The operator welcomes listeners to the Cummins Inc. Third Quarter 2023 Earnings Conference Call and introduces Chris Clulow, Vice President of Investor Relations, who will be joined by CEO Jennifer Rumsey and CFO Mark Smith. They will discuss the company's results for the fourth quarter and full year of 2023 and answer questions. Before starting, they remind listeners that some statements may be forward-looking and that the actual results may differ due to risks and uncertainties. They also mention discussing non-GAAP financial measures and provide a link to the company's website for more information.

In this paragraph, Jennifer Rumsey, Chair and CEO of Cummins, discusses the company's performance in 2023 and its plans for 2024. She highlights their commitment to clean energy technology and innovation, particularly through their Destination Zero strategy and the development of zero emission solutions. Rumsey also mentions their investments in fuel-agnostic engines and collaborations with natural gas engines to help customers achieve their decarbonization goals. Overall, she expresses pride in the company's accomplishments and optimism for the future.

The company is seeing strong interest in their upcoming launch and has announced a joint venture and a new manufacturing location for their Accelera business. They have also reached a milestone in electrolyzer orders and have expanded their emissions compliance program. They have resolved US regulatory claims and have strengthened their product compliance and regulatory affairs organization.

In the fourth quarter of 2023, the company saw strong demand for their products in key markets, resulting in a 10% increase in revenues compared to the previous year. However, EBITDA was a loss of $878 million due to several costs related to regulatory claims, retirement and separation programs, and the separation of a business segment. Excluding these costs, EBITDA was $1.2 billion, showing an increase from the previous year. Research and development expenses also increased as the company continues to invest in future technologies. Operating cash flow was strong at $1.5 billion. Overall, 2023 saw record revenues of $34.1 billion, driven by the acquisition of Meritor and strong demand in global markets, but EBITDA was lower compared to the previous year.

In 2023, the company incurred significant costs related to regulatory claims, headcount reduction, and separation of a business. However, excluding these costs, the company achieved record EBITDA of $5.2 billion, driven by higher volume and pricing. The distribution, components, and power systems segments all saw improved EBITDA percentages. The Power Systems segment in particular showed a significant improvement due to a focused business transformation effort. Meritor also saw a significant increase in EBITDA, and the company is working to further improve margins and expand its global reach. Operating cash flow was also a record for the year. Looking ahead to 2024, the company remains focused on strong cash generation and provides an outlook for individual regions and end markets.

The company's 2024 guidance includes Atmus for the full year but excludes any costs or benefits related to the planned separation of the business. They are forecasting a decline in total company revenue and EBITDA due to slowing demand in key regions, particularly in North America heavy duty truck market. They expect a decline in industry production for heavy and medium duty trucks in North America, but anticipate growth in the China and India markets. They also expect a decline in engine shipments for pickup trucks in North America but anticipate strong performance for their natural gas engine in China.

In 2024, the global construction market is expected to decline by 5-15%, while the power generation market is expected to see a 5-10% increase. Sales of mining engines are expected to decrease, but there is a growing pipeline of orders for electrolyzers and continued growth in electrified components. Despite record revenues, EBITDA, net income, and earnings per share in 2023, there may be a moderating demand in North America truck production in the second half of 2024. However, this may be offset by a strong power generation market, resilient distribution business, and improved Accelera sales. Cummins is also taking steps to reduce costs and optimize their business for continued success in 2024.

In the final paragraph, the speaker announces the date for the Analyst Day and hands over to Mark to discuss the financial results. Mark mentions that they exceeded their expectations for revenue and had a net loss of $878 million in the fourth quarter. He also mentions a one-time charge of $2.04 billion and costs associated with voluntary retirement and separation programs. The full year results show a record $34.1 billion in revenue and a net loss of $3 billion. Mark also mentions costs related to the planned separation of Atmus and the indefinite suspension of operations in Russia.

In the fourth quarter of 2023, our business saw a 10% increase in revenues compared to the previous year, with strong performance in both North America and international markets. EBITDA was $1.2 billion, with improved pricing and strong operating cash flow offset by higher compensation and investment costs. Gross margin increased by 30 basis points, driven by favourable pricing and higher volumes. Selling, admin, and research expenses also increased due to investments in new products and higher variable compensation costs. Joint venture income saw a $25 million increase, while other income increased by $17 million due to the recovery of technology fees.

The company's interest expense increased by $5 million in the fourth quarter due to higher interest rates. The all in effective tax rate was negative 13.3% due to non-deductible costs associated with a regulatory settlement. The company reported a net loss of $1.4 billion for the quarter, which includes costs associated with the regulatory settlement, voluntary retirement and separation programs, and planned separation of Atmus. Operating cash flow was $1.5 billion, higher than the previous year. For the full year, revenues were a record $34.1 billion, with a 21% increase from the previous year. EBITDA for the year was $5.2 billion, an increase of $1.2 billion from the previous year. Net earnings for the year were $735 million, compared to $2.2 billion in the previous year.

In 2023, the company's net earnings included costs related to a regulatory settlement, the separation of Atmus, and voluntary separation programs. Cash from operations was a record high, and capital expenditures increased as the company invested in new products and capabilities. The company's long-term goal is to return at least 50% of operating cash flow to shareholders, and in 2023, they returned 56%. The company's priorities for cash deployment in 2024 are expected to be similar to those of the previous year. The operating segment revenues were a record high, and EBITDA increased by 40%.

In 2024, the company expects a decrease in total revenue and EBITDA margins for the components business, while the engine segment is projected to have a decrease in revenue and EBITDA. The distribution segment had an increase in revenue and EBITDA in 2023, but is expected to have a decrease in revenue and EBITDA in 2024. The power system segment had record revenues and EBITDA in 2023 and is expected to have a decrease in revenue and an increase in EBITDA in 2024. The company also expects Accelera revenues to increase and net losses to decrease in 2024. Overall, the company projects a decrease in revenues and an increase in EBITDA margins for 2024.

The company expects to make capital investments of $1.2 billion to $1.3 billion in order to support future growth. They had a successful year in 2023 with record sales and strong profits, and will continue to focus on cash generation, returning cash to shareholders, and maintaining a strong balance sheet. They anticipate a moderation in certain markets in 2024 and have already taken steps to reduce costs. They plan to split their ownership in Atmus through an exchange offer, giving shareholders the option to exchange their Cummins stock for Atmus stock. The company's guidance for the year includes the inclusion of Atmus in their consolidated results, but excludes any costs or benefits of the separation. They will update their guidance once the separation is completed.

The speaker asks participants to limit themselves to one question and a follow-up, and to rejoin the queue if they have additional questions. The first question is from Jerry Revich from Goldman Sachs, who asks about the impact of new engine regulations on margins and the potential for a price increase. The speaker responds by saying that they typically see an increase in content and value for customers with new emissions regulations, but also an increase in warranty costs. The company is currently focused on improving operating performance and investing in future platforms for profitable growth.

The speaker discusses the progress the company has made in driving efficiency and reducing logistics costs. They mention that labor hours per unit have improved and costs have leveled out. However, there is some concern about potential shipping delays in the near future. They clarify that the projected decrease in engine shipments in North America is for medium duty trucks, not heavy duty trucks.

The heavy duty market is expected to see a decrease of 10-15% this year, with improvements in supply constraints and backlogs looking strong. The medium duty market is performing well, but a shallow cycle and softening in the second half of the year are predicted. Market share implications will be discussed with Chris after the call. The engine segment is expected to have high decrementals in 2024, with the JV income being a drag. The parts headwind was pronounced in 2023, and assumptions around product coverage are also factored into the guidance.

David Raso asked about the company's costs and if there will be an inflection point in the next year or two where costs will decrease. Jennifer Rumsey responded that the energy transition will take decades and the company is currently investing in fuel agnostic engine platforms. She believes these investments will position the company well in the future as customers transition to alternative fuel options.

The company is expecting to see higher levels of R&D in their products until they launch them in the '26, '27 timeframe. They are also investing in their accelerator business and looking at opportunities to share investments. As revenues grow, they will improve different parts of their business. They are also focused on improving operating performance and reducing costs. The company is expecting a decline in North America truck sales throughout the year, but the exact cadence is uncertain.

Jennifer Rumsey and Mark Smith discuss the lead lag between engine and truck build rates, stating that the company's engine build rates will slightly lead truck build rates. They expect the current rate to hold steady through the first part of the year and then forecast a softening in the second half. They also mention that there may be some vulnerability in the heavy duty truck market, but they expect to move in line with the market. They also mention a product changeover in the pickup market that will drive Q4 volumes lower. In regards to the second half slowdown, they mention that last quarter they had indicated a potential softening in the aftermarket, but things came in at the higher end of their expectations. They now expect aftermarket to pick up in the second half, with a forecast of flat to up 5% for the year. They are confident in this forecast due to customer commentary.

In the aftermarket, there was a decrease in demand for parts in Q4 due to customer cash flow management, but it is expected to recover in the coming year. The backlog of truck builds has been slowly decreasing, and there is concern about the health of truck fleet operators and spot rates. The Accelera business is expected to deliver on electrolyzers over the next 12-18 months, and the profitability of the business is expected to increase as deliveries increase, with an exit rate in 2024.

Jennifer Rumsey discusses the current state of investments in Accelera businesses, specifically in R&D and manufacturing to scale up the production of electrolyzers and electrified components. Backlog for electrolyzers is at a record level, and as revenues grow, margin performance is expected to improve. The 2024 investment plan also includes investing in a battery cell joint venture to ensure a leading cell for commercial vehicles in the U.S. and domestic supply. Rob Wertheimer asks for an update on the data center and large engine market, which is currently strong and expected to continue growing due to trends in cloud storage and artificial intelligence.

The demand for data center products is expected to continue growing at a strong pace, with a 10-15% increase projected. The company is confident in their capacity to meet this demand and is focused on improving the performance of this business. The trend is expected to continue in the next few years and the company is constantly evaluating their capacity to meet the demand. In regards to medium duty, there were supply chain constraints which affected production, but the market is expected to remain strong with pent-up demand for the company's products.

During a conference call, an operator introduces a question from Tami Zakaria with JPMorgan. Tami asks about the company's previous scenarios for DV adoption and how it may affect their Accelera revenue target for 2030. Jennifer Rumsey, the company's representative, responds by stating that they will be refreshing their view on adoption at their upcoming Analyst Day in May. She also mentions that current regulations and incentives may lead to a slower adoption rate, but it would still fall within the range they previously suggested. In terms of cash flow and leverage, the company typically aims to return 30% of cash flow to shareholders, but the recent settlement may impact this.

Mark Smith, the speaker, says that they will start the year with the same approach as last year - investing in the business, focusing on dividends, and de-levering. They will continue to evaluate this strategy as the year progresses and will de-lever as they generate more cash. The guide for China truck sales is wide due to low visibility and uncertainty in the market. The low end reflects a weak base, while the high end leaves room for unexpected stimulus. The company is doing well with launching new products and is optimistic about outperforming the market in China.

The speaker discusses the current state of the market and how they hope for more tangible help in the near future. They mention that they will provide updates on data points and have a stronger view by the end of Q1. Due to a strained voice, another speaker will answer questions. The focus for 2024 will be on debt reduction and payment of dividends, with the potential for share count to go down due to the Atmus operation. The company will continue to evaluate opportunities for growth and capital returns.

The speaker answers a question about Meritor's financial performance in 2023 and how it will contribute to the company's overall components guide for 2024. They mention that Meritor achieved its goals for the year and will continue to improve in 2024. The speaker also thanks the participants and concludes the call.

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