And as I had mentioned that about 70% of the second half production plan for locomotives is delivered in the third quarter versus the fourth quarter. So overall, when you even those out, we’ve had a year very much in terms of overall cadence expectations, of course, at a higher level of revenue growth, which explains the raise in the second and the third quarter. But the fourth quarter underlying momentum is just as strong as the third quarter. And we feel good as going into the 2024 with the backlog growing as Rafael had mentioned, has actually sequentially grown for the last couple of quarters. And as we exit the third quarter, it’s up 13%.
Matthew Elkott: No, that’s very helpful to know. And just one — my follow-up question, John. Can you talk a bit about the — a bit more about that $2 billion Kazakhstan MOU? How much of it do you think could materialize in orders in 2024? And how much could materialize in deliveries in 2024?
John Olin: We’re not going to break out the timing of it, but we would expect all $2 billion of it to turn into orders. We’ve got a great customer in Kazakhstan and they’ve got a tremendous growth opportunity, given some of the dynamics of the flow of products from China to Europe. And we’re certainly working with them to upgrade their fleet and expand their fleet so that they can manage their future.
Rafael Santana: I would add the following. We expect a large part of that to convert. And as I said, about some international markets, we’re increasing deliveries in Kazakhstan, and it’s strong growth going to 2024.
Matthew Elkott: Perfect. Thanks Rafael, thanks John. Appreciate it.
Rafael Santana: Thank you Matt.
Operator: The next question is from Saree Boroditsky of Jefferies. Please go ahead.
Saree Boroditsky: Thanks, good morning. So kind of building on your comments, I think you mentioned the largest savings from integration 2.0 into next year. Could you just provide an update on the progress you’re seeing there? How is it going versus expectations? And any way to quantify the margin benefit into 2024? Thanks.
John Olin: Yes. Saree. So if you recall that Integration 2.0 was a 3-year program that started at the beginning of 2022. And on any of these type of restructuring programs or opportunities to integrate, we’ll see a higher investment profile in the beginning and a higher savings profile in the back as we get the projects often executed. So to date, we’ve invested about $100 million out of an expected $135 million to $165 million over the next — or over that 3-year period of time. And Saree, what we’re seeing now is just as those projects start and either the facilities are being consolidated or products being moved or however, we’re looking at optimization, those savings are starting to build. And at the end of 2022, we had about ongoing savings of about $5 million and that continues to escalate, and we look for that to build up to $75 million to $95 million.
So we won’t quantify it, but you can start to see the momentum that we need to have to be at a run rate of $75 million to $95 million in 2025.
Saree Boroditsky: Great. And then maybe this is kind of partially related, but Transit margins came in pretty strong, despite what typically would be a weaker seasonal quarter. So what kind of drove that margin improvement there? And how does this set you up as we look into 2024?
John Olin: Yes, we’re very pleased with the Transit margin. It was up 1.5 percentage points driven by a couple of things, Saree. Number one, is certainly fixed cost absorption was favorable given the volume growth ex currency of 14.5%. The other area is product mix. Product mix was favorable in Transit. And if you look at the aftermarket grew a fair amount faster than OE. And also, when we talk about Integration 2.0, a fair amount of that hits our Transit business, right? So that’s helping driving it. And also we’re lapping some of the inefficiencies that we had in cyber in the year ago quarter. So I feel very good about the transit business, as Rafael had mentioned and certainly a bright future as we continue to move that business forward.
Saree Boroditsky: Okay, thanks for taking the questions.
Operator: The next question is from Chris Wetherbee of Citigroup. Please go ahead.
Unidentified Analyst: Hey good morning guys. It’s Rob [Ph] on for Chris this morning. Could you give us an update in terms of your delivery timing expectations for next year, like as of right now, the orders more kind of first half or second half loaded? Or do you not yet have line of sight on that one?
John Olin: Yes. Rob, it’s a little bit early for us to start talking about gating. It’s early for us to talk about guidance as well. So a typical cadence would be to provide guidance in the call in February after the year is done. And again, just broadly, we’re looking at certainly profitable growth in 2024, but in another quarter’s time, we’ll have certainly more detail with regards to what that is and what’s driving it.
Unidentified Analyst: That’s helpful. And this might be a little bit too early as well. If we’re looking at the 12-month backlog, how does that mix compare to the mix today? Do you have a sense — is it better? Is it worse? We’re just kind of thinking about some of the puts and takes for next year?
Rafael Santana: I think more in terms of the coverage looking ahead, right? And my comments on the strong coverage that it provides a piece of it has really to be connected with long lead parts of our portfolio. And that’s where I think about new locomotives, and I think about mods and I think it in conjunction of both international markets and North America. And that’s probably the strongest — certainly the strongest we’ve had to walk into any year.
Unidentified Analyst: Appreciate the color. Thanks Raf.
Rafael Santana: Thank you.
Operator: The next question is from Rob Wertheimer of Melius Research. Please go ahead.
Robert Wertheimer: Thank you. I just had two quick follow-ups. John, I think you’ve been pretty clear on the gross margin and some of the puts and takes. I wondered though, I mean, can you give any comment on just what normal gross margin leverage should be absent the strike or whatever and whether next year has any incremental labor pressure that would keep gross margin from rising. I mean, a great fixed cost leverage across the enterprise, don’t going to be wrong, but more on the SG&A line. So just any comments on that would be helpful. Thank you.
John Olin: Yes. I think from a gross margin standpoint, what you’re seeing on a year-to-date basis is certainly a drag from the strike in Erie but also that mix that we talked about, right? We had mix headwinds in the first half, and that had an impact on gross margin. So this quarter, gross margin was flat, again affected by the strike at Erie, but a lot of benefits as we move forward. And when we look at Integration 2.0, that directly fits into the gross margin, and we would expect a tailwind on margins because of that. And then also the biggest driver of margin is volume, right, and leveraging the fixed cost structure of the business. And that’s not only fixed manufacturing costs, but also the fixed portion of SG&A. So as we grow, we expect to continue to aggressively manage our cost structure and making sure that we do deliver those incremental volumes, which, again, we would expect to be in the 25% to 30% range.
