In fact, we see the opportunity here to continue to grow with the business. If you think about the record backlog some of our customers had, we’re continuing to see momentum there.
Jerry Revich: Appreciate the discussion, thanks.
Rafael Santana: Thank you.
Operator: The next question is from Ken Hoexter of Bank of America. Please go ahead. Hello, Ken your line is open.
Nathan Ho: Hi, sorry. This is Nathan Ho dialing in for Ken Hoexter. Congratulations to the team on the solid results. John, I think you commented earlier that mix was favorable to Freight gross margins. And I’m just looking through some of the segments. It looks like Equipment is up 40%, Components up 30%, yet Services and Digital are a little bit. I mean, Service is up 18% and Digital is down 30%. I understand the team doesn’t usually comment on segment level of margins. But could you maybe just talk a little bit more about the comment there and maybe some of the pricing and mix dynamics at play?
John Olin: Yes, Nathan. So number one, what you pointed out, what we said may be a little bit counterintuitive, right? But if you take it back to the discussion that we’ve been having for the last four quarters, when we really started to step up a lot of the locomotive deliveries internationally, that put a fair amount of overall mix pressure on us, again, starting in the third quarter of 2022 and really going through the last four quarters. So as we move out of the fourth quarter of 2023, we are stepping in from a freight perspective into higher-margin deliveries. And that’s shining through even though given the fact that overall equipment is at a lower margin than digital, we are still seeing, in aggregate, a fair amount of mix favourability.
The other piece of it is not only mix within the various groups, but also the mix between groups, right? When you look at the Freight growing at 23.4% and currency adjusted Transit at 14.5% that provides a fair amount of mixed tailwinds as well.
Nathan Ho: Perfect, thank you. And as my follow-up, I just wanted to maybe continue on the prior trend of thought on the backlog. I noticed just on the Freight side, it seems like this is the fifth quarter of sequential declines. I think just comping the multiyear backlog, this quarter versus 2Q were down $722 million. How should we read this? Is this a — is this any commentary on unit volumes or maybe something regarding pricing or mix? Any thoughts there would be helpful.
Rafael Santana: I think you’ve got to keep in mind, first, the lumpiness of the multiyear orders that we get. And you’re going to see that lumpiness not just playing out through the quarters, that lumpiness will play out in the years as well. As we mentioned, we expect the backlog to be down this year, year-over-year. But the other side of it is the multibillion-dollar orders that we’re working on, which are not in our backlog, and we expect that to convert. So I really look at us in terms of the lumpiness of the orders. The other piece you’ve got to be very focused on is when you think about the lead times on certain of your products, making sure that you have the coverage to work through it, and that’s why I highlighted both modernizations and new locomotives, so if you think about the lead times on those, you need a strong coverage, and we have it. We have it if we think about 2024, we have it beyond 2024.
Nathan Ho: Perfect. I appreciate it. Thank you.
Operator: The next question is from Scott Group of Wolfe Research. Please go ahead.
Ivan Yi: Good morning. This is Ivan Yi on for Scott Group. My first question, you’re showing very strong EPS growth this year. What are the puts and takes to another year of double-digit EPS growth next year? Can you kind of walk through the moving parts there? Thank you.
John Olin: I think Ivan, it’s very much similar to what we experienced this year is one, volume growth does wonders for expanding margins, right driving incremental growth. We’ve talked about our incremental growth is about 25% to 30%. So with that incremental volume, which we would expect revenue growth in 2024, we will build EPS growth in addition to that. The other is, as Rafael had mentioned, Integration 2.0. So that was a 3-year investment, and we’re just starting to get to the kind of the ramp on the savings plan. And we’re seeing that ramp up in the first 3 quarters of this year, but expect the largest growth in terms of savings due to that program in 2024. So that, again, will drive margins a little bit faster than revenue. But overall, as we sit today and look forward to 2024, we expect that profitable growth that Rafael spoke to. And with that, we expect to be overall in line with our long-term objectives and our long-term guidance.
Rafael Santana: I’ll reinforce two other points, which is just an element of international markets. I spoke here specifically about Brazil, South Africa, Kazakhstan and Australia, which are very significant, and we have significant momentum walking into 2024 with this market. So we do expect significant growth there from a sales perspective. And the other piece is, again, the coverage as we look into stepping into 2024, which is certainly one of the strongest coverages we’ve had stepping into any given year.
Ivan Yi: Thank you. And then just a follow on, again, on the backlog. The one-year backlog is up nicely year-over-year, but the multiyear backlog, of course, is down. Can you just kind of go through that divergence? Why is that happening? And which one of those metrics is the better one to focus on, the one year or the multi-year? Thank you.
John Olin: I got — first, go back to the things I’ve highlighted here. You’ve got to make sure you have the coverage, especially on the long lead items. Otherwise, you’re getting an order here a new locomotive at this point and you don’t have the coverage for 2024, there’s not much you can do there. So having the coverage for that long lead items is important, and we have it. The second piece I talked about is the fact our fleets internationally continue to grow out. So we’re seeing good momentum there, not just from a CapEx but from also an OpEx perspective. So that’s very positive. And in North America, discussion continues despite of, I’d say, continued to grow parking levels. Customers are investing for really lower costs for improved efficiency, for improved reliability.
So all in all, when we think about the momentum here, looking at North America and internationally, CapEx and OpEx, it continues to look into profitable growth going to 2024, very much aligned to the long-term guidance we’ve provided.
Ivan Yi: Thank you.
Operator: The next question is from Matt Elkott of TD Cowen. Please go ahead.
Matthew Elkott: Good morning. Thank you. If we take the guidance raise and the sequential moderation in the 12-month backlog together, is it because you have some deliveries that were scheduled for next year and were pulled forward to this year?
John Olin: No, no. Not at all, Matt. when we look at it, we’ve been talking about the year a lot in first half, second half. And at the beginning of the year, we said that first half would grow a little bit faster than the second half. And I think the way to look at between our third and fourth quarter is to look at them together, and we’re seeing what you would see on the implied growth is 14% growth in the back half versus 16% growth in the first half. And again, that’s what we’ve expected. But it’s really a function of the way the production plan was set up over a year ago in terms of the deliveries that we expected to make in the third quarter versus the fourth quarter on some of our larger equipment, in particular, on locomotives.
