipeline of opportunities across geographies. North America carloads were up 1.8% in the quarter; despite this carload growth, the industry's active locomotive fleet was down when compared to last year's first quarter, while Wabtec's active fleet was higher. As we look forward, we continue to see significant opportunities across the globe in demand for new locomotives, modernizations, and digital technologies, as our customers invest in solutions that continue to drive reliability, productivity, safety, and fuel efficiency. Looking at the North American railcar builds, last quarter, we discussed the industry outlook for 2024, to be about 38,000 cars to be delivered, which has now been lowered by the industry sources to reflect an expected 36,000 cars. Internationally, activity is strong across most of our core markets, significant investments to expand and upgrade infrastructure are supporting a robust international orders pipeline. In mining, commodity prices and an aging fleet are supporting activity to refresh and upgrade the truck fleet. Finally, moving to the Transit sector, the megatrends of urbanization and decarbonization remain in place, driving the need for clean, safe, and efficient transportation solutions around the globe. Next, let's turn to Slide 6 to discuss a few business highlights. Late in Q1, we signed a $270 million strategic order for new locomotives with a large mining customer in Africa. This, coupled with a recent service order in the region for $64 million, highlights the significant opportunity that we believe exists in Africa. Within mining, we're seeing continued strength in the business; in particular, aftermarket and the team has signed orders totaling over $250 million in the quarter. In Indonesia, we won a long-term parts agreement with PT KAI. And finally, our Maintenance of Way team launched its Shuttlewagon Commander NXT, the next generation of railcar movers. The new model was specifically designed for the needs of customers, to optimize tractive effort, reduce wheel slipping, and extend tire life. All of this demonstrates the continued momentum across the business, the team's relentless focus on execution, and the strong pipeline of opportunities we continue to deliver on. Wabtec is well-positioned to capture profitable growth with innovative and scalable technologies that address our customers' most pressing needs. Moving to Slide 7. Before turning it over to John, I want to briefly discuss our progress that we're making against one of our company's key strategies, which is to lead the decarbonization of rail. Our highly capable team, our installed base of locomotives, and our advanced locomotive technologies put Wabtec in a unique position to lead the industry on fuel efficiency and to reduce carbon emissions. With this in mind, we're driving progress on two fronts. First, we enable our customers to transition to near zero emissions using their current installed base of locomotives. Our focus here leverages our customers' existing fleets and wayside infrastructure. Our customers can improve fuel efficiency and carbon emissions by up to 18% through replacing older fleets with our Tier 4 and modernized locomotives along with realizing improved durability, haulage ability, reliability, and fuel efficiency. We're also enabling our existing locomotive portfolio to be capable of reductions of up to 60% in carbon through the use of bio and renewable fuels. And when further mixed with hydrogen in the locomotive's internal combustion engine, we can achieve up to 80% total carbon reduction. In addition, we believe we have a competitive advantage given that our locomotives are more fuel efficient and our four-stroke engine architecture facilitates the use of hydrogen in our internal combustion engines. The best part of this approach is that it provides significant optionality for our customers. Our approach is completely reversible back to diesel if supplies of alternative fuels are not available or not economical. On our second path to decarbonization, we're developing zero emissions technology and equipment. Recently, we introduced the world's first heavy haul battery-electric locomotive to a mining customer in Australia. Given the customer's application, they plan to operate this locomotive relying on regenerative braking to charge the batteries. Later this month, we will ship our first battery hybrid locomotive. Finally, we are investing and partnering with government agencies to develop heavy haul locomotives powered by hydrogen fuel cells. We believe that the commercialization of hydrogen fuel cells for heavy haul locomotives is farther down the road. Consequently, we are pacing our investments with our customers' readiness to adopt the technology.

John Olin, CFO

Thanks, Rafael, and hello, everyone. Turning to Slide 8, I will review our first quarter results in more detail. In the first quarter, we continued to see the underlying momentum that we experienced as we exited last year. As expected, both revenue growth and operating margin growth were overshot in Q1 versus our expectations for full year growth. As we discussed in the last quarter call, we expected both revenue and margin growth to be higher in the first half versus the second half. While we continue to expect growth in the second half, we expect it to be at a much more tempered pace than the first half. Sales for the first quarter were $2.5 billion, which reflects a 13.8% increase versus the prior year. Sales growth in the quarter was driven by the Freight segment, especially in our equipment and services groups. For the quarter, GAAP operating income was $412 million, driven by higher sales, improved gross margin, and focused cost management. Adjusted operating margin in Q1 was 19.8%, up 3.4 percentage points versus the prior year. This increase was driven by improved gross margin of 2.4 percentage points and operating expenses, which grew at a slower rate than revenue, increasing our Q1 margin by an additional 1.0 percentage points. GAAP earnings per diluted share were $1.53, which was up 64.5% versus the first quarter a year ago. During the quarter, we had pretax charges of $10 million for restructuring, which were primarily related to our Integration 2.0 and our portfolio optimization initiative to further integrate and streamline Wabtec's operations. As you may recall, Integration 2.0 is expected to drive $75 million to $90 million of run rate savings by 2025, and our portfolio optimization initiative will eliminate roughly $110 million of low-margin, nonstrategic revenue while reducing manufacturing complexity. In the quarter, adjusted earnings per diluted share was $1.89, up 47.7% versus the prior year. Overall, Wabtec delivered another solid quarter, demonstrating the underlying strength of the business. Turning to Slide 9, let's review our product lines in more detail. First quarter consolidated sales were up 13.8%. Equipment sales were up 30.2% from last year's first quarter driven by robust sales of mining equipment and higher deliveries of new locomotives. Component sales were up 13.6% versus last year, driven by increased sales of industrial products, higher international sales, and the acquisition of L&M in late Q2 of 2023, partially offset by lower North American railcar build. Digital Intelligence sales were down 5.9% from last year, where we continue to experience lower revenues in our North American market, but we do see growth in our next-generation onboard locomotive products and digital mining. Our services sales grew 17.3%. Services growth was driven by significantly higher year-over-year deliveries of mods, increased overhauls, and parts sales. Our customers continue to recognize the superior performance, reliability, and availability of our fleet. Across our Transit segment, sales increased 5.5%, driven by growth in our products and services businesses. The momentum in the Transit segment remains positive as secular drivers such as urbanization and decarbonization accelerate the need for investments in sustainable infrastructure. Now moving to Slide 10. Both GAAP and adjusted gross margin were up 2.4 percentage points during the quarter. In addition to higher sales, gross margin benefited from improved pricing and a favorable mix between segments. The mix within the Freight segment was also favorable despite significantly higher new loco and mod deliveries in the quarter. During the quarter, we also benefited from favorable fixed cost absorption and benefits from Integration 2.0 as well as comparing against higher next-generation digital development costs in the first quarter of 2023. Our team continues to execute well to mitigate the impact of continued cost pressures by driving operational productivity and lean initiatives. Turning to Slide 11, for the first quarter, GAAP operating margin was 16.5%, which was up 3.9 percentage points versus last year. Adjusted operating margin improved 3.4 percentage points to 19.8%. GAAP and adjusted SG&A expenses were down as a percentage of revenues as we leveraged higher sales with a strong focus on managing costs. Engineering expense was $48 million, modestly lower than Q1 last year. We continue to invest engineering resources in current business opportunities, but more importantly, we are investing in our future as an industry leader in decarbonization and digital technologies that improve our customers' productivity, capacity utilization, and safety. Now let's take a look at the segment results on Slide 12, starting with the Freight segment. As I already discussed, Freight segment sales were up 17.2% during the quarter. GAAP segment operating income was $368 million for an operating margin of 20.2%, up 5.7 percentage points versus last year. GAAP operating income includes $3 million of restructuring costs primarily related to Integration 2.0 and portfolio optimization costs. Adjusted operating income for the Freight segment was $439 million, up 48.3% versus the prior year. Adjusted operating margin in the Freight segment was 24.1%, up 5.1 percentage points from the prior year. The increase was driven by improved gross margin, strong operational execution, favorable mix, improved pricing, Integration 2.0 savings, and as we lap last year's investment in our next-generation digital development costs. SG&A and engineering expenses were lower as a percentage of revenue. Finally, the segment's 12-month backlog was $5.67 billion, up 14.5% from the same period a year ago. The multiyear backlog was $17.9 billion, down 2.3% from the prior year. Both our 12-month and multiyear backlogs demonstrate good visibility in 2024 and beyond. Turning to Slide 13, Transit segment sales were up 5.5% to $673 million. When adjusting for foreign currency, Transit sales were up 4.9%. GAAP operating income was $74 million, with restructuring costs related to Integration 2.0 at $7 million in Q1. Adjusted segment operating income was $86 million. Adjusted operating margin as a percent of revenue was 12.7%, down 0.2 percentage points from last year, driven by unfavorable mix and higher input costs, partially offset by Integration 2.0 savings. Finally, the Transit segment's 12-month backlog for the quarter was $2.04 billion, up 3.3% versus a year ago. The multiyear backlog was also up 4.2% to $4.19 billion. Now let's turn to our financial position on Slide 14. First-quarter cash flow was $334 million. During the quarter, cash flow benefited from higher earnings, improved working capital, and increased securitization funding. We continue to expect greater than 90% cash conversion for the full year. Our balance sheet and financial position continue to be strong. We ended the quarter with liquidity of $2.13 billion. Our net debt leverage ratio was 1.7x at the end of the first quarter, which was favorable compared to the same quarter a year ago at 2.3x debt leverage. We continue to allocate capital in a disciplined and balanced way to maximize returns for our shareholders. During the quarter, we repurchased $175 million of our shares and paid $36 million in dividends, which was recently increased by our Board of Directors, up 17.6% per share versus the prior year.

Rafael Santana, President and CEO

With that, I'd like to turn the call back over to John to talk about our 2024 financial guidance. Thanks, John. Now let's turn to Slide 15 to discuss our 2024 updated full-year guidance. As you've heard today, our team delivered a very strong start to the year. We believe that the underlying customer demand for our products and solutions continues across our business. Our orders pipeline and 12-month backlog continue to be strong, providing visibility for the profitable growth ahead. With these factors in mind, we are increasing our previous guidance. We now expect 2024 sales of $10.4 billion at the midpoint, up 7.5% from last year and adjusted EPS to be between $7.00 and $7.40 per share, up about 21.5% at the midpoint. Finally, we continue to expect cash flow conversion to be greater than 90%. Looking ahead, I am confident that Wabtec is well positioned to drive profitable growth in 2024 and beyond. Now let's wrap up on Slide 16. As you've heard today, our team continues to deliver value for our stakeholders, thanks in large part to our resilient installed base, world-class team, innovative technologies, and our continued focus on our customers. Overall, we believe we have an opportunity to continue building significant long-term momentum with growth in modernizations, in new locomotive sales, in digital solutions, and in transit systems. With solid underlying demand across the portfolio, increased visibility through our backlog, and an intense focus on continuous improvement in cost management, Wabtec is well positioned to drive profitable long-term growth and maximize shareholder returns. With that, I want to thank you for your time this morning, and I'll turn now the call over to Kyra to begin the Q&A portion of our discussion. Kyra?

Kyra Yates, Vice President of Investor Relations

Thank you, Rafael. We will now move on to questions. Operator, we are now ready for our first question.

Operator, Operator

Our first question comes from Justin Long with Stephens.

Justin Long, Analyst

So I think the most surprising part of this quarter was the big sequential improvement in freight margins. And I wanted to ask if there was anything unique to this quarter that drove that improvement? Or does this just speak to the operating leverage in the business as equipment revenue ramps? And John, if there's anything you can share on how freight margins are expected to progress over the rest of the year, what's baked in the guidance versus what we just saw in the fourth quarter, the 24%.

John Olin, CFO

Great, Justin. While freight margins have increased by 5.1 percentage points, we do not anticipate maintaining that level by the end of the year. There are several factors that will reduce this margin in the latter half of the year. However, our margins are improving in relation to our previous guidance. We are optimistic about the year's progress, but specifically regarding freight margins, let's discuss a few components. First, there was excellent operational execution that boosted productivity, which we expect to sustain. Additionally, we had a favorable mix that we believe will continue in the first half, but we foresee it becoming unfavorable in the latter half, which will slightly impact freight margins. Secondly, there was significant absorption in the quarter due to the 17.2% growth in the Freight segment. We do not expect such strong revenue growth in the second half, which we anticipate will result in a more neutral impact on margins then. Lastly, we have lapped a one-time investment made last year for the development of our next-generation PDS software. This contributed about one-third of the total margin benefit for the enterprise, particularly impacting the Freight group. We do not expect this benefit to recur. Overall, while we expect an increase in freight margins in the back half of the year, it will not be at the same level as what we experienced in the first quarter.

Justin Long, Analyst

Okay. Got it. And I guess, secondly, we have the proposed locomotive regulations from CARB. I know the public comments around that were due to the EPA earlier this week. But do you have any color around the timing of a final decision on that front? And if the current proposal does pass, any initial thoughts on how quickly this could impact your business based on some of the recent conversations you've had with customers?

Rafael Santana, President and CEO

So Justin, you're right there. I mean, the public comment period was due last Monday. They had a public hearing. I think the outcome here of the rule remains, I'll say quite fluid. So what I'll tell you is, we're technically very well positioned here to support customers for all outcomes. We've got the best-in-class products. We've got the lowest emissions, the lowest fuel consumption, best reliability, ultimately best availability and value for customers there. One thing that I would want to highlight is, the EPA also recently finalized the new standards for highway vehicles, which requires manufacturers to reduce greenhouse gas by 25% for the heavy truck fleet. And the EPA also defined through that, that liquid hydrogen for internal combustion engines would be classified as zero emissions despite of using some oil. And this is important as it allows first this for our installed base, the internal combustion engines to use hydrogen which can be transitioned to fuel cells ultimately. But I call this out because this definition of zero emissions, I think, plays well into our plans to help railroads transition to near zero emissions with really a reversible solution here through that period.

Operator, Operator

The next question comes from Bascome Majors with Susquehanna.

Bascome Majors, Analyst

Just to follow up on that, John or Rafael, less about this year but more long term. Can you go a little bit deeper into the favorability of mix given the growth in some of the subsegments, be it equipment or the modification side of services that you've typically talked about as being a little bit lower mix than some of your businesses and how that was able to drive such meaningful gross profit expansion, not just the fixed cost absorption and just how you view that in a longer-term context relative to your long-term incremental margin guidance of the 25% to 30%?

Rafael Santana, President and CEO

Bascome, let me start here because, number one, we're confident about the fundamentals of the business. I mean, we've had a strong performance over the last years and now in this quarter and hopefully comes through here, the team's commitment and the robustness of the strategy. I think we're continuously innovating. I think that's been a key piece, even if you think about mods or new locomotives. We're continuously adapting to some of these market changes to ensure we remain on a growth trajectory. We've been actively managing our pipeline to really convert some of these opportunities into tangible results. I think we've also continued to take proactive steps when challenges arise in this process. I think it's important to highlight that you're going to continue to see variation on quarters, yearly results but we're confident here in our ability to continue to drive profitable growth over time in the business. I'll let John comment on the specifics of the quarter and the half.

John Olin, CFO

Yes, when we consider locomotives and modifications over the long term, we anticipate they will create a headwind on the overall mix. We've discussed this before: there are good mixes and bad mixes, and this one is really good as it enables us to put an asset in place that will generate income for decades. However, looking closer at the first quarter and the first half, we are actually seeing some favorable mix effects from locomotives and modifications due to comparisons with the same period last year. In the previous year, we had an international order delivered over four quarters, towards the end of '22 and the beginning of '23, which had a very low margin as we transitioned into a different market. This has contributed to the mix we are experiencing, but it will only impact the first half. As I informed Justin, we expect this to shift in the second half. Furthermore, I want to emphasize that for the year overall, we anticipate most of our revenue and profit growth to occur in the first half. This is largely due to the production of those locomotives and modifications. After last year's strike, our production and deliveries were significantly lower in the first half than in the latter half. Our goal this year is to balance the production across the quarters better. Consequently, we expect locomotive and modification deliveries to increase by about 30% in the first half and decrease slightly in the second half. This will cause a substantial amount of revenue to be recognized in the first half, along with the absorption we have mentioned. The mix will be favorable in the first half and somewhat unfavorable in the second half. While we expect the second half to show favorable year-over-year growth in both revenue and margins, it will be at a much milder rate than in the first half. This leads us to the guidance we provided, indicating an improvement in revenue growth and profit margin growth.

Operator, Operator

The next question comes from Angel Castillo with Morgan Stanley.

Angel Castillo Malpica, Analyst

Congrats on a solid quarter. Just wanted to talk about your decarbonization slide, very strong performance there and just the second half deliveries in terms of your targets for some of the alternative fuels is very impressive. So just curious, as you think about or you have conversations with customers, what are you hearing in terms of the benefits of some of these improvements that you're making in enabling your engines to deliver some of these savings? How is that impacting overall kind of discussions, order patterns and kind of expectations as we think about second half and then flowing into 2025?

Rafael Santana, President and CEO

Yes. So a couple of comments there. Number one, this has been really part of a long-term strategy on making sure that we have the most fuel-efficient and fuel is a significant part of the expenses for our customers. So we continue those investments there. I think there is continued opportunity to take advantage of both the Tier 4s and the modifications. I do believe we have some of the best products there in the market. We see that playing not just in North America; we see that playing internationally as well. We really like the opportunity here, and I think customers welcome the ability to transition from known core products and be able to really take advantage of that to significantly reduce carbon emissions. Our engines, I'd say, are well prepared to take on both renewable and biofuels, and we're progressing here on making sure hydrogen is also a part of that solution. So with that, I think we're very well positioned to support customers through that transition. But we're also working on, what I call, zero emissions technologies, which start with some of the elements of the hybrid units that we're delivering this quarter to New York, and we're also delivering later this year the first, really the heavy haul battery-electric locomotive that's going to Australia, which we unveiled last year. So I think we're continuing to pace some of our investments here in the light of adoption. But with that, we're very well positioned in that regard, and we really try to make sure we make our engines as agnostic as we can to make sure that we provide that reversibility for customers through transition.

Angel Castillo Malpica, Analyst

Very helpful. Shifting to capital allocation, we had strong performance in the first quarter and excellent cost management. Considering your strong balance sheet and capacity to return cash to shareholders, can we anticipate larger buybacks and increased capital deployment? You mentioned the dividend increase, but what about other avenues for cash? How should we view this for the full year?

John Olin, CFO

Yes, we anticipate generating a healthy amount of free cash this year, and our balance sheet is in a good position, sitting at a net debt leverage ratio of 2 to 2.5 times, closer to the lower end of that range, which we feel comfortable with. We plan to prioritize our free cash flow for mergers and acquisitions if we identify strategic opportunities that are accretive. If not, we will return any excess cash to our shareholders through share repurchases. We're pleased with our progress so far, having already repurchased $175 million worth of shares, and we aim to return all excess cash to our shareholders throughout the year.

Operator, Operator

Our next question comes from Scott Group with Wolfe Research.

Ivan Yi, Analyst

This is Ivan Yi on for Scott Group. I wanted to touch on pricing here. I know you guys don't really give out any core pricing numbers but can you directionally talk about the pricing trends? What are your expectations for pricing sort of the rest of this year?

John Olin, CFO

When we look at overall pricing in the quarter, pricing was up slightly and our costs were slightly favorable. So that helped provide a little bit of margin improvement in the quarter.

Operator, Operator

The next question comes from Matt Elkott with Cowen.

Matthew Elkott, Analyst

Rafael, I think you mentioned the industry locomotive fleet in North America was down but Wabtec was up. Is this just a matter of what we already know, the railroads are coalescing behind Wabtec locomotives increasingly? How much is Trip Optimizer a factor in that? And any other thoughts on that would be helpful.

Rafael Santana, President and CEO

I think, first, I mean, there's certainly an element of, I'll call it, overall life cycle cost that those units provide and that's how you got to keep that in mind. And those are investments that have been done over time that have really positioned our fleets to be the most efficient at an engine level. So it starts there. It's continuous. If you think about our ability to provide service and support to those fleets, so our customers ultimately get not just the fuel efficiency but they get the reliability and availability of those units. That comes with significant investments we've made over time on an engineering team that are able to really drive continuous improvement to those fleets over time and really the service network that we've got and our ability to support customers across the globe on that. On top of that, you include some digital investments we've made and we continue to make to help customers improve not just fuel efficiency but to improve safety and to improve various elements that they need.

Matthew Elkott, Analyst

Got it. That's very helpful. And just one follow-up question. I think John, back in February at the plant tour, you mentioned $110 million of revenue this year that could be discontinued to optimize margins. Could you provide an update on that?

John Olin, CFO

Yes. We're moving forward with the exit of, I'd call, low margin revenue from the business. So Matt, when we look at that midpoint of our new guidance at 7.5%, it actually is higher than that given the fact that we're taking out that $110 million. The majority of that will come out this year but some of it will move into next year as we're working through exit strategies for different product lines.

Operator, Operator

The next question comes from Jerry Revich with Goldman Sachs.

Clay, Analyst

This is Clay asking for Jerry. I have a quick question about the Transit segment. You've seen steady margin improvement in transit over the past couple of years. Do you believe that most of the operational improvements in the business are now done?

Rafael Santana, President and CEO

No, we don't. In fact, I think there's continued opportunity here to drive profitable growth in the business. First, some comments in the quarter. I think they were very much in line with the expectations we had. Those were, some of them tied to the higher OE growth. We had high input costs, and some of that was offset by Integration 2.0 savings. But on one end, while we are pleased with the overall progress that the business has had, we are continuing significant work there to simplify the footprint, to further improve and sustain margins. I think you're going to continue to see that variation quarter-to-quarter, but the team here is very much committed to continue expanding margins, taking action to drive profitable growth, and being more selective too, in terms of the opportunities we tackle, in terms of the differentiation we're able to provide in the products that we have.

Clay, Analyst

And along the same lines in transit on top line, you've had solid book-to-bill for a while now. Based on your upcoming bids, what level of sales growth is sustainable for the segment over the next couple of years?

Rafael Santana, President and CEO

We, as we look at longer term and over time, it's probably a range of 3% to 5%. It's probably a range that we should keep in mind. But we continue to see favorable book-to-bill there. I just would emphasize the first comment I made in terms of us being more selective about the opportunities that are out there.

Operator, Operator

The next question comes from Saree Boroditsky with Jefferies.

James, Analyst

This is James on for Saree. So I wanted to go back on alternative fuels. While rails are focused on reducing CO2 emissions, I think fuel costs and efficiency also play a critical role here. Can you kind of talk about the economics of using alternative fuels such as biodiesel and renewable?

Rafael Santana, President and CEO

Uptake varies really across the globe depending on both the availability and the elements of, I'll call, subsidies, that could play out there. I think that's really been a key piece of our strategy, which is ultimately making sure that we've got that flexibility to support customers. You might have renewable diesel available in a certain part of the country, you might not have it in all parts of the country. How we make sure we ultimately have an engine that's agnostic to that? Playing right to it, we're seeing also government support in terms of creating potentially some areas where you might have hydrogen that might play a role. We look at this being again how you help our customers transition, as some of that, I'll call, replace, over time with our reversible technology. I think that's a key piece without really making sure you don't lose sight of what I call zero emission technologies, which plays into the battery-electric. It plays ultimately into utilizing higher and higher hydrogen mix, which could lead to fuel cells, but some of those are much farther out in terms of the opportunity to adopt, in terms of the maturity of the technology and the economics that it needs to get to.

James, Analyst

Got it. And as a follow-up, I kind of wanted to go back on the margins again. Back in Investor Day, you kind of talked about expanding margin by 250 to 300 basis points in the next 5 years. But given such a strong margin performance in the first quarter of 2024, despite more temporary expectation for the back half, are you kind of thinking differently about the long-term margin target? Or are you still looking for 250 to 300 basis points margin expansion?

John Olin, CFO

Yes, James. As we look forward in the business, we believe we see mid-single digits on the revenue side and double digits on the EPS side. Nothing has changed based on our performance this year or last year in terms of our longer-term view of the industry and our performance within that industry.

Rafael Santana, President and CEO

I think we continue to see opportunity to drive profitable growth ahead. I think that's important. At the same note, you're going to have, again, variation, whether it's quarter-to-quarter, half-over-half, but there is strong momentum here in both the pipeline, in both North America and internationally. I think the auto piece, we sometimes don't talk enough, it's just ongoing lean initiatives, the progress on integration should support the portfolio optimization efforts. I mean those two things combined really provide us an opportunity here for both margin and revenue expansion.

Operator, Operator

The next question comes from Adam Roszkowski with Bank of America.

Adam Roszkowski, Analyst

It's Adam Roszkowski on for Ken Hoexter. A question for John. Could you provide an update on the $75 million to $90 million run rate cost savings by 2025 and where you are now?

John Olin, CFO

Yes, Adam. When we look at the cost standpoint, we are about $120 million, $125 million down the runway of what we were expecting of $135 million to $165 million and that's realized in the first two years. From a standpoint of savings, we run a run rate savings base at $22 million a year as we exited 2023. With that, Adam, we are ramping up to that $75 million to $90 million as we exit 2025. So we would expect an escalation of the $60 million, the midpoint, $60 million, $65 million, whatever the midpoint is over the next couple of years and would expect that to be somewhat linear. Most of the projects have all been approved and are in different phases of execution and some are actually completing as well. We would expect those savings to ramp pretty quickly over the next two years.

Operator, Operator

The next question comes from Steve Barger with KeyBanc Capital Markets.

Steve Barger, Analyst

If we do get an accelerated domestic locomotive cycle driven by regulatory changes, would you anticipate change orders and cancellations for modifications? Or would you think that would all be additive to the backlog?

Rafael Santana, President and CEO

There is certainly a decision to be made, but it is very specific to each customer. I wouldn't say there would be a complete reversal of that, and I do not expect any cancellations. However, there will definitely be a greater focus on advancing with the newer technology, particularly as we incorporate the capability to use alternative fuels. I believe this gives customers a safety net to transition over time with the flexibility they require.

Steve Barger, Analyst

Understood. And Rafael, following up on the hydrogen conversation. You said Wab is pacing investment to market adoption rates but it's also come up several times on this call. Do you expect to see hydrogen equipment on track within the next, say, 5 years? Or is that mainline hydrogen equipment more 2030 and beyond, just to level set expectations?

Rafael Santana, President and CEO

So two comments. I do expect hydrogen to be, I'm going to call both tested and there could be an element here if government potentially steps in to create some corridors where you might be able to introduce that as an alternative fuel into the internal combustion engine. If your question is more around 100% hydrogen utilization, that's later down the road and that goes with fuel cells. That goes with irreversible technology. So that's going to take a bit more time on that. So that's not in the near or mid-term.

Steve Barger, Analyst

Yes. I wasn't even thinking about 100% adoption. I was just thinking about the idea that you can have a legitimate freight hauling piece of equipment on the track in, say, 5 years? Is the technology there?

Rafael Santana, President and CEO

So we do that similarly. We do that today with LNG. We have, ultimately, an engine that's able to mix up to 78% of LNG. So you should think along the same lines. At the same time, if there's any issues as you're running or availability of fuel is not there, you're still able to complete the mission with the current engine that you have on. I think you could expect to see some experimentation there. There could even be some corridors, but I think it's still going to be a niche application.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Kyra Yates for any closing remarks.

Kyra Yates, Vice President of Investor Relations

Thank you, David, and thank you, everyone, for your participation today. We look forward to speaking with you again next quarter. Goodbye.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.