Rafael Santana: Hey, Rob. Our customers invest for returns at the end of the day. So, it’s just really comes down to making sure as they look into their fleets, they’ve got really the opportunity here to continue to drive costs down, to drive reliability up, and improve service levels, and I think that continues. When I look at that investment, of course, we’re coming from trough levels here in the past. We have growth coming into ’23. We have still significant growth in ’24, and the recent order that you just referred to, it just gives us greater visibility into really continue to grow market. I think we still have, I think, an opportunity to grow here as we get closer here to what I’ll call average replacement rates with really the older fleets we’ve had.
I think some of the elements on what customers decide to invest in could be shaped here certainly by regulation, but most importantly, I think, it’s going to get shaped by some of the elements of technology that we’re introducing, that allows faster payback, a greater payback, and greater flexibility to really, I’ll call, ultimately bridge customers here into a lower emissions environment, and that’s how we look at it.
Operator: All right. Thank you. And our next question today comes from Scott Group with Wolfe Research. Please go ahead.
Scott Group: Hey, thanks. Good morning. So, within the…
Rafael Santana: Good morning, Scott.
Scott Group: Good morning. Within the revenue guidance, just directionally, are you guys expecting better Freight or Transit growth? And when you just think about all the moving pieces with your growth, how should we think about mix as a tailwind or not this year?
John Olin: Great question, Scott. When we look at across our five business groups and look into 2024, we expect equipment to be the fastest growing, again, for the reasons that Rafael just mentioned on the last question. And with that, I mean, actually, in looking at mods as well, we expect both mods and locos combined to be growing at a faster rate than our average — the midpoint of the revenue growth, and that will put a little bit of mix headwind in 2024. And again I’ve said before, in this world, Scott, there’s two kinds of mix, there’s good mix and bad mix, and this is a case of really good mix. As we mix down a little bit, because we’re putting out assets in the marketplace, that will be generating revenues for us for decades to come. So, we feel really good, but there will be a little bit of mix headwinds going forward.
Scott Group: Okay. Helpful. And then, I just want to clarify just on the mod side, are you seeing — I think you’ve been talking about pretty consistent double-digit growth in mods the last bunch of years. Do we have that again this year? And then, any update on the battery loco and timing of first delivery and all that? Thank you.
John Olin: With regards to the mods, we tend to look at one or the other, mods and new. If we look at combined mods and new in the year, we said they’d be up double digit, and they were in 2023. As we look forward as I had just mentioned, we do expect them to grow faster than the average, those combined, to grow faster than the average.
Rafael Santana: So, strong growth here going to ’24, and, Scott, with greater visibility ahead. On your question on battery electric, we’re continuing to make progress here. In the fourth quarter, as you know, we unveiled the first heavy-haul battery electric locomotive with over 7 megawatts of power. These units will start running this year in Australia. And on that, I think fuel continues to be a one of the biggest cost for customers. There’s a continued focus here on driving efficiency. We’ve got a number of pilots and demo projects, and while we do not expect broad adoption of these, there’s going to be some really key opportunities here that we’re ready to work on and support customers on.
Scott Group: Thank you.
Rafael Santana: Thank you.
Operator: And our next question today comes from Allison Poliniak with Wells Fargo. Please go ahead.
Allison Poliniak: Hi. Good morning.
Rafael Santana: Good morning, Allison.
Allison Poliniak: Just wondering if you could expand on the digital intelligence piece of your business, particularly in North America. It seems like that’s been a bit slower. Just — any color there? Are folks pushing off some of these investments from a cyclical standpoint? Understanding the long-term drivers are still there? Just any color on that near term. Thanks.
Rafael Santana: Yes. So number one, I think during the quarter, I think in one side, while we saw higher demand from international, when you think about PTC, on-board locomotive, digital mine, we saw really a softer demand here, which is continuing with US, driven by really discretionary OpEx and the commuter signaling business. What I’d say is the pipeline of opportunities remains strong, driven primarily by international and also by digital mining solutions. I’d say recurring revenues in short-term convertibility continues to be a focus area for the group. But I think what’s more exciting here, something we announced in the fourth quarter, which is really tied to us entering the railcar telematics market. We are creating a platform here with proven technology, and this is a market of 1.6 million freight cars.
It is a multi-billion dollar opportunity for us, one that we will be providing real-time data to railcar, and tank car owners. And we’re — opportunities like this will keep propelling growth and profitable growth for this business.
Allison Poliniak: Got it. And then, on the cost optimization, could you maybe give us any color on how we should think about run rate exiting 2024? And then, was that portfolio pruning part of that? Is that incremental? Just any color there. Thanks.
John Olin: Yeah, Allison. This is John. So, they’re separate. Integration 2.0, we couldn’t be more pleased with the performance of that. And, to-date, most of the investment is behind us, and most of the savings are in front of us. So, as we exited 2023, we had a run rate of $22 million. And as we exit 2025, the run rate that we will exit at will be $75 million to $90 million. So, over the next two years, we would expect a significant ramp in moving from $22 million to the $75 million to $90 million, and it will probably be somewhat equal as we ramp from here to on the exit period.
Allison Poliniak: Great. Thank you.
Rafael Santana: Thank you.
Operator: And our next question today comes from Ken Hoexter with Bank of America. Please go ahead.
Ken Hoexter: Great. Good morning. So, Rafael and John, can you talk a bit about the — you’ve kind of gone over the mix of product type, but how about international versus domestic, and kind of maybe talk us through to understand margin differentials, or mix issues as one is growing versus the other, within your 5% growth outlook?
Rafael Santana: Yeah. When you think of revenue side, I think you heard me describing stronger international pipeline, which I think, ultimately, wants to reflect stronger growth internationally as we look especially beyond ’24 in that regard. So, we see a strong pipeline of deals, some of them signed last year. We’ll see a part of those converting into backlog this year, which will continue to signal really the strength that we’ve got longer term in the business. I think with regards to specific margins, I mean, this is really project-by-project driven, as John described. I think there is an element of still headwinds just associated with pace in which we grow both the new locomotive business, but also the mods business at a rate — at a growth rate faster than the overall company.
Ken Hoexter: So, maybe we can delve into that for a quick one from my follow-up, just the backlog conversion. It looks like the backlog is building up maybe double-digit rates, right? Freight is up 11%, Transit up 8%. Just wondering, is that a good signal, a read-through for that revenue growth? I mean, you’re targeting 5%. The backlog is growing there double digit. How do we reconcile the two? Where’s there a loss, I guess, in the conversion?
Rafael Santana: So, a couple of things. I mean, we will have variation here to quarter-to-quarter. Just reflecting last four quarters, I mean, we have quarters on low-single digits, we have quarters on double digits. And I think you’re going to see some of that variation. How we run the business is making sure that we’ve got that convertibility built out 12 months out, 18 months out, and we got to really think about the lead times we’ve got associated with our products. So, it’s making sure that we have that coverage. If you think in specific about ’24, I think, there’s some elements of coverage, especially for the flow products that really need to — really be executed through the year. And if you keep in mind, you’ve got things like the freight car build, which is down.
So, you do have some elements here that play out through the year. But bottom line is, we feel strong about both the coverage, and about the ability here to continue to drive profitable growth with the pipeline we have.
Ken Hoexter: Thanks, Rafael.
Rafael Santana: Thank you.
Operator: And our next question comes from Angel Castillo with Morgan Stanley. Please go ahead.
Angel Castillo: Hi, good morning. Thanks for taking my question. Just maybe kind of expanding on that and a little bit longer term, as you think about your book-to-bill for 2024, focused in particularly on locomotives — new locomotives, how are you thinking about that kind of evolving? It sounds like deliveries will be ramping up during the year. But just based on what you’re hearing from your conversations with your customers, how do you kind of see that throughout the year in terms of above 1, below 1? Just any more color there would be helpful.
John Olin: Angel, on average, we expect our book-to-bill to be over 1 because we expect to continue to grow in the mid-single digits over the sustainable future, right? But, again, going back to — some of these orders can be lumpy from time to time, and a lot of them are multi-year, so we’re not — we don’t provide a guidance in terms of what we expect forward-looking book-to-bill be, but over time, we would certainly expect it to be over 1.
Angel Castillo: Got it. And then, maybe just on the portfolio divestitures or pruning that you talked about, could you quantify that from an EPS perspective, how much of that is kind of — what was kind of the impact embedded in the guidance? And any kind of incremental pruning that you see as kind of opportunities here?
John Olin: Yeah. So, when we look at portfolio optimization, again, we’re looking very focused on overall company profitability and certainly Integration 2.0 is helping to drive that. But in addition to that, we’re looking at — taking a hard look at the portfolio, and looking at the product lines that are not carrying the weight or not delivering the profitability that we expect, or the value that we expect. And with that, we’re going out and removing about $110 million of revenue. So, when you look at our overall guidance, you’ve got to realize too that this revenue isn’t going to be there in 2024. So, that’s putting a little bit of headwind on the overall midpoint that we’ve given. But to answer your question, this is very low margin or no margin, Angel. So, it’s not having an impact on our profitability going forward, but it is bringing our revenue down, and therefore, we would expect a little bit upward pressure on — or upward momentum on margin percent.
