The operator welcomes participants to the Cummins Incorporated Third Quarter 2023 Earnings Conference Call and introduces the host, Chris Clulow, Vice President of Investor Relations. Clulow is joined by Jennifer Rumsey, Chair and CEO, and Mark Smith, CFO, for a discussion of the company's results. Forward-looking statements and non-GAAP financial measures will be discussed, and participants are directed to the website for reconciliations to GAAP measures.

In the second paragraph of the article, the speaker discusses the availability of the press release and financial statements on the company's website. They then introduce the Chair and CEO, Jennifer Rumsey, who will provide a summary of their third quarter financial results, sales and end market trends, and outlook for 2023. The speaker also highlights two major events from the third quarter: a joint venture with two partners to accelerate battery cell production and the acquisition of two Faurecia commercial vehicle manufacturing plants. Both of these events demonstrate the company's commitment to advancing technology and the energy transition.

Cummins has announced the acquisition of Meritor, which will help meet the demand for low emission products. There are also collaborations with natural gas X15 engine with Freightliner and Knight Transportation, Inc. The company's overall performance for the third quarter of 2023 was strong, with revenues increasing by 15%. The EBITDA was also higher compared to the previous year, but there were additional costs related to the separation of the filtration business.

The third quarter of 2023 saw an improvement in EBITDA percentage compared to the same period in 2022, excluding costs related to acquisitions and separations. Operating cash flow also reached a record high, thanks to efforts in cost reduction and operational focus. Revenues in North America grew by 16% due to the addition of Meritor and strong demand in core markets. Heavy-duty and medium-duty truck production and unit sales also saw increases, and 41,000 engines were shipped to Stellantis for use in their Ram pickups, remaining flat from the previous year.

In the third quarter of 2023, engine sales to construction customers in North America decreased by 8%, while revenues in North America Power generation increased by 15%. International revenues increased by 13%, with strong demand in most markets. In China, revenues increased by 24%, with medium- and heavy-duty truck demand increasing by 48%. In India, revenues increased by 13%, while power generation revenues decreased by 16% due to emissions regulation changes. The company is raising its full year 2023 revenue guidance to be up 18% to 21% compared to last year.

The company has narrowed its EBITDA guidance range to 15.2% to 15.4% due to higher revenues in the Components segment and increased profitability in the Power Systems segment. However, profitability in the engine business is expected to decrease due to softening aftermarket and off-highway markets. The company has raised its forecast for heavy-duty trucks in North America for 2023 but maintains its guidance for the medium-duty truck market. Engine shipments for pickup trucks in North America are expected to remain consistent with 2022 levels. In China, the company projects a 15% increase in total revenue, driven by share growth and better volumes. The heavy- and medium-duty truck market in China is expected to improve by 15% to 25%, while the light-duty truck market is projected to improve by 10% to 20%. Despite a slow recovery in the China truck market, the company has seen strong performance for its 15-liter natural gas engine.

Cummins expects the natural gas market to continue to grow, with approximately 20% of the heavy-duty market expected to be powered by natural gas by the end of 2023. They have seen strong customer reception for their natural gas product in China and plan to launch a 15-liter engine in North America in 2024. In China, they expect construction volume to be flat to down 10%, while in India, they project a 6% increase in total revenue. They also expect strong demand in their major global high horsepower markets, with flat to 10% growth in mining engine sales and a 15%-20% increase in power generation revenues. For their Accelera business, they maintain their sales and EBITDA guidance for 2023. In their components segment, they expect revenues from the Meritor business to be $4.7 billion to $4.9 billion, with an EBITDA range of 10.5% to 11%. Overall, Cummins has raised their sales guidance and narrowed their EBITDA guidance range, but expects weaker revenue in the fourth quarter.

The company is experiencing lower demand in certain markets and is taking steps to reduce costs, including offering voluntary retirement and separation programs. They have also returned a significant amount of cash to shareholders and have a strong leadership team in place. Promotions have been announced, including a new role for the Vice President and President of the Engine Business, who will focus on operational improvements during the energy transition.

Cummins has announced changes in leadership positions, with Srikanth taking on a new role focused on customer-focused innovation and Brett Merritt and Bonnie Fetch assuming roles as Vice President and President of the Engine and Distribution businesses, respectively. Both have extensive experience in their respective fields and are well-equipped to lead their segments. These changes come at a time of change and growth for the company.

In conclusion, the speaker thanks Cummins employees for their hard work and dedication in meeting customer needs, strengthening relationships, and overcoming supply chain challenges. The company's third quarter results show a focus on strong performance, future growth, and sustainable solutions while also returning cash to shareholders. Revenues increased by 15%, with 10% being organic growth and 5% from the acquisition of Meritor. EBITDA was $1.2 billion, or 14.6% of sales, with the exclusion of costs related to the planned separation of Atmus and integration of Meritor. Underlying EBITDA was 14.9%, compared to 13.3% a year ago, due to favorable pricing and improved logistics costs, partially offset by higher variable compensation and a one-time employee recognition bonus.

In the third quarter, our gross margin increased by 170 basis points, driven by favorable pricing and logistics costs, but partially offset by higher variable compensation expenses. Selling, admin, and research expenses also increased due to higher variable compensation and engineering costs. Income from joint ventures was higher due to technology fees and improved demand in China. Other income was lower due to foreign currency translation and mark-to-market losses on investments. Interest expense increased due to higher interest rates. The effective tax rate was 21.4% and net earnings were $656 million, including costs associated with the separation of Atmus.

In the third quarter of last year, the company's all-in net earnings were $400 million, which included costs related to the planned separation of Atmus and acquisition and integration costs for Meritor. Operating cash flow was a record quarterly inflow of $1.5 billion, driven by strong earnings and working capital management. The company is focused on generating strong operating cash flow and is pleased with the progress in the third quarter. Revenue guidance for 2023 has been raised to 18% to 21%, and EBITDA is expected to be 15.2% to 15.4%. The Components segment saw a 20% increase in revenue and a 14.2% EBITDA. For the Components Segment, total 2023 revenues are expected to increase 35% to 40% with an EBITDA range of 14.2% to 14.7%.

In the Components segment, Meritor expects revenues to be consistent with previous guidance and EBITDA to be slightly higher. The Engine segment saw a 5% increase in revenues and a higher EBITDA due to operational improvements and a one-time employee bonus. Revenues for the Engine business are projected to increase in 2023 but with a slight decrease in EBITDA due to softening aftermarket revenues and weaker demand in some markets. The Distribution segment saw a 13% increase in revenues and a higher EBITDA due to stronger volumes, improved pricing, and a one-time employee bonus. Revenues for Distribution are expected to increase by 10% to 15% with a narrowed EBITDA range. The Power Systems business saw a 7% increase in revenues and a higher EBITDA due to pricing, higher volumes, and cost reduction activities. Revenues for Power Systems are projected to increase in 2023 with a higher expected EBITDA range.

In the third quarter, the seller's revenues more than doubled to $103 million due to various factors including electrolyzer project delivery and higher demand for battery electric systems. However, the EBITDA loss in the segment was $114 million, which will support future growth. The company's outlook for the topline and bottom line remains unchanged. They expect a 22% effective tax rate in 2023 and plan to focus on capital investments to drive profitable growth, reduce debt, and return cash to shareholders through dividends. The company has also taken steps to reduce costs in response to signs of softening aftermarket demand and weaker demand in some industrial parts. Their priorities for capital allocation in 2023 include reinvesting for growth, increasing the dividend, and reducing debt. The company has already announced a 7% increase in the dividend and has reduced debt by $390 million through the end of the third quarter.

In October, the company reduced debt by $650 million and is now turning the call back to Chris. The first question is about the joint venture with PACCAR and Daimler, and the speaker, Jennifer, explains that the partnership is focused on battery cell manufacturing for the US market. Cummins has previously invested in other key components for electrified powertrains and plans to use the cells in their own battery packs, as well as supply them to PACCAR and Daimler.

The company is launching a new domestic battery offering focused on LFP technology, which they believe will be a successful commercial vehicle battery chemistry due to its lower cost, better durability, and improved safety. They plan to offer this battery cell to other commercial and industrial applications in the US and will continue to offer other battery chemistries around the world. In the short-term, their Engine segment had solid performance but their reduced margin rate for the fourth quarter is due to lower production days and a decline in the aftermarket. This decline is likely related to customers reducing inventory.

The speaker believes that the overall decline in the engine business is less than the reported rate due to inventory adjustments. However, parts revenues have been decreasing and there may be a slight decline in some areas. This, combined with lower production days and decreased absorption, has led the company to initiate cost reduction actions. These actions are not predicting a significant decline in revenues, but rather a prudent move to ensure success in 2024. Additionally, there will be a decrease in JV income in the fourth quarter due to timing of license fees. The speaker does not believe this will change the overall guidance for the engine business. The cost-out decisions are partly related to the outlook for 2024.

The company is seeing a leveling off and slight decline in some markets, and is taking cost-cutting actions as a precautionary measure. They expect some impact on margins in 2023, but are not providing guidance for 2024. They will give a more detailed assessment of cost and benefit impact in the next quarterly earnings call. The actions taken are voluntary and there may be additional actions in the future.

The speaker is asking about the difference in margins between the engine and components divisions in the fourth quarter. The company explains that the engine division has a larger parts business, which is experiencing pressure, while the components division is more stable. Both divisions are anticipating lower volumes in the fourth quarter due to inventory reduction and supply constraints in the North American medium- and heavy-duty truck market. The company also notes that there may be differences in customer demand for parts between the two divisions in the short-term.

The speaker, David Raso, introduces the next question from Rob Wertheimer of Melius Research. Rob asks about the current state of parts destocking and how much channel inventory is left. Mark Smith responds that they have seen destocking in the Power Systems side, particularly in the oil and gas market, but the engine side has been more sustained. He believes they are nearing the bottom of the destocking trend, but it depends on economic factors and truck utilization. Rob also asks about the state of the Chinese market, which has been weak for many industrials.

The speaker is asking for an overview of the current state of the Chinese economy and how it is affecting different parts of their business, specifically in terms of fleet dynamics and recovery. The response mentions that economic activity has been weak, but there has been some improvement. The demand for natural gas engines is strong due to the cost difference with diesel. The company has also made product investments and expects to increase their market share. The speaker also mentions that government stimulus may drive positive momentum in the economy, but there is limited visibility. The recent announcement of a planned bond issuance by the government is seen as a positive sign for future infrastructure growth.

Tami Zakaria asks about the Power Systems business and the expected decrease in margins for the fourth quarter. Mark Smith explains that this is due to a seasonal decrease in demand for parts from industrial customers. Jennifer Rumsey also discusses the increase in R&D investment, which will position Cummins well for the future and help them stay competitive during the energy transition. This includes investments in new engine platforms and the Accelera business for electrolyzers and electrified components.

The company is focused on improving efficiency and investing in R&D to grow margins and the bottom line. They expect higher cash flow in the future due to increased engineering and new engine platforms. There is more visibility in the Power Systems business due to long lead times and underlying demand, with strong visibility for the first half of the year.

The company is expecting more pressure on the on-highway side due to a potential downturn in heavy-duty truck orders. However, the distribution and Power Systems segments are expected to remain stable, with Power Systems showing strong demand in the data center market. The company's largest customer has seen a decrease in their parts business, but the reasons for this are unclear.

The speaker acknowledges that the businesses do not perfectly align, but they are affected by similar dynamics. They mention that destocking has been a major factor, and that there have been different dynamics due to supply constraints during the current cycle. They also note that their market share in North America has increased, which should benefit them in the long term. Overall, they believe that the recent margin influences are due to short-term factors and not long-term market trends.

Jennifer Rumsey, the CEO of Cummins, was asked about the company's visibility into on-highway engine pricing for 2024. She stated that they were price-cost favorable this year and are focused on maintaining a positive price/cost ratio through new product launches and managing inflationary costs. The company expects some slowing in pricing in the market but will continue to work on maintaining a positive ratio. When asked about the construction outlook, the CEO mentioned that there may be a drop in engine demand due to aging construction fleets, but this doesn't necessarily indicate a significant shift in construction activity. The three biggest markets for construction equipment, North America, China, and Europe, are experiencing varying levels of economic growth, with Europe showing a slowing pace and China surprising with its steady demand despite financial concerns in the construction sector.

The company is still uncertain about the future market conditions, and there is still work to be done to determine where they will stand next year. The final question from an analyst is about the expectations for the X15 product and the company's electrolyzer backlog and manufacturing capacity. The company will launch the X15 in North America next year and has seen interest from customers due to its environmental and cost benefits. The electrolyzer backlog is still growing and the company is in the process of commissioning a 25-megawatt electrolyzer with Florida Power and Light.

The company is working on a big project that they are ramping up and will deliver this year. There are no more questions and the conference is ending. The Investor Relations team will be available for further questions.

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