The Cummins Inc. Second Quarter 2023 Earnings Conference Call has begun, with Chris Clulow, VP of Investor Relations, as the host. Jennifer Rumsey, Chair and Chief Executive Officer, and Mark Smith, Chief Financial Officer, are also present to answer questions. The call contains forward-looking statements which could differ from actual results due to risks and uncertainties. Non-GAAP financial measures will be discussed and can be found on the company's website. The press release, financial statements, and webcast presentation are also available on the website.

Jennifer Rumsey, the Chair and CEO of Cummins, discussed the company's second quarter financial results and sales and end market trends by region. She also highlighted some of the major events from the quarter, such as the visit of President Joe Biden to the company's Accelera facility in Fridley, Minnesota, which is dedicated to electrolyzer production, and the successful Initial Public Offering (IPO) of Atmus Filtration Technologies Inc. which generated $299 million of net proceeds and Atmus added $650 million of debt. Mark will then take the audience through more details of the financial performance and forecast for the year.

In the second quarter of 2023, the company recorded record revenues of $8.6 billion, an increase of 31% compared to the second quarter of 2022. EBITDA was $1.3 billion or 15.1%. Excluding certain items, EBITDA was 15.4%, a slight decline from the 15.7% in 2022. This was due to the addition of Meritor activity, which has a lower gross margin percentage, and increased SG&A and development expenses. EBITDA and gross margin dollars improved compared to the second quarter of 2022 due to higher volumes, pricing, and the acquisition of Meritor. Selling and administrative expenses increased due to higher accruals related to variable compensation plans, and research and development expenses increased due to investments in products and technologies.

Meritor's performance and financial results improved in the second quarter of 2023 with sales of $1.2 billion and EBITDA of 12.2%. North American revenues grew 31% to $5.3 billion, driven by the addition of Meritor and strong demand in core markets. International revenues increased 32% due to the addition of Meritor and strong demand across most markets. In China, industry demand for medium- and heavy-duty trucks was up 61% from the previous year.

In the second quarter of 2023, sales and units of the company, including joint ventures, increased 63%, while industry demand for excavators decreased 23%. The light-duty market in China increased 21%, while sales of power generation equipment in China decreased 8%. In India, revenues increased 22%, and industry truck production increased 2%, while shipments increased 1%. The company is maintaining its full-year 2023 revenue guidance of up 15-20% and EBITDA of 15-15.7%, and is expecting stronger revenue and profitability in both its Power Systems and Distribution segments, offset by increased cost in the Accelera business. They are also maintaining their forecast for heavy-duty trucks in North America to be 270,000-290,000 units in 2023.

In the North America medium-duty truck market, production is projected to be up 5-15% from 2022, while North America construction is expected to be down 10-0% and Brazil truck is expected to be down 30-40%. Engine shipments for pickup trucks in North America are expected to remain at 2022 levels. In China, total revenue is expected to increase 15%, driven by share growth, better volumes and content increases. Heavy and medium-duty truck demand is expected to improve 15-25%, and light-duty truck demand is expected to improve 10-20%, off of the low levels in 2022. The 15-liter natural gas engine launched in 2021 is performing well.

The heavy-duty market is expected to have 20% of its vehicles powered by natural gas by 2023, with strong customer reception. In China, construction volumes are projected to be flat to down 10%. In India, total revenue is expected to be up 6%. Global high horse power markets are expected to remain strong, and mining engine sales are projected to be flat to up 10%. Power generation markets are expected to increase 15-20%, and Accelera's full-year sales are expected to be between $350-$400 million. However, costs are higher than expected, so EBITDA guidance for Accelera is now expected to be a loss of $420-$440 million for 2023.

Cummins had record sales and profitability in the first half of 2023, and is maintaining its guidance for sales up 15-20% and EBITDA of 15-15.7%. However, there is a weaker outlook in the second half due to a decrease in North American heavy-duty truck production, North America construction, and Brazil truck production. To manage the lower revenue, Cummins is managing its operating expenses below the second quarter levels and returned $223 million to shareholders in the form of dividends. Additionally, it announced a 7% increase in the quarterly dividend.

In the second quarter of 2021, Cummins had record revenue of $8.6 billion, with organic sales growth of 12%. EBITDA was $1.3 billion, including costs associated with the planned separation of Atmus. Excluding those costs, EBITDA was 15.4%, compared to 15.7% a year ago. Mark Smith then provided more detail on the line items.

In the second quarter, gross margin decreased by 70 basis points due to the dilutive impact of the Meritor acquisition and higher variable compensation expenses. Selling, admin and research expenses increased due to the addition of Meritor and higher development costs. Income from joint ventures was up due to a slow recovery in demand in China, and other income was up due to the lack of mark-to-market losses on investments. Interest expense increased due to financing costs related to the Meritor acquisition and rising interest rates. The all-in effective tax rate was 22.3%, and all-in net earnings were $720 million or $5.05 per diluted share. Operating cash flow was an inflow of $483 million, but lower than the second quarter last year.

Cummins reported strong segment performance in the second quarter of 2023, with Components revenue increasing 76%, Engine revenue increasing 8%, and Distribution revenue increasing 15%. The Components segment is expecting 2023 revenues to increase between 32% and 37% and EBITDA margins in the range of 14.1% to 14.8%. The Engine segment is expecting 2023 revenues to increase 2% to 7% and EBITDA in the range of 13.8% to 14.5%. The Distribution segment is expecting 2023 revenues to be up 10% to 15% and EBITDA in the range of 11.7% to 12.4%.

The Power Systems segment saw record revenues of $1.5 billion and a 58% increase in EBITDA, driven by higher power generation volumes and improved pricing. Accelera revenues more than doubled to $85 million due to higher demand for battery electric systems and the addition of Meritor and Siemens commercial vehicle businesses. The company expects an 8-13% increase in Power Systems revenues and a 60 basis point increase in EBITDA in 2023, while Accelera revenues are expected to be in the range of $350-400 million with losses in the range of $420-440 million. The company maintains its 15-20% revenue increase and 15-15.7% EBITDA margin forecast for 2023, with an effective tax rate of 22%.

In the second quarter of 2023, Meritor reported record high profits with improved gross margins. For the rest of the year, their focus is to deliver strong incremental margins in their core business, reduce inventory levels, and invest in lower carbon technologies. They expect lower revenues in the second half of the year and will manage their operating expenses accordingly. In response to a question from Jamie Cook of Credit Suisse, Meritor explained that their engine margins were weaker due to compensation and investments, but their joint venture income was higher. They also noted that their investments in the future will require more investment.

Jennifer Rumsey and Mark Smith address two questions posed by Jamie. Mark Smith explains that in the engine business, there are three key themes that have impacted the results: increased investment in engineering, inflation on material costs, and weaker JV earnings in the second half of the year. Jennifer Rumsey adds that the performance of their products is still positive and strong.

Cummins has seen strong demand for their medium-duty and electrolyzer products, and have made changes to their global plants to increase capacity for North America. The market outlook is still good, but there is some softening in the aftermarket and some anticipated down days in the fourth quarter, with China not growing significantly and seasonally softer in the second half. Cummins is taking action to prioritize investments and manage headcount, discretionary spending, and SG&A. There is also interest from customers in alternative fuel technologies, with the EPA mandating a landfill gas and changes to the RIN structure.

Jennifer Rumsey discusses the growing interest in alternate fuel and engine technologies such as natural gas and hydrogen, and how the infrastructure build-out for hydrogen is slow. Mark Smith then talks about the performance of Meritor and Atmus, with Meritor's results improving from the first quarter.

Mark Smith and Jennifer Rumsey discussed the power systems market, noting that demand in the RV market has weakened and that the data center market has a strong order board through next year. They also noted that there have been supply challenges in the power systems market in the past, but they have been able to produce at a better level in the first half of the year. They also revised their outlook for the mining market, noting that it is showing strength.

Mark Smith and Jennifer Rumsey discussed the aftermarket activity in the distribution business, noting that the high levels were due to customers not being able to buy new trucks, but that aftermarket demand is still healthy. They also noted that the truck production in the fourth quarter will increase, but did not give a specific magnitude.

Mark Smith and Jennifer Rumsey are discussing the market activity in the fourth quarter of the year and how it could affect pricing for 2024. They note that the industry typically has a lower build rate during this quarter due to the holidays, and they are debating the potential for a softer market with fewer production days. They emphasize that this is not a Cummins-specific issue, but rather an assumption about the market activity at the end of the year.

Mark Smith and David Raso are discussing pricing for Cummins Engines for 2024. Jennifer Rumsey explains that the goal is to balance the price with cost pressure and launch new products to continue conversations with customers. Robert Wertheimer asks if Cummins Engine controls the pricing that happens to the end customer, to which Jennifer Rumsey responds that they do not, as they have long-term agreements with the OEMs and price their engine and powertrain solutions and options to the OEM.

Cummins has shifted away from influencing retail prices 20 years ago, and now focuses on offering a product with good performance compared to others in the market. In the heavy-duty space, fuel economy is a major factor in customer choices. Cummins' market share is high in both heavy-duty and medium-duty truck markets, and they tend to have higher share with larger fleets due to stronger relationships.

Mark Smith and Chris Clulow discussed the price realization and cost assumptions for the year, with Smith stating that they would be at 3.5-3.75% plus for pricing and 1.5% for costs. Clulow also noted that the overall guide for the year would likely trend towards the higher end of the revenue guide, but they chose not to change it. Smith then mentioned that construction, Brazil truck, and parts were the three areas that were not improving or going in the other way. Lastly, Fisher asked if the team's increasing confidence about the truck market for 2023 and 2024 had changed at all, to which Smith and Clulow did not respond.

Jennifer Rumsey and Mark Smith discussed the forecast for the industry in the fourth quarter, which is lower due to the number of production days in the quarter. They also discussed the improvement in gross margin across the business and the need to manage operating costs in anticipation of a downturn. Finally, they discussed the potential for stimulus in China and the possibility of an upside.

Jennifer Rumsey explains that the company is still aiming for EBITDA neutrality in 2027, and that increased investment this year is being made to make sure they have the right product and supply chain in place to reach that goal. She also explains that the outlook for construction in North America is tempered due to data centers and public sector, non-residential construction being strong.

The company is investing $50 million to get their electrolyzer production and product ready for a ramp. This is mainly in the form of engineering resources, and is an operating expense.

The Accelera leadership team has worked to improve margins on the EV side, although demand has been modest. Meanwhile, demand for electrolyzers has been increasing, but the challenge is making sure they are ready for delivery. The market for these products is changing, and it is necessary to invest now in order to benefit in the long run.

Cummins Incorporated held a teleconference to discuss their second quarter earnings. During the call, Jennifer Rumsey discussed investments in the electrolyzer and electrified powertrain side, but there is still uncertainty about the infrastructure and the exact pace of it. Chris Clulow concluded the call, thanking everyone for their participation and making the Investor Relations team available for questions.

This summary was generated with AI and may contain some inaccuracies.