Operator:

Greetings and welcome to Cummins, Inc. Second Quarter 2024 Earnings Call. On our call today is Jen Rumsey, Chair and CEO; Mark Smith, Vice President and CFO; and Chris Clulow, Vice President of Investor Relations. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Clulow. Thank you. You may begin.

Jennifer Rumsey:

Thank you, Chris and good morning. I'm excited to be with all of you today as I celebrate my two-year anniversary of becoming CEO of Cummins. I'll start with a summary of our second quarter financial results. Then I will discuss our sales and end market trends by region. I will finish with a discussion of our outlook for 2024. Mark will then take you through more details of both our second quarter financial performance and our forecast for the year. Before getting into the details on our performance, I want to take a moment to highlight a few major accomplishments from the second quarter. At our recent Analyst Day, I shared that we are raising our long-term financial targets as a result of our of our strengthening portfolio and continued execution our Destination Zero strategy. The strong partnerships that we have with customers and stakeholders are key to driving our strategy and growth profile forward. In this quarter, we strengthened those partnerships even further. In May, we announced with Isuzu Motors Limited the launch of a new 6.7-liter engine designed for use in Isuzu medium-duty truck lineup. This engine will power on-highway truck applications for the Japan market and will be available for Asia-Pacific markets and other global markets later this year. We also announced plans to launch a battery electric powertrain for Isuzu's F-Series in North America. Availability of the medium-duty truck is expected in 2026 and will include Accelera's next-generation lithium-ion phosphate or LFP battery technology. These advancements mark an important milestone for both Cummins and Isuzu as Cummins enters the Japan on-highway market for the first time in our history. We are proud of the partnership our two companies have built, and I'm excited to leverage our collective strength and scale to deliver profitable growth for both partners. Also this quarter, we further progressed our partnership with Daimler Trucks and buses and PACCAR as we completed the formation of joint venture now known as Amplify Cell Technologies, to localize battery cell production in the in the battery supply chain the United States. This included naming the Chief Executive Officer of joint venture and breaking ground at a new manufacturing plant in Marshall County, Mississippi. Amplify Cell Technologies will enable Accelera by Cummins and our partners to advance battery cells focused on commercial and industrial applications in North America and serve our customers' evolving needs. This is a significant step forward as we continue leading our industry into the next era of smarter, cleaner power. And in July, Accelera was awarded $75 million from the Department of Energy to convert approximately 360,000 square feet of existing manufacturing space at our Columbus, Indiana engine plant for zero emissions components, including battery packs and electric powertrain systems. The $75 million grant is the largest federal grant ever awarded solely to Cummins and as part of the appropriations related to the inflation Reduction Act. The Columbus engine plant is also where we manufacture blocks and heads for our current and next-generation engine-based solutions, further showcasing our Destination Zero strategy in action. Now, I will comment on the overall company performance for the second quarter of 2024 and cover some of our key markets, starting with North America before moving on to our largest international markets. Demand for our products remain strong across many of our key markets and regions, resulting in record revenues the second quarter of 2024. Sales for the quarter were $8.8 billion, an increase of 2% compared to the second quarter of 2023, driven by continued high demand and improved pricing. EBITDA was $1.35 billion or 15.3% compared to $1.3 billion or 15.1% a year ago. Second quarter 2023 results included $23 million of costs related to the separation of Atmus. EBITDA and gross margin dollars improved compared to the second quarter of 2023 as the benefits of higher volume and pricing exceeded supply chain cost increases and offset the impact of the Atmus separation. Our second quarter revenues in North America grew 4% to $5.5 billion, driven by the strong demand in our core markets more than offsetting the impact of the separation of Atmus. Industry production of heavy-duty trucks in the second quarter were 75,000 units, up 1% from 2023 levels. While our heavy-duty unit sales were 31,000, up 7% from a year ago. The second quarter marked record production volume for our heavy-duty engines at the Jamestown Engine plant. Industry production of medium-duty trucks was 41,000 units in the second quarter of 2024, an increase of 4% from 2023 levels, while our unit sales were 38,000, up 13% and also outpacing the market growth. We shipped 41,000 engines to Stellantis for using the Ram pickups in the second quarter of 2024, up 8% from 2023. Revenues in North America power generation increased by 23% and driven by continued strong data center and mission-critical power demand. The impressive power generation performance in North America and across the globe helped us achieve record sales and profitability in the Power Systems segment. Our second quarter international revenues decreased 2% compared to last year. Second quarter in China, including joint venture, were $1.6 billion, a decrease of 2% as weaker domestic volumes were partially offset with higher data center demand. Industry demand for medium and heavy-duty trucks in China was 270,000 units, a decrease of 3% from last year. Demand in the China truck market continues to run at low levels with higher orders for natural gas engines and strong exports offsetting weak domestic diesel demand. In light-duty market in China, we were up 4% from 2023 levels at 480,000 units while our units sold, including joint ventures, were $33,000, an increase of 18%. The industry demand for excavators in China in the second quarter was 53,000 units, an increase of 4% from 2023 levels. Our units sold were 10,000 units, an increase of 19% as a result of QSM15 penetration at both new and existing OEM partners and export growth. Sales of power generation equipment in China increased 36% in the second quarter, primarily driven by accelerating demand in data centers. This helped drive impressive financial performance at our Cummins Chongqing joint venture within our Power Systems business. Second quarter revenues in India, including joint venture, were $649 million, a decrease of 10% from the second quarter a year ago. Industry truck production increased by 11% and while our shipments increased by 5%. Power Generation revenues decreased by 17% year-on-year as the second quarter of 2023 benefited from pre-buy demand ahead of emissions regulation changes. Now, let me provide our outlook for 2024, including some comments on individual regions and end markets. We have raised our expectations for 2024, while still anticipating the second half to be weaker than the first half, primarily in the North America heavy-duty truck market. We are increasing our revenue guidance to down 3% to flat compared to our prior guidance of down 2% to down 5%. We are also increasing our EBITDA guide to be 15% to 15.5%, compared to our prior guide of 14.5% to 15.5%. We now expect higher revenue in our Engine, Power Systems and Distribution segments, offsetting slightly lower revenue expectations for the Accelera business. We also expect stronger profitability in our Engine and Power Systems segments, driving most of the improvement in EBITDA. We are maintaining our forecast for heavy-duty trucks in North America to be 255,000 to 275,000 units in 2024 as we still expect softening in the second half of the year. In the North America medium-duty truck market, we are raising our forecast to be 150,000 to 160,000 units, flat to up 5% from 2023. This is an increase from our previous guidance by 10,000 units as we continue to benefit from an elevated backlog and strength in vocational orders. Consistent with our prior guidance, our engine shipments for pickup trucks in North America are expected to be 135,000 to 145,000 in 2024, with a planned model year changeover likely to drive a temporary dip in production in the second half. In China, we project total revenue, including joint ventures, to increase 3% in 2024, consistent with our prior guidance. In India, we project total revenue, including joint ventures, to increase 8% in 2024, primarily driven by strong power generation and on-highway demand. We expect industry demand for trucks to be flat to up 5% for the year. For global construction, we project down 10% to flat year-over-year, consistent with our prior guidance. We continue to expect slightly weaker property investment and slowing export demand in China. We are raising our guidance for the global power generation market to be up 15% to 20% compared to our prior guidance of up 10% to 15%, driven by continued increases in the data center and mission-critical markets. Sales of mining engines are expected to be down 5% to up 5%, consistent with our prior guidance. For aftermarket, we have improved our guidance to flat to up 5% for 2024, raising the bottom end of our previous guidance of a decline of 5%, with demand holding up better than expected in on- and off-highway markets. In Accelera, we expect full year sales to be $400 million to $450 million, a reduction of $50 million from the prior guide. As we noted at our Analyst Day, the energy transition is progressing more slowly, impacting both our e-mobility and electrolyzer revenues. In summary, coming off a strong first half of the year, we are raising our guidance on sales to down 3% to flat and raising our EBITDA guidance to 15% to 15.5%. While we anticipate softening in the North America heavy-duty market in the second half of the year, demand in several of our core markets remain strong. Should economic momentum slow, Cummins is in a strong position to keep investing in future growth, bringing new technologies to customers and returning cash shareholders. In July, we announced an 8.3% increase in the quarterly dividend from $1.68 to $1.82 per share, the 15th consecutive year in which we have increased the dividend. During the quarter, we returned $230 million to shareholders in the form of dividends consistent with our long-term plan to return approximately 50% of operating cash flow to our shareholders. Our diluted earnings per share benefited from a lower number of shares outstanding with the impact of the Atmus split more fully reflected in the weighted average share count in the second quarter. In summary, we had a strong performance in the first half of 2024, driven by record demand for Cummins products in our core markets. It is exciting to see our business grow with long-established customers in existing markets and to see newer partnerships yield additional opportunities in previously untapped markets for Cummins. I'm grateful for our employees who continue to execute on our strategy and deliver solutions that help our customers win wherever they operate. Our results reflect our dedication to delivering strong financial performance while also investing in our future growth, bringing sustainable solutions to decarbonize our industry and returning cash to our shareholders. As we discussed at Analyst Day, there is a lot to be excited about in our future. Now let me turn it over to Mark.

Chris Clulow:

Thank you, Mark. [Operator Instructions] Operator, we're ready for our first question.

Steven Fisher:

Thanks. Good morning. Just on China truck, you didn't change your expectations there. Wondering how you're thinking about some of the new incentives that the government put in place there to support the second half of the year. Is that a potential point of conservatism in your outlook? Or do you think it may not materialize in there?

Operator:

Thank you. Our next question comes from the line of Jamie Cook with Truist Securities. Please proceed with your question.

Mark Smith:

Okay. Good questions. We'll try and fit in our answers with the time available for us this evening. On Power Systems, there's really three elements to the margins. And to answer the last part of your question, yes, we do expect there's still more to come. So, the team there is doing a fantastic job, started with some cost reduction, reprioritizing where we're where we're investing, investing less, strong pricing environment on the Power Systems side and then yes, there's more to do on the operational efficiency. So really, it's several strings to the bow in terms of what's been driving the results and still more to come. So we're really, really excited. Hopefully, you felt the confidence from Jenny Bush and to the team from the Analyst Day and have continued to deliver here in the second quarter, and we're bullish on that segment. That's -- those are really the main drivers on Power Systems.

Operator:

Thank you. Our next question comes from the line of Steve Volkmann with Jefferies. Please proceed with your question.

Mark Smith:

Yes. Great questions. So on average, across the company, very, very much by segment, but 2.5% for the year, and that really hasn't changed. That's not changed in the results, but it definitely has been an important driver of the Power Systems results. And I don't think it's going to vary a lot that year-over-year increase should mostly hold across all the quarters.

Jerry Revich:

Yes, hi. Good morning, everyone. And Jennifer, Happy Anniversary.

Jerry Revich:

I wanted to ask on the medium-duty engine platforms globally, right? So you folks are picking up Daimler's business, now you're picking up Isuzu business in Japan. Can you just expand and talk to us about how many more medium-duty engines, you folks expect to ship globally 2026 versus, I don't know, call it, two or three years ago, given the timing of the transition? And if you could just comment on Japan, is it -- help place to import product into given the currency. Can you just talk about how you folks are able to do that economically? Thank you.

Mark Smith:

In India and Brazil to the later 2027.

Operator:

Thank you. Our next question comes from the line of Angel Castillo with Morgan Stanley. Please proceed with your question.

Mark Smith:

Yeah. So we've got a little bit of help. We've improved the parts outlook. So that certainly helps overall -- we've been taking some measured actions across the company since the second half of fourth quarter of last year into the fourth quarter -- into the first quarter of this year, those should help with some lower costs in the second half of the year. And then we've got a stronger outlook in medium-duty truck. So those are really the three key elements. We're not going to get into breaking down the profitability by us. Those are really the three things that have helped improve. Yeah, and I think the conversion on the volume and the second quarter showed us there's still more room for improvement just in general operating efficiencies. No real change in -- in pricing most of the segments.

David Raso:

Hi. Thank you my question is on the guide. One area little skeptical on -- one area where it seems like you have some upside. The engine business, the second half of the year, you're guiding the revenues down only 3% year-over-year. And I'm just trying to go through heavy truck builds down double digit or the parts business mutes that. The light duty has the soft fourth quarter on the model change. Off-highway, comp fees, China a little better but big declines in Ag and some in construction. So I'm trying to understand why the revenue going down 3%? Or is it there's enough new penetration of customers that can push against all that, and at the same time, the engine margins only go down 30 bps sequentially on lower revs. And then the upside is PowerGen revenue growth less than 5% year-over-year in the second half, you're up over 6% in the first half. And the margins are down sequentially, I mean I understand the industrial piece within power can be down, but at least there are comp fees. So I'm just trying to understand, I assume PowerGen has a little more focus, a little more capacity, right, being pushed at minimum, good pricing. So again, why the -- or maybe it's just conservative, conservative on PowerGen, and if you can make us more comfortable on that engine? Thank you.

Operator:

Thank you. Our next question comes from the line of Tami Zakaria with JPMorgan. Please proceed with your question.

Mark Smith:

So to the latter, not significantly, we've probably got about 50 basis points of cost headwind across all the different categories, varies by business and segment. And then on distribution, you're right to point out the margins. So there's really -- yes, for distribution, PowerGen is a little bit dilutive relative to the rest of the segment, even though obviously within Power Systems, its very accretive. So that's true. We've called that out. Also in the first and the second quarter, there was some modest individual charges that didn't merit to be called out in the overall results. So I don't merit a lot of commentary, but just say they've trimmed the margins a little bit. And, therefore, we're really just reflecting where we are for the year. We do believe distribution margins have still got significant potential to improve over time, so that’s what’s going on.

Tim Thein:

Hi. Good morning. I'll maybe combine these before I get the hook. Actually both pertaining to the North America heavy-duty segment. And the first part is just around market shares, Mark. Obviously, those can and do shift around quarter-to-quarter. And I'm just thinking big picture as we get in a softer back half of the year where the sleeper segment likely is disproportionately impacted from a production standpoint at the expense of vocational. I would imagine that favors Cummins from a share perspective, just absent any kind of specific OEM programs and other factors. So, maybe just your thoughts on that. And then the second part is just on the parts business, obviously, has been kind of a choppy past few quarters, but the commentary seems to be more positive, whereas some of the dealers and OEMs that have reported recently have flagged softness there. So I'm just curious, is that just kind of an absence of customer destocking that you went through last year or better just fleet utilization? What's driving that? If you can things. Thank you.

Operator:

Thank you. Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.

Jennifer Rumsey:

Yes. Great. Thanks for the question. No, we are launching that product this month. with PACCAR excited to get it out in the market and then we'll launch it next year with DTNA, so have more offering there. We've got some early demand from some of the big fleet customers that have sustainability goals in the market, and we'll see how that develops over time, really with those fleet and other customers. And so we've projected we could get up to about 8% in the market, but I think it's going to take some time for us to get up to that. that level and for that market to develop in these operating costs and sustainability goals to drive demand up.

Jeff Kauffman:

Thank you very much. I just wanted to follow-up on the engine slowdown that you're projecting for the second half of the year and maybe try and carry this into early 2025 because I think there's a perception that we're weak for a quarter or two and then the pre-buy kicks in and we're off to the races. When do you believe we start to show positive comparisons potentially in North American engines? And then we have an election this November, and I don't really know which way it's going, but just any thoughts on how a Republican victory or a Democratic victory might change the outlook for engines or new power?

Mark Smith:

And I just -- I know there's a lot of questions about heavy duty. But as we mentioned earlier, the demand for medium duty is getting stronger. We're actually investing to raise capacity over time, partly because of the strength of the market part because of the new business we've won. So right now, the expectation is that less volatility and a sustained high demand is what we're being told right now. Things can change based on the economy. But there's more question marks about heavy. Clearly, it's going down in the near-term and a lot less questions about medium duty for now.

Kyle Menges:

Thank you. I just wanted to dive a little bit deeper into the power systems and really focus on the unit outlook and how to think about capacity for the remainder of the year and then how you think about you could exit the year from a capacity standpoint or just doing the math, it seems like. And assuming you're running pretty hot from a capacity standpoint, it seems like unit shipments capacity for the year would be around 20,000 or so units. I'm curious what that might look like the capacity on an annualized basis exiting the year and looking into 2025 with some of the investments you're making?

Jennifer Rumsey:

Yeah. The only thing I'll add to Mark's comments, which are absolutely accurate is, in particular, the data center market. What you've seen happen in the first half of the year was we worked really hard on our supply base and production and the 95 liter, which is running now at capacity, and then we launched the Symptoms product, which adds -- adds additional platforms, including a 78-liter that's able to run at this 3-megawatt key data center point. And so helped us the supply chain improvement as well as the new product launches helped us increased revenue and what we're selling into the market. But we're continuing to run into capacity constraints on some of the platforms in that data center market, in particular, which is why we're making some modest investments to be able to take up capacity over the next couple of years.

Chris Clulow:

Thanks, everybody, for participating today. That concludes it for today. As always, the Investor Relations team will be available for questions further after the call and throughout the rest of the week. Thank you. Bye.

Operator:

Greetings, and welcome to the Q1 2024 Cummins Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Clulow, Vice President of Investor Relations. Thank you, Chris. You may begin.

Mark Smith:

Thank you, Jen, and good morning, everyone. We delivered solid first quarter revenue and profitability and generated positive operating cash flow. Given the strength of first quarter results and our improved outlook, we've raised our full year expectations for 2024 after adjusting for the separation of Atmus. First quarter revenues were $8.4 billion, down 1% from a year ago. The separation of Atmus in mid-March resulted in a year-over-year sales decline of around 1% to our -- to Cummins consolidated sales.

Christopher Clulow:

Thank you, Mark. [Operator Instructions] Operator, we're ready for our first question.

Stephen Volkmann:

I think I'd like to start off with power gen, if we could. That business seems to be going well. So sort of 2 things I'm curious to hear about exactly kind of what you think your position is in the data center market. How much of your business is data centers?

Jennifer Rumsey:

Great. Thanks, Steve. And as you heard in the guidance, we're projecting the power gen business to be up 10% to 15% for the year, and data center, mission-critical is really the driver of that. And we've had a very strong demand from data center customers, have had historically a strong position in that market, and that market is obviously growing. We're sold out on our 95-liter through 2025 right now. And I mentioned the launch of the new Centum product, which uses our 50 and 78-liter engine. So that's providing additional solution to those customers. And then, of course, we're continuing to look at capacity of the 95-liter and how we plan to support what we think will be continuing strong and growing market.

Jennifer Rumsey:

Yes, we do have concrete plans to increase the capacity that we have in place to-date for the 95-liter.

Jerry Revich:

I wonder if I just ask the cadence of earnings over the course of this year, nice to see an upwards revision to both top line and margins. Mark, can you just talk about where the quarter came in versus your expectations because obviously, the quarter was light versus where the consensus was set up, and I'm just wondering how the quarter developed versus your internal plan. And what's the cadence of the acceleration that you folks are seeing to raise the guidance higher?

Jerry Revich:

Super. And can I just ask from a bigger picture standpoint, so new regulations 2027 will have embedded warranties essentially. What does that mean for your parts market share. Is that an opportunity when that field population increases for you folks to have higher engine parts market share because of that warranty dynamic on the new regulations, how significant is that opportunity?

Nicole DeBlase:

I'm going to ask mine together because they're related. So and they're both around Power Systems. So I think in the guidance, you guys are embedding full year margins below 1Q levels. I think it's a lumpy business, but if I look back historically, it's more common that the second half is higher. And then similar question on growth, the comps [ reduced ] slightly in the second half, but your full year growth guidance is, for an outcome less than the growth you saw in the first quarter. So if you could address both of those items.

David Raso:

May 16, the meeting, can you just give us some expectations around the meeting? I think particularly around the margins. I think people are just trying to figure out the operating leverage in the company in the last couple of years, maybe not quite the margins people were expecting. Even the guide today, it was nice to see the power gen margin increase. But overall, the relative increase in earnings relative to the increase implicit in the sales guide. Still not that tremendous. So I'm just curious if you can sort of tee up a little bit what should we expect May 16. not trying to steal the thunder of the meeting but just to level set...

David Raso:

Okay. And 1 quick one. The JV income in the first quarter was up year-over-year, but you're still guiding the year down. And I'm just trying to make sure we know why is it down? Is it China not continuing some of the improvement? Is there other parts of the royalty income? I know it's a pretty lumpy line item within the JV income. If you can help us with that would be great.

Mark Smith:

Which is embedded in Accelera.

Operator:

Our next question comes from the line of Angel Castillo with Morgan Stanley.

Jennifer Rumsey:

Yes. So there's a couple of dynamics to keep in mind in that market. So first of all, as I articulated, the order board is pretty long. And so some of the work to improve price cost in response to inflation and performance of the business takes some time to play out. So we're starting to see stronger pricing leverage come into that market. And then we're continuing to, of course, drive improvements in the Power Systems business and efficiency in manufacturing and supply chain. And I noted the launch of the new products that we've also designed to be able to sell at some higher margins. So there are some favorable dynamics that have been happening in the power gen market compared to historically where we would have been in margin performance.

Jennifer Rumsey:

Yes. So certainly, like in past emissions regulations, our goal is to deliver incremental value to the customer, to have margin improvement associated with that. You will see with the 27 EPA regulations, we already talked about the emissions warranty dynamic. You will also see added content, in particular, after-treatment system to meet those regulations has notable additional content.

Operator:

Our next question comes from the line of Tami Zakaria with JPMorgan.

Mark Smith:

Good question. You're right that the Atmus separation is a little bit dilutive to margins. So yes, good that you picked up on that. It's really volume and a little bit of cost reduction activity. Those are the 2 primary drivers.

Robert Wertheimer:

My question is going to be around your competitive positioning in the 2027 EPA from what you can see today. There's a bunch of questions we get on whether there's a prebuy on what the cost increase would be and maybe the warranty should be stripped out of that, I'm not sure.

Jennifer Rumsey:

Yes. Great. Thanks for the question. And we are investing, as we've talked about in the new HELM engine platforms. And we're in a unique position because of our scale to continue to invest in what will be a market-leading engine solutions to meet those future regulations.

Noah Kaye:

Just sticking with the EPA 2027 for a minute here. If the final rules continue to provide nice crediting of hydrogen trucks. And just given your offerings in this space, wondering if you started to see more of a pickup for hydrogen fuel cell or whether most of sort of the Accelera inbounds at this point are primarily both.

Noah Kaye:

Yes, makes sense. And then you mentioned that you got regulatory approval for the JV. So just can you lay out for us kind of the game plan on how spending for the gigafactory should proceed over the next couple of years? And what you may be doing at this point in terms of lining up supply and demand for the factory, at least your [indiscernible]

Jamie Cook:

So sorry, I'm managing through like 7 calls. I hope this hasn't been asked. But Mark, the question is to you, I guess, understanding you have your guys' Analyst Day coming up this month. I'm just looking at Cummins and thinking, okay, perhaps there's a cost story there, you have market share gains that should be helping you maybe less spend on Accelera. I'm just wondering, as you think about margins over the medium term, do you think there's an opportunity to structurally improve incremental margins? Or as you think about sort of the next couple of years, it is more so taking these actions to hit Cummins' historic targeted incremental margins?

Mark Smith:

So I heard you we will explicitly address incremental margins in May. You will not miss that for all who are asking, very appropriate, at center of mind -- or top of mind for us clearly. So you will hear that very, very shortly, I guess.

Mark Smith:

Yes. And then what you heard maybe earlier was some industry consensus building about '25 and '26 ahead of 2027. So our baseline assumption today is that this is not as sharp or as steep as normal cyclical downturn. That's an assumption, not a fact, but that's what we've baked into our outlook for this year. China is the 1 where we're still -- we're waiting for more momentum probably.

Jeffrey Kauffman:

I was just curious your thoughts. It's apparent that the downturn, I think a lot of us feared in '24 on the heavy-duty engine side isn't going to be as bad as originally feared. I know ACT Research has taken up their forecast. You did mention some weakness beginning in 3Q, but are we taking from what would have been otherwise prebuy in '26 if we have a better '24? Or do you think the 2 are unrelated?

Operator:

Our last question comes from the line of Chad Dillard with Bernstein Research.

Christopher Clulow:

Sorry, can you repeat that? I don't think we got the first part.

Jennifer Rumsey:

Yes. So we are -- as you know, we've taken up our R&D investments. We noted that in our comments because we're making investments, in particular in these new fuel-agnostic engine platform. So we're at an elevated level of R&D for those new platform investments. And those products are beginning to launch and really will launch through the '26 and '27 time period. And then, of course, we're at a period of investment in the Accelera business as we work to launch new products and ramp up revenue there as well.

Christopher Clulow:

Thanks, everybody, for your participation today. That concludes our teleconference. Really appreciate the interest. And as always, the Investor Relations team will be available for questions after the call. Have a good day.

Operator:

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Greetings, and welcome to Cummins Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to, Chris Clulow, Vice President of Investor Relations. You may begin.

Jennifer Rumsey:

Thank you, Chris and good morning, everyone. I'll start with a summary of 2023 and discuss our fourth quarter and full year results and then I'll finish with the discussion of our outlook for 2024. Mark will then take you through more details of our fourth quarter and full year financial performance and our forecast for this year. As I reflect back on 2023, I am incredibly proud of what Cummins and our employees accomplished for our stakeholders and I feel energized about the opportunities ahead for us as we continue to demonstrate our relentless focus on being a global leader in clean energy technology and innovation. We made significant progress in achieving our Destination Zero strategy and it continues to be clear that this dual path approach to reducing greenhouse gas and air quality impacts of our products is the right approach to meet our customers' needs today and continue to grow our business and impact. We did this by advancing our core business as well as developing new zero emission solutions through Accelera by Cummins. Most notably, for our core business in 2023, we committed to investing more than $1 billion across our US engine manufacturing network to support the industry's first fuel-agnostic engine and platforms, as well as unveiled the X10 fuel-agnostic series launching in North America in 2026. Additionally, we initiated several collaborations with our natural gas X15 engine, which will launch in North America this year and further enables our customers to achieve their decarbonization goals. This is the industry's first natural gas engine design specifically for heavy duty and on-highway truck applications, offering customers the opportunity to realize reductions in nitrous oxide and greenhouse gas without compromising performance. We are continuing to see strong interest from both OEMs and end users ahead of the launch later this year. In our Accelera business, we announced a joint venture with Daimler Trucks and Buses, PACCAR, and EVE Energy to accelerate and localize battery self-production and the battery supply chain in the US. We further announced this quarter the selection of Marshall County, Mississippi for the 21-gigawatt-hour factory that is expected to create more than 2,000 US manufacturing jobs with production anticipated to begin in 2027. Accelera also reached a further milestone this year of electrolyzer order backlog, totalling over $500 million. In order to meet the growing electrolyzer demand, we began production at our first US manufacturing location for electrolyzers in the Cummins Power Generation Facility in Fridley, Minnesota. Lastly, we are resolute about the leading role we play in the energy transition, and emissions compliance continues to be a critical element of this work and central to our values. We were transparent about this in December when we announced that we reached an agreement and principle to resolve US regulatory claims regarding our emissions certification and compliance process for certain engines, primarily used in our pickup truck applications. After 4.5 years of working diligently with the regulators, reaching an agreement was the best way for us to achieve certainty on this matter and move forward with certifying our new products and advancing our Destination Zero strategy. We have expanded and strengthened our emissions compliance program to help ensure our products comply with increasingly stringent emissions regulations around the world. Our product compliance and regulatory affairs organization, which we launched in 2019, has a reporting line directly to me and positions come as to meet global product compliance requirements and deliver solutions for our customers that are safe and lead to a cleaner environment. Now I will comment on overall company performance for the fourth quarter of 2023 and cover some of our key markets. Demand for our products remain strong across many of our key markets and regions. Revenues for this quarter totalled $8.5 billion, an increase of 10% compared to 2022, driven by strong demand across most global markets. EBITDA was a loss of $878 million or negative 10.3% compared to positive $1.1 billion or 14.2% a year ago. Fourth quarter 2023 results included $2.04 billion of costs related to the agreement to resolve US regulatory claims, $42 million of costs related to a voluntary retirement and separation program, and $33 million of costs related to the separation of the Atmus business. This compares to the fourth quarter 2022 results, which included $19 million of costs related to the separation of the Atmus business. Excluding those items, EBITDA was $1.2 billion or 14.4% of sales compared to $1.1 billion or 14.5%. EBITDA dollars increased from a year ago as increased pricing and higher volumes more than offset increased selling, administrative research and development expenses and inflation costs. Research and development expense increased in the fourth quarter as we continue to invest in the products and technologies that will create advantages in the future, particularly in the engine, components and Accelera segments. In addition, operating cash flow for the fourth quarter of 2023 was very strong at $1.5 billion compared to $817 million in the fourth quarter of 2022 as we continue to focus on working capital management within the business. 2023 revenues were a record $34.1 billion, 21% higher than 2022, driven by the addition of Meritor and strong demand across most global markets. EBITDA was $3 billion or 8.9% of sales compared to $3.8 billion or 13.5% of sales in 2022. 2023 results include $2.04 billion of costs related to the agreement to resolve US regulatory claims, the voluntary headcount reduction program I noted previously, and $100 million of costs related to the separation of the filtration business. This compares to our 2022 results, which included $111 million of costs related to the indefinite suspension of operations in Russia and $81 million of costs related to the separation of the filtration business. Excluding those items, EBITDA was a record $5.2 billion or 15.3% of sales for 2023 compared to $4 billion or 14.2% of sales for 2022, as the benefits of higher volume and pricing exceeded increased selling, administrative, research and development and inflation costs. EBITDA percent improved year-over-year in the distribution, components and power systems segments. Our Power Systems business in particular finished 2023 with a full year EBITDA of 14.7% of sales, up from 12.2% in 2022. This segment completed the first year of their focused business transformation effort, and the improvement in performance is encouraging. You will see from our guidance that we expect further margin gains this year. In addition to our segments, Meritor finished 2023 with full year EBITDA of 10.8% of sales, up from 7.4% in 2022, as our employees did a tremendous job of executing value capture opportunities across the business. I'm very pleased with the performance of Cummins Meritor to date as we continue our program to improve margins in that business and expand its global reach. In addition, operating cash flow for 2023 was a record of $4 billion, a significant increase from $2 billion in 2022. I'm proud of our leaders and employees efforts in 2023 as they helped deliver on one of our primary focus areas. Strong cash generation will continue to be a top priority moving forward. Now let me provide our overall outlook for 2024 and then comment on individual regions and end markets. Our 2024 guidance continues to include Atmus for the full year, but excludes any costs or benefits associated with the planned separation of that business. We are forecasting total company revenue for 2024 to be down 2% to 5% compared to 2023, and EBITDA to be in the range of 14.4% to 15.4% of sales, as we anticipate slowing demand in some of our key regions and markets, particularly North America heavy duty truck. Early in 2024, we expect the heavy duty market to continue at its current rate, which is slightly off the peak of the first half of 2023, with further softening in our forecast in the second half of the year. Industry production for heavy duty trucks in North America is projected to be 245,000 to 265,000 units in 2024, a 10% to 15% decline year-over-year. In medium duty truck market, we expect market size to be 140,000 units to 150,000 units, down 5% to flat compared to 2023. Our engine shipments for pickup trucks in North America are expected to be 135,000 units to 145,000 units in 2024, a 5% to 10% decline year-over-year as we prepare to launch our model year 2025 in the fourth quarter. In China, we project total revenue, including joint ventures, to increase 3% in 2024. We're projecting a range of down 5% to up 10% in heavy duty and medium duty truck demand, and expect a range of down 5% to up 5% in demand in light duty truck market. We expect replacement demand to be the biggest driver, but the effect may be weakened by a sluggish economy and moderating export demand. Despite this slow pace of recovery in the China truck market, we expect to see continued strong performance for the 15 liter natural gas engine as we achieved approximately 20% share for 2023 in the heavy duty market. In India, we project total revenue, including joint ventures, to increase 9% in 2024, primarily driven by strong power generation and on highway demand. We expect industry demand for trucks to be flat to up 5% for the year. For global construction, we expect a 5% to 15% decline year over year, primarily driven by weak property investment and shrinking export demand in China. We project our major global high horsepower markets to remain strong in 2024. Revenues in the global power generation market are expected to increase 5% to 10%, driven by continued increases in the data center and mission-critical markets. Sales of mining engines are expected to be down 5% to up 5%, while the small market for us, demand for oil and gas engines, is expected to decrease by 40% to 50% in 2024, primarily driven by decreased demand in North America. And for aftermarket, we expect a range of flat to an increase of 5% for 2024, as we expect to be largely through inventory management efforts and destocking that happened throughout the industry in the second half of 2023. In Accelera, we expect full-year sales to be $450 million to $500 million, compared to the $354 million in 2023. We have a growing pipeline of electrolyzer orders, which we expect to deliver over the course of the next 12 months to 18 months, as well as expect continued growth in electrified components. In summary, 2023 was a record year for revenues and operating cash flow, excluding the impacts related to the agreement to resolve U.S. regulatory claims. 2023 was also a record year for EBITDA, net income, and earnings per share. While 2023 revenues were at the high end of our expectations, we anticipate moderating demand in North America truck production in the second half of 2024. We expect this moderating demand to be partially offset by a strong power generation market, resiliency in our distribution business, given the strong aftermarket presence, and improved Accelera sales. In addition, we are taking steps to reduce costs, optimize our business and position Cummins for continued success in 2024. We are in a strong position to keep investing in the future, bringing new technologies to customers and returning cash to our investors. As I close, I would like to officially announce that our Analyst Day is now scheduled for May 16 in New York City. I look forward to further discussing our strategy and expect invitations to be sent out shortly. Now let me turn it over to Mark, who will discuss our financial results in more detail. Mark?

Chris Clulow:

Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have an additional question, please rejoin the queue. Operator, we're ready for our first question.

Jerry Revich:

Yes, hi. Good morning, everyone. Jennifer, Mark, Chris, so normally when you folks have new engine regulations, we tend to see higher margins from you folks. I know we're a couple of years out from the 27 regulations, but can you just share some high-level thoughts? It looks like the average selling price of the engine could double given that embedded warranty increase and I'm wondering if you'd just comment on that and then broadly just talk about the parameters of how do you expect the dynamic to play out for your business compared to the margin expansion we've seen on prior emission cycles where you folks have increased your value add. Thanks.

Jerry Revich:

Okay, super. And then can I ask separately, given the high logistics costs that the industry saw in 2023, can you comment on where your labor hours per unit stand today versus normal? And to what extent could that be a source of upside relative to the guide?

Mark Smith:

Yeah, I would say in the near term, there's a little bit of increased anxiety about events in the Middle East and some shipping delays and some reversing of the trend we've seen in logistics costs, which have been actually going down for us, Jerry. I don't want to overstate that, it's obviously is a little bit of a concern in the near term.

Tim Thein:

Maybe just one bit of a clarification, but on the comments on for engine shipments in North America for on highway, I think you said 140,000 down 5% to 10%. Is that -- was that relative to the total North heavy and medium duty market, or was that a comment just on heavy duty in terms of?

Jennifer Rumsey:

And I'll just give a little color. This has been an unusual cycle, I think, in the '21, '22 timeframe and supply constraints that prevented the industry from fully meeting customer demand and that has improved over the course of 2023. We saw the markets peak really in the second quarter and saw some slight drop off in the second half, but to the high end of our guide, it was not as much as we had forecast going into Q1. Backlogs look strong, in particular, feeling quite good about the medium duty market and continuing to watch what happens. We are still predicting a shallow cycle and further softening as we go into the second half of the year. So that, just some color behind those numbers is how I would describe that.

Mark Smith:

Yeah, good, good question, Tim and the main thing that you didn't cover there was just our assumptions around product coverage. We're not expecting any significant change, but baked into our guidance is a little bit higher product coverage or warranty as a percent of sales in the engine business. We'll see how that plays out, but, that's the other factor that's in there that you didn't list.

David Raso:

Hi, thank you. Just sort of a bigger picture question, I know there's been a lot of costs involved and you're right in the thick, of course, call it a decade long energy transition that there's a lot of expenses. I'm just curious, if you look out over the next year or two, is there an inflection point that you see your cost begin to recede and if not, is there a thought of maybe a larger cost out program? I recognize the separation program you discussed, but just something maybe more substantial size, just given relative to other names we look at, they've had a real strong run on profitability the last couple years and it's been a little more of a challenge for your margin. So just curious if you see something on the horizon that really changes that, be it cost inflection, or maybe an idea you've proactively taken, sorry, spend inflection coming down, or something on the cost side that maybe you can do. Thank you.

David Raso:

All right, thank you. And just a minute real quick, and I'll hop off. The cadence of the declines in North America truck that you're looking to experience as the year goes on, can you give us a little sense of the cadence, maybe from an industry perspective, and would your declines, the cadence be any different? Just the idea of the lead lag between what's in inventory, how early you ship, just trying to get a sense for the cadence and how you relate to the industry cadence. Thank you.

Mark Smith:

In a medium duty truck, there really isn't that much difference between the two, and market and hours and then heavy duty, that's where we see a little bit more vulnerability for the market and would largely expect us to move in line with the market.

Operator:

Our next question is from Angel Castillo with Morgan Stanley. Please proceed.

Mark Smith:

Yeah, I'll have a go -- first go at that question. First of all, I'll just say on aftermarket, we saw a very pronounced, I would say some element of de-stocking or lower production across our lower demand in parts in Q4, which we largely attribute to customer cash flow management. We don't expect that to be a continuing trend. We expect to recover from Q4 levels on parts and be pretty steady across the year. On the truck builds, well, of course, you've heard from most of our major customers. So we really don't have much more to say other than the backlog of trucks has been slowly edging down and then the thing that gives us the broader concern is the spot rates and the health of the truck fleet operators. That's our principal concern. It's not our OEM customers and right now that the backlog and the orders still continue at quite decent levels. It's what's happening to the underlying economics of freight activity. That's what's giving us the concern combined, which hasn't been moving in the right direction, combined with the slowly easing heavy duty backlog. So it isn't a kind of pronounced downturn we might have seen in prior cycles at this point, but those are the factors that are weighing into our consideration and I think our guidance isn't more conservative than anybody else's and we don't have any other observations beyond those really.

Jennifer Rumsey:

Yeah, so we are in a period of still pretty heavy investment in Accelera businesses are really making both R&D and manufacturing investments to scale up the product and we're fortunate we have, existing plant and data that we can invest within to do that, to begin to produce electrolyzers and we continue to see growing demand and backlog is, as I noted, at a record level for electrolyzers. So that production rate is going to begin to grow and then you'll see margin performance in the electrolyzer portion of the business improving as the revenues grow and we deliver that backlog out into the market. Same thing in our electrified components business as we see revenue growth there. You'll see margin performance improving. One thing we have now included in our 2024 investment, of course, is beginning to invest in the battery cell joint venture and we believe that, that is a key investment that we're making together to ensure we have a leading cell for commercial vehicles here in the U.S. and domestic supply, which will both allow us and our customers to take advantage of incentives that are available and ensure security of supply over time into this market.

Rob Wertheimer:

Yeah, hi. I wonder if you could give us some thoughts on what's happening in the data center and large engine market. Obviously, it's very strong. I don't know how many years of visibility you have or what that market looks like. Your primary competitor announced a capacity expansion. I don't know where your capacity and your room to grow into that market if it is, a multiyear kind of curve. So I wonder if you could kind of give us an update on dynamics there.

Mark Smith:

Probably the clearest secular trend over the next couple of years.

Rob Wertheimer:

And then do you have room to grow in '25 and '26? Maybe not sure too much on your capacity, but it seems as though you're probably, you're probably being asked to quote or to think about, capacitor that far out, right.

Rob Wertheimer:

Okay. Perfect. I'll stop there. If I can sneak one more in on medium duty, there's a bit of a narrative that as the COVID constrained production, the OEMs prioritized large class state over the medium duty and that's reflected somewhat in industry outlooks in your out. I'm just wondering if medium duty has more inherent demand than that being helped by interest rates or anything else, or if that's kind of where the market is kind of flattish? I'll stop there.

Operator:

Our next question is from Tami Zakaria with JPMorgan. Please proceed.

Jennifer Rumsey:

Yeah, as you said, we did a kind of a low and a high scenario for adoption at our last Analyst Day and you can expect that we're going to refresh our view of that as we go into the Analyst Day in May. What I would say is that, there are regulations and incentives that are helping to start to drive that adoption, maybe more towards the lower end of those scenarios is what we would think and we are continuing to look at pacing of investment to make sure that we're managing that in line with how we see adoption actually occurring.

Jennifer Rumsey:

Yeah, we're still within, it would still fall within the range that we gave in the Analyst Day, consistent with those range of scenarios that we suggested and recall that, a large portion of that revenue in 2030 for Accelera is in the growth of the electrolyzer business as well.

Noah Kaye:

Thanks so much. First off, a housekeeping question. I'm trying to understand cash flow dynamics as we exit the year and the leverage profile. Obviously the settlement impacts that a bit, but, you typically have a target to return 30% of cash flow to shareholders. How are we thinking about return to capital this year and where you're kind of aiming to end the year on leverage?

Noah Kaye:

All right. So you do expect to de-lever as we get to the end of the year.

Noah Kaye:

Okay. And then just the guide for China truck seems a bit wide. Can you kind of talk us through the low end and the high end of the range in terms of the scenarios you're envisioning? Is it high end contingent on stimulus? Walk us through what you're seeing and assuming.

Jennifer Rumsey:

Chris and I will answer the rest of the questions.

Operator:

Our final question is from Michael Feniger with Bank of America. Please proceed.

Mark Smith:

The main impacts of Atmus operation will be obviously, they'll set off on their own pursuing their growth strategy and as this final step, we will swap Cummins shares for -- investors will retire Cummins shares in exchange for Atmus shares. So our share count will go down if the exchange is successful. The reason our share count here in the past 18 months hasn't been changing or drifting up is because we stopped the share repurchase as well. We de-levered post the Meritor acquisition, which we've been telegraphing to investors. We've got a little bit more of deleveraging to go, and then we'll continue to evaluate whether we, what our opportunities are to generate the best returns for investors, either through organic growth or through more capital returns, but that's the basic way it's going to work. The share count will go down on the separation.

Mark Smith:

Got it. And I will say I'm feeling better than I sound, and that's largely because of the record cash flow. So please, as I said at the start, don't read into my breaking voice. Meritor achieved the goals we had for this year. It is not a segment on its own. We provided that data for the first full year for transparency purposes to make sure investors had a read on how we were doing after a little bit of a bumpy start when we first acquired Meritor. So that's all rolled into the guidance, but it's safe to say we've got further improvement in Meritor going into 2024 and we're really pleased with how the team is doing there, Ken Hogan and his team. So we're excited about that going forward. So thank you. Thanks everybody. Appreciate it.

Chris Clulow:

Thank you, everybody. That concludes our teleconference for the day. I appreciate all of you participating and your continued interest. As always, our Investor Relations team will be available for questions after the call. Take care.

Operator:

Greetings, and welcome to the Cummins Incorporated. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Clulow, Vice President of Investor Relations. Thank you, Chris. You may begin.

Jennifer Rumsey:

Thank you Chris and good morning everyone. I'll start with a summary of our third quarter financial results. Then I will discuss our sales and end market trends by region. I will finish with a discussion of our outlook for 2023. Mark will then take you through more details about our third quarter financial performance and our forecast for the year. Before getting into the details of our performance, I'm excited to first highlight a few major events from the third quarter that demonstrate the continued execution of our strategy. On September 6th, Accelerate by Cummins, Daimler Truck and Bus and PACCAR, along with EV Energy joined forces to accelerate and localize battery cell production and the battery cell supply chain in the United States. The planned joint venture will manufacture battery cells for electric commercial vehicles and industrial applications, creating highly desirable manufacturing jobs in the United States in the growing clean technology sector. Total investment by the partners is expected to be in the range of $2 billion to $3 billion for the 21 gigawatt hour factory with production expected to begin in 2027. We see this partnership as an opportunity to share investment with two long-standing partners while advancing a key technology solution for our customers and industry and collectively to accelerate the energy transition in the United States. In October, Cummins completed its acquisition of two Faurecia commercial vehicle manufacturing plants and their related activities, one in Columbus, Indiana and one in Roman Netherlands. This acquisition is a natural addition to the Cummins Emission Solutions business and will help ensure we meet current and future demand for low emission products. Lastly, Cummins announced several collaborations with our natural gas X15 engine that further enable our customers to achieve their decarbonization goals. Freightliner announced they are working with Cummins to offer the new X15 natural gas engine and its heavy-duty Freightliner Cascadia trucks. Also Cummins and Knight Transportation, Inc. announced that the industry's largest full truckload company has successfully tested Cummins new X15 engine in Southern California, using renewable natural gas to realize reductions in nitrous oxides and greenhouse gas without compromising performance. The X15 N, which will launch in North America in 2024 is the first natural gas engine to be designed specifically for the heavy duty on-highway truck application. Now, I will comment on the overall company performance for the third quarter of 2023 and cover some of our key markets, starting with North America before moving on to our largest international market. Demand for our products continued to be strong across many of our key markets and regions. Revenues for the quarter were $8.4 billion, an increase of 15% compared to the third quarter of 2022, driven by the addition of Meritor and strong demand across most global markets. As a reminder, the third quarter of 2022 included two months of consolidated operations for Meritor following the completion of the acquisition on August 3rd of 2022. EBITDA was $1.2 billion or 14.6% compared to $884 million or 12.1% a year ago. Third quarter 2023 results include $26 million of costs related to the separation of the filtration business. This compares to third quarter 2022 results, which included $77 million of costs related to the acquisition, integration and inventory valuation adjustments of Meritor and $16 [ph] million of costs related to the separation of the filtration business. Excluding those items, EBITDA percentage of 14.9% in the third quarter of 2023 represented an improvement from 13.3% we delivered in 2022. We as the benefits of higher volume and pricing exceeded increased selling administrative, research and development expenses and inflation costs. Third quarter of 2020 also included a onetime employee recognition bonus of $56 million. Research and development expense increased in the third quarter as we continue to invest in the products and technologies that will create advantages for us in the future, particularly in the Engine, Components, and Accelera segments. In addition, operating cash flow for the third quarter of 2023 was a record inflow of $1.5 billion compared to the $382 million in the third quarter of 2022 as we continue to focus on our working capital management within the business. I'm proud of our leaders and employees for their efforts in driving down costs and operational focus to achieve this record result for the quarter, and we will continue to focus on strong cash generation moving forward. Our third quarter revenues in North America grew 16% to $5.2 billion compared to last year, driven by the addition of Meritor and strong demand in our core markets. Industry production of heavy-duty trucks in the third quarter was 74,000 units, up 1% from 2022 levels, while our heavy-duty unit sales were 29,000, up 18% from last year, reflecting strong demand for our products. Industry production of medium-duty trucks was 37,000 units in the third quarter of 2023, an increase of 7% from 2022 levels, while our unit sales were 32,000, up 19% from 2022. We shipped 41,000 engines to Stellantis for use in their Ram pickups in the third quarter of 2023, flat with 2022 levels. Engine sales to construction customers in North America decreased by 8%, driven primarily by high inventory in the channel. Revenues in North America Power generation increased 15% as industrial and data center demand improved and supply constraints eased modestly. Our international revenues increased by 13% in the third quarter of 2023 compared to a year ago with the addition of Meritor and strong demand across most markets. Third quarter revenues in China, including joint ventures, were $1.6 billion, an increase of 24% as markets continue to recover compared to a very weak third quarter of 2022. Industry demand for medium- and heavy-duty trucks in China was 243,000 units, an increase of 48% from last year. Our sales and units, including joint ventures, were 41,000, an increase of 36%. In light-duty markets in China, we saw increase of 14% from 2022 levels at 442,000 units, while our units sold, including joint ventures, were 26,000, an increase of 12%. Industry demand for excavators in the third quarter was 40,000 units, a decrease of 30% from 2022 levels. The decrease in market size is due to weaker activity in construction. Our units sold were 7,000 units flat with 2022 levels as increased penetration at new and existing customers offset the declining market. Sales of power generation equipment in China increased 5% in the third quarter, primarily driven by slight improvement in non-data center markets. Third quarter revenues in India, including joint ventures, were $730 million, an increase of 13% from the third quarter a year ago. Industry truck production increased by 17%, while our shipments increased 23%. Power Generation revenues decreased by 16% due to the second quarter -- ahead of emissions regulation changes. Now, let me provide our outlook for 2023, including some comments on individual regions and end markets. Based on our current forecast, we are raising full year 2023 revenue guidance to be up 18% to 21% versus last year. We are also narrowing our EBITDA guidance range to be 15.2% to 15.4%. We now expect higher full year revenues in our Components segment and higher profitability in our Power Systems segment, offset by decreased profitability in our engine business as a result of softening aftermarket and off-highway markets. We are raising our forecast for heavy-duty trucks in North America to be 280,000 to 300,000 units in 2023 after a strong third quarter. Our current guidance forecast lower industry truck production in the quarter. While orders remain relatively strong, inventory management, truck component shortages, limiting our OEM production rates and fewer working days are all contributing to our view for the quarter. In North America medium-duty truck market, we're maintaining full year 2023 market size guidance of 135,000 to 150,000 units, up 5% to 15% from 2022. While we continue to work to increase our production through rebalancing across our global plants and improving the supply base, industry production continues to be limited due to other supply chain constraints. Consistent with our prior guidance, our engine shipments for pickup trucks in North America are expected to be 140,000 to 150,000 units in 2023, volume levels in line with 2022. Additionally, we maintain our guidance for North America construction to be down 10% to flat, driven by high channel inventory and softening market conditions. In China, we project total revenue, including joint ventures to increase approximately 15% in 2023, driven by share growth, better volumes and content increase. We project a 15% to 25% improvement in heavy- and medium-duty truck demand and 10% to 20% improvement in light-duty truck market coming off the low market levels in 2022 and that's consistent with the prior guidance. Despite the slow pace of recovery in the China truck market, we are continuing to see strong performance for the 15-liter natural gas engine, which we launched in 2021. Due to the expanding fuel cost differential, approximately 20% of the heavy-duty market is expected to be natural gas power by the end of 2023. In the short time since launching our new natural gas product in China, our share has been ramping up with strong customer reception in the heavy-duty market, and we expect momentum to continue into the fourth quarter. We look forward to launching the 15-liter natural gas engine in North America in 2024. We expect China construction volume to be flat to down 10% in line with prior guidance, consistent with the tepid economy and weaker overall activity. In India, we project total revenue, including joint ventures, to be up approximately 6% in 2023, consistent with our prior forecast. We expect industry demand for trucks to be flat to up 5% for the year. We project our major global high horsepower markets to remain strong in 2023. Sales of mining engines are expected to be flat to up 10%, consistent with our prior guide. Revenues in the global power generation markets are expected to increase 15% to 20%, consistent with our prior guide, with the strong performance driven primarily by improvement in the data center and mission-critical markets. For Accelera, we expect full year sales to be $350 million to $400 million and also maintain our EBITDA guidance of the expected loss of $420 million to $440 million for 2023. Within components, Cummins expects revenues contributed by the Meritor business for 2023 to be $4.7 billion to $4.9 billion, and EBITDA is expected to be in the range of 10.5% to 11%. In summary, we are raising our guidance on sales of up 18% to 21% and narrowing our EBITDA guidance range from 15.2% to 15.4%. Our guidance for the full year implies weaker revenue in the fourth quarter. While demand remained strong in several markets, softening in the aftermarket demand, a continued weak outlook in China, continued industry supply constraints impacting North America truck production and inventory management efforts across many markets are some of the factors driving the lower fourth quarter run rate. In view of the lower forecasted revenues, we have initiated actions to reduce costs in our business, particularly in selling and administrative costs. In order to lower costs as we move into next year, we are offering voluntary retirement and a voluntary separation program in select regions and parts of our business for eligible exempt employees. We will continue to monitor our end markets closely and assess the need for further action while continuing to invest for our future. During the quarter, we returned $238 million to shareholders in the form of dividends. Our long-term strategic goal is to return approximately 50% of operating cash flow to shareholders. The strong execution from the second quarter of 2023 continued into the third quarter, driving record operating cash flow despite the ongoing challenges in our operating environment. As we look forward to the opportunities ahead, we have a strong, capable leadership team who will help us successfully navigate an exciting and changing future. Today, I was also pleased to announce several promotions on my leadership team, which will be effective January 1 of next year. First, Srikanth Padmanabhan, currently Vice President and President of the Engine Business, will take on a newly created role of Executive Vice President and President of Operations. In this role, Srikanth will be an important work that will define and drive improvements in how we operate as a company through the energy transition and ensure our success of our operational priorities. Throughout his more than 30 years at Cummins, Srikanth has worked across many of Cummins businesses and regions, and consistently pushed the boundaries of customer-focused innovation to position Cummins as the leading powertrain supplier of choice in the transition to a net zero future. Srikanth is a result and people-driven leader and is the perfect choice to lead this work. Second, Brett Merritt, currently Vice President of On-Highway Engine Business and Strategic Customer Relations will assume the role of Vice President and President of the Engine Business, replacing Srikanth when he takes his new role. Brett has spent more than 25 years in the automotive and commercial vehicle industry and more than 14 at Cummins. The past 11 spent leading and growing On-Highway Business from 800,000 engines in 2012 to 1.2 million engines last year. Brett is an experienced business leader and a trusted partner to many of our key customers, and I'm excited for Brett to lead this segment. Bonnie Fetch, currently Vice President of Global Supply Chain, will assume the role of Vice President and President of our Distribution Business, replacing Tony Satterthwaite., who has been acting as Interim Head of DBU. Bonnie, who previously led supply chain for DBU has led for Cummins global supply chain and manufacturing organization, including Cummins new and ReCon parts business since early 2022, where she led her team in navigating the many complex supply chain challenges as well as improved operational and functional performance. For more than 30 years of experience, including 20 years at Caterpillar, before coming to Cummins, includes General Management, HR and Supply Chain Leadership and makes her uniquely qualified for this role. I'm excited for her to leverage her broad experience to run this segment. This is a period of change for our company, and it's also an exciting one. I want to end by thanking our Cummins employees who continue to work tirelessly to meet our customer needs and respond to the strong demand levels by ensuring quality products, strengthening our some relationships and navigating continued supply chain challenges. Our results reflect our focus on delivering strong operating performance, investing in future growth and bringing sustainable solutions to decarbonize our industry, while returning cash to shareholders. Now let me turn it over to Mark.

Chris Clulow:

Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have an additional question, please rejoin the queue. Operator, we're ready for our first question.

Jerry Revich:

Yes, hi. Good morning everyone.

Jerry Revich:

Jennifer, congratulations on the joint venture with PACCAR and Daimler. As we look forward to what that means for Cummins product availability and offering within EVs, can we just expand on that in terms of what's the opportunity to bundle it with e-Axles, battery management systems? And if you could just talk about, is there a plan use the plant to source batteries globally for your customers? Or is this strictly focused on the U.S. initially? Just would love your broader comments. Thank you.

Jerry Revich:

Okay. It's super. And Mark, can I ask just a shorter-term question on the Engine segment, you folks had pretty solid performance in the quarter and for the year. The reduced margin rate at the midpoint seems like a big step down in profitability implied fourth quarter versus third quarter. Can you just talk about is that a significant production cut, China JV? Or is that just taking the midpoint of the range versus thinking about the broader, maybe higher end potential outcomes?

Chris Clulow:

One quick to add, Jerry. It doesn't change our overall guide for engine business, but it is a difference between Q3 and Q4 is our JV income does step down because of license fees timing. So, we had a lot of that happened in the third quarter that steps down about 40 basis points for Engine business margin from Q3 to Q4. So hopefully, that helps.

David Raso:

Thank you. I'm curious, the cost-out decisions. How much is that related to what you're seeing on the horizon in 2024 and if you can give us any insight on what that is? And maybe margins in 2023 being maybe a little more of a, let's say, a heavier lift to expand margins than maybe we see across the machinery space broadly. Just curious how much is it sort of structural to what 2023 is playing out versus what you're seeing in 2024? And obviously, any sense of magnitude the cost outs would be really helpful. Thank you.

Mark Smith:

And we'll give you a fuller assessment on the next quarterly earnings call about the both the cost and the benefit impact. Of course, what we're announcing today is voluntary actions, so we don't know what the exact take-up is going to be and then our assessment of what is the kind of momentum in markets going forward. There will be some other smaller actions around facilities and other things. But we'll lay that out in detail in the next quarter when we've got a more holistic or hopefully, clearer view of the full year next year.

Mark Smith:

The size of the parts business in the engine business is significantly bigger than the size of the aftermarket business in the Components.

Mark Smith:

Yeah, I think it's pretty stable. I think that's just the dynamics we're seeing between the two different businesses right now.

David Raso:

All right. Thank you very much.

David Raso:

All right. Thank you.

Rob Wertheimer:

Hey, I have two. One is just on the parts destock that you have mentioned and that makes sense. I'm just curious if you have any sense as to how much channel inventory people carry if you're all the way through that, half the way through. If you just quantify that potential if you're able to?

Rob Wertheimer:

Perfect. And then if I can ask kind of a bigger picture question in China. It's obviously been very weak for a lot of industrials. Maybe it's bottomed in all your end markets maybe in some. I wonder if you could just give just your high-level view of what's going on in the economy there, whether fleet dynamics mean you have to be in recovery mode, whether that's true of trucks or power gen? Or just maybe give an overview of China, what you see in different parts of your business on the recovery? Thank you.

Mark Smith:

Yeah. I mean just to give you a sense, I know we don't like talking about months, but July was like the lowest in a decade, right, in some of our JV production. It's crept up since there, but it has been tough. Again, it's not worse than we thought, but that just gives you a sense of how weak it was in the summer. Hopefully, there's upside from here, but we don't have good visibility to that.

Operator:

Thank you. Our next question is from Tami Zakaria with JPMorgan. Please proceed with your question.

Mark Smith:

Right. So the good news is they've been performing really well. So that's the underlying, and I think that's -- we expect that to be a continuing trend. As I mentioned earlier, typically, we see, particularly with the industrial side of that business that the customers really dropped down the purchase of parts in the fourth quarter. That's not new, but that that typically happens every Q4, and that's probably the main factor there -- the main negative factor. Otherwise, the underlying demand is strong. There's no major changes to pricing or the cost structure.

Jennifer Rumsey:

Yes, Tami, as you noted in a period of increased R&D investment that we think will position Cummins well for the future. So in particular, now through the 2026, 2027 time frame when we launch these new fuel-agnostic engine platforms, we're making a major R&D and capital investments, and those are bringing new customer business to us and also will position us to have leading products through the energy transition. We've also been increasing our investment in the Accelera business as we ramp up the product investments for our electrolyzers and see growing demand for electrolyzer volume as well as in the electrified components. So that's really what you're seeing come through in the R&D line. And then we're continuing to really focus on improving underlying performance and efficiency in other areas so that we can continue to make the necessary R&D investments.

Operator:

Thank you. Our next question is from Tim Thein with Citi. Please proceed with your question.

A – Mark Smith:

Yes, you're right, Tim, that there is more visibility, but long lead times and the underlying demand. Certainly, I think we've got great visibility through the first half of the year. And of course, we're seeing -- we're anticipating more pressure on the on-highway side just because not a severe downturn, but generally, market participants are expecting some moderation in heavy-duty truck orders going into next year. So we would expect more revenue headwinds on the engines and components side. Distribution, as you know, is very heavily aftermarket-driven. So absent some massive crush in the economy, that should be more stable. And then Power Systems, certainly, very strong visibility through the first half of the year and some into the second half of the year. We haven't seen a dramatic shift in trajectory at this point in time.

A – Mark Smith:

And it's encouraging that both Power Systems and distribution now are on multi-period margin expansion trends that serve us well going forward.

A – Mark Smith:

Generally, I think it's destocking, right? We've had -- we have -- there's obviously, we know returns levels and things like that from all parts of our channel have gone up as customers have been deep.

A – Mark Smith:

And then if I just step back from the noise in this kind of correction period, Tim, clearly, our market share in North America on-highway markets has gone up noticeably so that should all go well for the parts that will inevitably be purchased through Cummins. I just think just in this correction period. I was just trying to provide that extra color this time to explain what I think a short-term margin influences, but not long-term market trends.

Steven Fisher:

Thanks. Good morning. Just curious about how much visibility you have to on-highway engine pricing going forward at this point into 2024. I guess to what extent is your pricing going to be dependent on the pricing of your OEM customers or how independent can that be?

A – Mark Smith:

Right. And again, when we give out for next year, then we'll, I'm sure you'll ask us about price cost. We'll be happy to share the dynamic.

A – Mark Smith:

I think part of it can be the age of construction fleets, right? So we're seeing a drop off in engine demand. That doesn't necessarily mean a dramatic shift in North America construction activity. The three biggest markets both in North America, China and Europe, I think generally, it feels like the pace of economic growth in Europe is slowing. In China, it surprised us a little bit that the construction equipment demand hasn't fallen even further given some of the trails in the overall kind of financial health of construction sector in China, but it has come down some. But yes, no clear picture yet going into next year, I would say, that of all the markets, we still got some tire kick in to do, Steve, to figure out where we land for next year.

Noah Kaye:

Yeah. Thanks. You indicated some favorable testing around the X15 and coming to market next year. So just would love to get a little bit more color on your expectations for demand there, the extent to which this could be a driver of share gains and where you're hearing the sort of the strongest indicators of demand for that product?

Noah Kaye:

Okay. And then I think we'd love to get a catch-up on the electrolyzer backlog and quoting activity. Any change in the trajectory there? Anything you noticed during the quarter? And can you update us on where you're at in terms of building out capacity?

Operator:

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Chris Clulow for any closing remarks.

Operator:

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Good day, ladies and gentlemen, and welcome to the Cummins Inc. Second Quarter 2023 Earnings Conference Call. Our host for today's call is Chris Clulow, VP of Investor Relations. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the call over to your host. Chris, you may begin.

Jennifer Rumsey:

Thank you, Chris. Good morning. I'll start with a summary of our second quarter financial results, then I will discuss our sales and end market trends by region. I will finish with a discussion of our outlook for 2023. Mark will then take you through more details of both our second quarter financial performance and our forecast for the year. Before getting into the details on our performance, I want to take a moment to highlight a few major events from the second quarter that demonstrate the continued execution of our strategy. On April 3, United States President, Joe Biden, visited company facilities in Fridley, Minnesota to tour Accelera by Cummins, first U.S. manufacturing location for electrolyzers, a key technology to produce no-carbon hydrogen. Accelera is initially dedicating 89,000 square feet of the existing Cummins power generation facility in Fridley to electrolyzer production with the opportunity to expand to meet the growing demand. Accelera also reached a further milestone of electrolyzer order backlog totaling over $500 million at the end of the quarter. The Fridley facility will help address that growing demand, along with other capacity being added globally. Lastly, progress continues to be made on the separation of the Filtration business. On May 26, Atmus Filtration Technologies Inc. began trading on the New York Stock Exchange under the ticker symbol ATMU in connection with its initial public offering. Upon the completion of the IPO, Cummins retained approximately 80.5% of Atmus outstanding shares. The Atmus IPO generated $299 million of net proceeds and Atmus added $650 million of debt. Cummins realizes the benefit of the IPO proceedings and the debt issuance as Atmus will hold the debt at full separation. Now I will comment on the overall company performance for the second quarter of 2023 and cover some of our key markets, starting with North America before moving on to our largest international markets. Demand for our products continued to be strong across many of our key markets and regions, resulting in record revenues in the second quarter of 2023. Revenues for the quarter were $8.6 billion, an increase of 31% compared to the second quarter of 2022, driven by the addition of Meritor, strong demand and improved pricing. EBITDA was $1.3 billion or 15.1% compared to $1.1 billion or 16% a year ago. Second quarter 2023 results include $23 million of costs related to the separation of the Filtration business. This compares to second quarter 2022 results, which include $47 million in recovery of amounts reserved related to the indefinite suspension of operations in Russia, offset by $29 million of costs related to the separation of the Filtration business. Excluding those items, EBITDA percentage of 15.4% in the second quarter of 2023, represented a slight decline from the 15.7% we delivered in 2022, principally due to the addition of Meritor activity, which currently has a lower gross margin percentage than our other businesses and increased SG&A and development expenses. EBITDA and gross margin dollars improved compared to the second quarter of 2022 as the benefits of higher volumes, pricing and the acquisition of Meritor exceeded the supply chain cost increases. The strong EBITDA performance of the business in the first half drove an increase in selling and administrative expenses versus the prior year as we recorded higher accruals related to our variable compensation plans during the quarter. Research and development expenses also increased in the second quarter as we continue to invest in the products and technologies that will create advantages in the future, particularly in the Engine, Components and Accelera segments. As we noted previously, Meritor results are included in our overall guidance for 2023. In the second quarter, Meritor operating performance and financial results showed improvement with sales of $1.2 billion and EBITDA of 12.2%. The improvement in the profitability from the first quarter EBITDA margin of 9.4% was driven by pricing to cover inflation, operational improvements and cost reduction activities, which more than offset material cost increases that we expect to persist through the second half of the year. Our second quarter revenues in North America grew 31% to $5.3 billion, driven by the addition of Meritor and strong demand in our core markets. Industry production of heavy-duty trucks in the second quarter was 77,000 units, up 11% from 2022 levels, while our heavy-duty unit sales were 29,000, also up 11% from 2022. Industry production of medium-duty trucks was 37,000 units in the second quarter of 2023, an increase of 11% from 2022 levels, while our unit sales were 34,000, up 27% from 2022. We shipped 38,000 engines to Stellantis for use in the RAM pickups in the second quarter of 2023, flat with the 2022 levels. Engine sales to construction customers in North America increased by 8%, driven primarily by positive net pricing. Revenues in North America power generation increased by 16% as industrial and data center demand improved and supply chain constraints eased modestly. Our international revenues increased by 32% in the second quarter of 2023 compared to a year ago, with the addition of Meritor and a strong demand across most markets. Second quarter revenues in China, including joint ventures, were $1.7 billion, an increase of 37% and as markets began to recover compared to a very weak second quarter of 2022, which was impaired by COVID shutdowns in Shanghai and other regions. Industry demand for medium- and heavy-duty trucks in China was 279,000 units, an increase of 61% from last year. Our sales and units, including joint ventures, were 41,000, an increase of 63% due to increased penetration within our joint venture partners and new products launched to meet the NS VI standard. The light-duty market in China was up 21% from 2022 levels at 460,000 units, while our units sold, including joint ventures, were 28,000, an increase of 23%. Industry demand for excavators in the second quarter was 51,000 units, a decrease of 23% from 2022 levels. The decrease in the market size is due to weaker activity and construction. Our units sold were 8,000 units, an increase of 5%, driven by improved share with new and expanded customer relationships for both domestic and export usage. Sales of power generation equipment in China decreased 8% in the second quarter, primarily driven by a decline in the data center market. Second quarter revenues in India, including joint ventures, were $724 million, an increase of 22% from the second quarter of a year ago. Industry truck production increased by 2%, while our shipments increased 1%. Power generation revenues increased by 75% in the second quarter, driven by strong economic activity and customer demand ahead of a July 1 emissions regulation change. Now let me provide our outlook for 2023, including some comments on individual regions and end markets. Based on our current forecast, we are maintaining full-year 2023 revenue guidance of up 15% to 20% versus last year. EBITDA is still expected to be in the range of 15% to 15.7%. We now expect stronger revenue and profitability in both our Power Systems and Distribution segments than we did three months ago, offset by increased cost in the Accelera business. We are maintaining our forecast for heavy-duty trucks in North America to be 270,000 to 290,000 units in 2023. Supply chain constraints continue to limit our industry's collective ability to produce and while end customer demand remains strong currently, our current guidance forecasts lower industry truck production in the fourth quarter. In the North America medium-duty truck market, we are projecting the market size to be 135,000 to 150,000 units, up 5% to 15% from 2022. This is an increase from our previous guidance by 10,000 units. Similar to heavy-duty, supply chain constraints continue to limit our ability to produce and fully meet end customer demand. However, through the rebalancing across our global plant efforts to improve the supply base, we have been able to increase our production, resulting in the improved outlook. The improvement in the medium-duty outlook was offset by decreases in our forecast for two other markets. North America construction is now expected to be down 10% to flat versus our previous guidance of flat to up 10%. Secondly, Brazil truck is expected to be down 30% to 40%, a decline from our prior guidance of down 10% to 20% as the market adjusts to Euro 6 equivalent emission standards. Consistent with our prior guidance, our engine shipments for pickup trucks in North America are expected to be $140,000 to $150,000 in 2023. Volume levels in line with 2022. In China, we project total revenue, including joint ventures, to increase approximately 15% in 2023, driven by share growth, better volumes and content increases. We project a 15% to 25% improvement in the heavy and medium-duty truck demand and a 10% to 20% improvement in the light-duty truck demand coming off the low market levels in 2022, consistent with prior guidance. Despite the slow pace of recovery in the China truck market, we are continuing to see strong performance for our products, including the 15-liter natural gas engine, which we launched in 2021. Due to the fuel cost differential, approximately 20% of the heavy-duty market is expected to be natural gas powered by the end of 2023. In the short time since we launched our new natural gas product in China, our share has been ramping up with strong customer reception in the heavy-duty market, and we look forward to launching the 15-liter natural gas engine in North America in 2024. We expect China construction volumes to be flat to down 10%, in line with prior guidance, consistent with the tepid economy and weaker overall activity. In India, we project total revenue, including joint ventures, to be up approximately 6% in 2023, an improvement from our previous forecast of about 1%, propelled by stronger power generation and on-highway sales. We expect industry demand for trucks to be flat to up 5% for the year. We project our major global high horse power markets to remain strong in 2023. Sales of mining engines are expected to be flat to up 10%, an improvement from our previous guidance of down 5% to up 5%. Revenues in global power generation markets are now expected to increase 15% to 20%, up from our previous guidance of a 10% to 15% increase, driven by non-residential construction and improvement in the data center markets. For Accelera, we expect full-year sales to be $350 million to $400 million, consistent with our previous guidance. As noted in my highlights, the electrolyzer market continues to gain momentum with our near-term focus on expanding capacity to meet the growing demand. As we scale up to serve the electrolyzer opportunity, continue to develop our products and support our customers in the field, costs are running higher than originally projected for the year. As a result, we have revised our EBITDA guidance for Accelera to an expected loss of $420 million to $440 million for 2023 versus our prior guidance of $370 million to $390 million. Within components, Cummins expects revenues contributed by the Meritor business for 2023 to be $4.7 billion to $4.9 billion, and EBITDA is expected to be in the range of 10.3% to 11% of sales, consistent with prior guidance. In summary, coming off a very strong first half where we produced record revenues and record EBITDA while delivering for our customers, we are maintaining our guidance of sales up 15% to 20% and EBITDA of 15% to 15.7%. Demand in most of our core markets is strong, while we continue to closely monitor global economic indicators. Should economic momentum slow, Cummins will remain in a strong position to keep investing in future growth, bringing new technologies to customers and returning cash to our shareholders. Our guidance for the full-year implies weaker revenue in the second half of the year. While demand remained strong in several markets, a weaker outlook in China versus the first half, an expected decrease in the North American heavy-duty truck production in the fourth quarter and the previously mentioned North America construction and Brazil truck decrease are some of the factors driving the lower second half run rate. In view of the lowered forecasted revenues in the second half of the year, we expect to manage our operating expenses below the second quarter levels. During the quarter, we returned $223 million to shareholders in the form of dividends, consistent with our long-term plan to return approximately 50% of operating cash flow to our shareholders. Shortly after quarter end, we announced a 7% increase in the quarterly dividend from $1.57 to $1.68 per share, the 14th consecutive year in which we have increased the dividend. The strong execution from the first quarter of 2023 continued into the second, resulting in record sales and strong profitability despite the ongoing challenges in our operating environment. I want to thank our Cummins employees who continue to work tirelessly to meet customer needs and respond to the strong demand levels by ensuring quality products, strengthening our customer relationships and navigating continued supply chain constraints. Our results reflect our focus on delivering strong operational performance, investing in future growth, bringing sustainable solutions to decarbonize our industry and returning cash to our shareholders. Now let me turn it over to Mark.

Chris Clulow:

Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have an additional question, please rejoin the queue. Operator, we are ready for our first question.

Jamie Cook:

Hi, good morning. I guess two questions. One, the engine margin, I’m just trying to understand. They were a little weaker than I thought. I understand there’s some compensation and investment in there, but your JV income was really high as well and margins in the back half versus the first half were lower. So can you just help us understand what’s going on, on the engine margin side and how to think about, like, what’s required in investment over the longer-term? And does that continue to weigh on the engine margin? And then my second question, Jen, just bigger picture. I know you don’t want to guide to 2024 – for 2024, but I know you’re very close with your customers. So as you look out in 2024, given some of the industry forecasts that are out there, which markets are you more after this [indiscernible] markets that you’re getting a little more cautious that we could see declines? Thank you.

Jennifer Rumsey:

And on your second question, Jamie, in terms of what we’re seeing in the market, the performance of our products continues to be very positive and strong. And what I would say is my conversations in the – in recent months have continued to have conversations with customers, in particular in the medium-duty space, and even in the electrolyzer space, there’s a lot of demand and interest in Cummins products. And I noted that we’ve made some shifts in our global plants to increase capacity and medium-duty for North America to meet that demand. So there’s still really strong demand in that market. And we’re cyclical business. We’re used to being a cyclical business, I think this is going to likely be a more gentle cycle across markets than what we’ve typically seen, but we do see some indications in certain markets, a little bit softening in aftermarket, some anticipated down days and our guidance implies heavy-duty a little bit lower in the fourth quarter, in particular, construction a little bit lower. And China, really not growing significantly, seasonally softer in the second half versus first half. So I still feel quite good about market outlook and how we’re performing. And yes, we think the Q2 is going to be our revenue peak and we’re – our guide reflects that and we’re taking actions to make sure we’re prioritizing the places we need to invest for the future while also managing headcount discretionary spending and just SG&A down for the second half of the year.

Mark Smith:

Thanks Jamie.

Jerry Revich:

Yes. Hi. Good morning, everyone.

Jerry Revich:

Jennifer. Hi. I’m wondering if you could just talk about the interest that you’re seeing from your customers in alternative fuel technologies. Over the course of the quarter, we have the positive EPA mandate essentially for a landfill gas, given the changes in the RIN structure. I’m wondering if you could just talk about what you’re seeing from your customers on interest in the 15-liter engine in North America specifically for that product. And any other comments that you would add on internal combustion hydrogen or other moving pieces, based on the visibility on the regulatory side? Thanks.

Jerry Revich:

Super. And Mark, can I ask within components, your EBITDA margins were up a touch sequentially 2Q versus 1Q, given just all the different piece in the portfolio between Meritor and Atmus. Can you just talk about how the different parts of business are performing?

Jerry Revich:

I thought I’d try. Thanks.

Operator:

Your next question comes from Tim Thein with Citigroup. Your line is open.

Mark Smith:

Hey, Tim, it’s Mark. Thanks for the question. I think the only market change, which isn’t new this quarter that’s been coming for a few months has really been a weakening order board on some of the consumer side, particularly the RV market where we’ve got a very strong presence, not surprising with interest rates where they are that overall market started to – the demand started to drift down. So I would say that’s the only one with some momentum change. I mean, oil and gas, there are different opinions at different points in time. That’s the one clear trend I would say right now. And then you’re right. The backlog is seeing us through this year. So we’re watching everything closely. But I would say, it’s stable outside of RV.

Mark Smith:

And then, of course, we’re pleased with the step up in performance over the last year. And then you heard in my comments that we’ve taken yet more actions to keep boosting that profitability up. So we’re very pleased with the momentum in that business.

Jennifer Rumsey:

No, I mean, the color I'll give there is, we were at incredibly high aftermarket levels because what was happening was customers couldn’t buy new trucks. So they were using trucks longer that drove more aftermarket demand. And so it’s still very healthy. We believe we’ve seen some – we’re seeing some inventory adjustment happening. And that the overall aftermarket demand has come down a little bit, but it’s still very, very healthy to your point, the aftermarket business for us from our margin perspective is a favorable one, but we still see it being healthy is what I would say.

Mark Smith:

A bit more signs, it’s leveling off than accelerating, I would say, Tim.

Mark Smith:

Thank you.

David Raso:

Hi, thank you. The comments about truck production in the fourth quarter. Can you give us a little more color on that in the sense of magnitude? How much is this your perspective versus already been laid out by your customers? And how to think about sort of dovetailing that into conversations for pricing for 2024?

David Raso:

That’s what I was trying to figure out. Have you heard a tone change? Nothing to do with less production days. Just truly daily line rates being communicated. Hey, we’re taking it down in the fourth quarter or so just your view. I’m just trying to make sure we understand…

Mark Smith:

Yes. We’re not trying to signal some Cummins specific issue here, David. It’s just assumption about the market activity at the end of the year.

Mark Smith:

Can you repeat that, David, sorry. I don’t think I pick it up.

Jennifer Rumsey:

Yes, look, we’re – our goal is to continue to balance the price with the cost pressure that we’ve been seeing, which is stabilized. And then we’ll launch some new products next year as well. So that will allow us to continue to have those conversations with customers, but really nothing dramatic there.

Mark Smith:

Thanks, David.

Robert Wertheimer:

Hi, I also had a question on price and then maybe just generally on the truck market and your market share and mix developments. So the first one is truck OEMs have had some really good success in margin as prices have gone up. I’m actually just a little bit curious mechanically, when a customer walks in to buy a truck, and they choose either Cummins Engine or the OEMs engine, you don’t control the price of that engine at retail, right? So, maybe, I guess, in effect, the truck OEM would be making margin on the increased price of the truck and engine. Is that the way to think about it? And do you still have catch up to come there?

Mark Smith:

We made a big shift away from influence in retail price 20 years ago.

Jennifer Rumsey:

I was going to say, of course, in the heavy-duty space, a big factor and customer choices as fuel economy.

Mark Smith:

Yes. I mean, the main delta in all those things is – whilst our share has gone up in heavy-duty over the last couple of years and it’s very strong. Medium-duty, it’s much stronger, right? That’s the main difference. And then I would say it’s a different kind of angle to your question, Rob, the larger fleets, we tend to have higher share with the larger fleets than we do with the overall – within heavy duty than the overall market itself because that’s where we’ve got those deeper, stronger relationships. So there’s a theme that’s been support as larger fleets are becoming more effective, more competitive. That’s been a trend that’s been helping us. But individual take and we’re really getting into splitting as the trend has been shared going up in heavy and in medium.

Operator:

Your next question comes from Tami Zakaria with JPMorgan. Your line is open.

Mark Smith:

Well, yes, we’ll be at about 3.5% to 3.75% plus on pricing. And on costs, we’ll be about 1.5% inflation.

Mark Smith:

Yes, we really – well, Chris, why don’t you go?

Tami Zakaria:

Okay got it. Thank you so much.

Tami Zakaria:

Got it. Thank you.

Steven Fisher:

Thanks. Good morning. I just wanted to follow-up on the truck market messaging again. I have the sense that you guys were getting increasingly confident about the business for 2023 and thinking that 2024 might not be too much of a downturn, if at all. So has that thinking changed at all? And was that aftermarket trend you mentioned sort of, like, a catalyst for different thinking, or is it more just something in the macro that’s gotten your thinking changed, or is it not really changed at all?

Mark Smith:

I think it’s correct that the forecast for the industry are a lower Q4, right, just because of the number of the production days in the quarter. Part of it is just math for the remainder of the year, which is not. And then part of it is just history tells us if there is some erosion in confidence, which we haven’t seen in customer orders. Just to be clear, if there is, we tend to have a bigger fade into the December holiday period and a slow ramp up. So we just – we built that into our guidance at the start of the year. That’s simple as that.

Steven Fisher:

Okay. And it sounds like part of your second half outlook is a bit weaker trend in China. How are you thinking about the potential for stimulus there? And whether there’s any chance for upside still that might come out of that?

Mark Smith:

Yes, but I would say that just seem the most likely size source of upside to our guidance right now.

Mark Smith:

I’m worried about it. Just looking for more and there is much sign of it right now.

Operator:

Your next question comes from Matt Elkott with TD Cowen. Your line is open.

Jennifer Rumsey:

Yes. We are still – with the strategy we have in place right now, we continue to work towards the EBITDA neutral in 2027. A big piece of that is this electrolyzer revenue growth as you saw with the comments on backlog that we continue to be confident in the outlook there and we – the increased investment this year is really focused on making sure we’ve got the product and the supply chain right to enable us to do that.

Jennifer Rumsey:

Yes. So, our outlook for U.S. construction down to flat, right? So data – and data centers would show up for us and power generation data center market is definitely strong. There’s parts of the market where construction, infrastructure investment and construction remains strong and there’s other segments of that market with rising interest rates and that we’re seeing things.

Matthew Elkott:

Does any of the data center construction market, does any of it show up in the – in construction for you guys, or it’s all most of your exposure to business…

Jennifer Rumsey:

Yes, it’s not a huge factor for us. I mean, the data center factor for us is that they buy these very large gensets for backup power and that drives significant revenue for power systems. The actual construction itself…

Matthew Elkott:

That makes sense. Thank you so much.

Chris Clulow:

Thanks, Matt.

Noah Kaye:

Hi, thanks for taking the question. Just wanted to expand if I could on Accelera and the increased investment spend this year about $50 million. I think you mentioned a couple of times it’s really to get electrolyzer production and product right. It is an operating expense, right? So is this mainly engineering resources? Maybe you can give us a little color on what you felt you needed to spend on to get ready for this ramp? And maybe you can even put in the context of some of the industry and policy changes that you’ve seen come through, obviously, some significant ones over the last year?

Noah Kaye:

Okay. So customer support as well as product engineering. All right. That’s helpful. But just to make sure we understand, there’s no change to the revenue guidance. The current book of business, which I think is more weighted towards EV, I mean, is that delivering kind of the expected margin contribution? We hear mixed indicators on EV adoption, particularly in North America, would love to sort of understand where that side of the business is tracking versus your expectations?

Jennifer Rumsey:

Yes. Here’s a – there’s a couple of things that we watch on this, how the market develops. So on the electrolyzer side, there’s investments, but the actual details of how that government money flows and when it flows are still being defined. So that is a bit of a timing impact on some of that. And then in the electrified powertrain, there’s still a lot of uncertainty beyond the bus market where you’ve got cities and corporations that have incentives and want to electrify on exactly how that infrastructure is going to build out. So there’s regulations that’s going to start to drive more of that, but a lot of uncertainty I would say on the exact pace of that.

Jennifer Rumsey:

Thank you.

Operator:

At this time, there are no further questions. I’d like to turn the call back to Chris Clulow for any closing remarks.

Operator:

This concludes today’s Cummins Incorporated second quarter earnings conference call. Thank you, everyone, for your participation. Have a wonderful rest of your day.

Operator:

Greetings and welcome to the Cummins Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Clulow, Vice President of Investor Relations. Thank you. Please go ahead.

Jennifer Rumsey:

Thank you, Chris. Good morning. I’ll start with a summary of our first quarter financial results, then I will discuss our sales and end market trends by region. I will finish with a discussion of our outlook for 2023. Mark will then take you through more details of both our first quarter financial performance and our forecast for the year. Before getting into the details on our performance, I want to take a moment to highlight a few major events from the first quarter. In March, Cummins announced the launch of Accelera by Cummins, a new brand for our New Power business unit. Accelera provides a diverse portfolio of zero emission solutions for many of the world's most vital industries, empowering customers to accelerate their transition to a sustainable future. Coupled with our brand announcement, Accelera shared that it will supply a 90-megawatt PEM electrolyzer system for Varennes Carbon Recycling plant in Quebec, Canada. This will be the largest PEM installation in North America and a key step in advancing the green hydrogen economy. Accelera and Blue Bird also announced, we will increase production of electric school buses more than doubling the zero emission school buses that we've collectively put into operation over the next 12 to 18 months. In addition, progress continues to be made on the planned separation of the filtration business. In February, we announced that our filtration business, Atmus Filtration Technologies filed a registration statement on Form S-1 with the US Securities and Exchange Commission for a proposed underwritten IPO of newly issued common stock. Now I will comment on the overall company performance for the first quarter of 2023 and cover some of our key markets, starting with North America, before moving on to our largest international markets. Demand for our products continue to be strong across all of our key markets and regions with a slow improvement in China, resulting in record revenues in the first quarter of 2023. Revenues for the first quarter were $8.5 billion, an increase of 32% compared to the first quarter of 2022, driven by the addition of Meritor, strong demand, and improved pricing. EBITDA was a record $1.4 billion or 16.1% compared to $755 million or 11.8% a year ago. First quarter 2023 results include $18 million of costs related to the separation of the Filtration business, while the first quarter of 2022 results include $158 million related to the suspension of operations in Russia, and $17 million related to the separation of the Filtration business. Excluding these costs, EBITDA percentage increased in the first quarter, driven by higher volumes and improved pricing, offset by supply chain and compensation cost increases. Research and development expenses also increased in the first quarter of 2023 as we continue to invest in the products and technologies that will create advantages in the future, particularly in the Engine, Components, and Accelera segments. Gross margin dollars improved compared to the first quarter of 2022 as the benefits of higher volume, pricing, and the acquisition of Meritor exceeded the supply chain cost increases. As we noted previously, Meritor results are included in our overall guidance for 2023 and we will continue to provide updates on the progress of our value capture initiatives, which will be focused on the portion of the business within our Components segment. In the first quarter, Meritor operating performance and financial results showed improvement with sales of $1.3 billion and EBITDA of 9.4%. The improvement in profitability from the comparable EBITDA margin of 7.2% in 2022 was driven by improved pricing, operational improvements, and cost reduction activities aligned with our value capture initiatives. Our first quarter revenues in North America grew 39% to $5.1 billion, driven by the addition of Meritor and strong demand. Industry production of heavy-duty trucks in the first quarter was 76,000 units, up 17% from 2022 levels, while our heavy-duty unit sales were 29,000, up 27% from 2022. Industry production of medium-duty trucks was 33,000 units in the first quarter of 2023, an increase of 11% from 2022, while our unit sales were 30, 000, up 13% from 2022. We shipped 39,000 engines to Stellantis for use in the RAM pickups in the first quarter of 2023, down 5% from 2022 levels. Engine sales to construction customers in North America decreased by 6% as volumes declined, partially offset by positive net pricing. Revenues for North America power generation increased by 14% as industrial and data center demand improved and supply chain constraints began to ease. Our international revenues increased by 24% in the first quarter of 2023 compared to a year ago with the addition of Meritor and strong demand across most markets. First quarter revenues in China, including joint ventures, were $1.7 billion, an increase of 16% as on-highway markets began to recover. Industry demand for medium and heavy-duty trucks in China was 268,000 units, an increase of 2% from last year. Our sales and units, including joint ventures, were $46,000, an increase of 31% due to increased penetration within our joint venture partners and new product launches to meet NS VI standards. The light-duty market in China was up 2% from 2022 levels at 476,000 units, while our units sold, including joint ventures, were 36,000 units, an increase of 6%. Industry demand for excavators in the first quarter was 57,000 units, a decrease of 26% from 2022 levels. The decrease in the market size is due to the change in emissions regulations and related adjustments and inventory levels. Our units sold were 9,000 units, a decrease of 8%. The decrease in the excavator market was offset by improved share with the new and expanded customer relationships and first quarter engine sales to replenish inventory levels at construction OEMs. Sales of power generation equipment in China decreased 28% in the first quarter, primarily driven by a decline in data center activity. First quarter revenues in India, including joint ventures were $752 million, an increase of 21% from first quarter a year ago. Industry truck production increased by 26%, while our shipments increased 7%. Power generation revenues increased by 30% in the first quarter as economic activity remains strong. In Brazil, our revenues increased 48%, driven by improved demand in most end markets. Now let me provide our outlook for 2023, including some comments on individual regions and end markets. We have raised our forecast for total company revenue in 2023 to be up 15% to 20% compared to our prior guidance of up 12% to 17%. This guidance reflects an improved outlook in North America, including stronger demand for Meritor. We are forecasting higher demand in heavy-duty truck and power systems markets and expect aftermarket revenues to increase compared with 2022. We are increasing our forecast for heavy-duty trucks in North America to be 270,000 to 290,000 units in 2023 compared with our prior guide of 260,000 to 280,000. While supply chain constraints continue to limit our industry's collective ability to produce, end customer demand remains strong. In the North America medium-duty truck market, we are continuing to project the market size to be 125,000 to 140,000 units, flat to up 10% from 2022. Similar to heavy duty, supply chain constraints continue to limit our ability to produce and fully meet end customer demand. Consistent with our prior guidance, our engine shipments for pickup trucks in North America are expected to be 140,000 to 150,000 in 2023, volume levels consistent with 2022. In China, we project total revenue, including joint ventures, to increase 16% in 2023, an improvement from the previous guidance of up 7% driven by share growth better than expected construction volumes and content increase. We project a 15% to 25% improvement in the heavy and medium-duty truck demand and a 10% to 20% improvement in the demand in the light-duty truck market, coming off the low market levels in 2022, consistent with the prior guide. We expect China construction volume to be flat to down 10%, improved from our prior guidance of a decline of 25% to 30%. While the market is adjusting to new emissions regulations, shipments to replenish inventory and export demand exceed our prior expectations. As we discussed previously, our guidance assumes a slow recovery in demand in China this year. We have continued to improve our presence in the region, through the down cycle of 2022 and are well-positioned for continued outgrowth. Our technological expertise and emissions experience positions us well to outgrow the market and support our partners. We are seeing this in 2023 with improved on-highway share now that NSVI is fully implemented, along with higher share in the construction market as we expand our partnerships. We also continue to ramp production and expand our presence in automated manual transmissions as our market share increases in the heavy-duty market is increasingly adopting this technology. In India, we project total revenue, including joint ventures, to be up 1% in 2023. We expect industry demand for trucks to be flat to up 5% for the year. We project our major global high horsepower markets to remain strong in 2023. Sales and mining engines are expected to be down 5% to up 5%, consistent with the prior guidance. Demand for new oil and gas engines is expected to increase by 15% to 25% in 2023, driven by increased demand in North America. Revenues in global power generation markets are expected to increase 10% to 15%, driven by increases in non-residential construction and improvement in the data center market. For Accelera, we are expecting full year sales to be $350 million to $400 million, consistent with our prior guidance. Revenues are expected to approximately double from 2022 due to higher battery demand in North America school bus market and the additions of the electronic powertrain portion of the Meritor business and Siemens commercial vehicle business. The electrolyzer market continues to gain momentum as well with the near-term forecast on expanding capacity to meet the growing demand. As mentioned on our previous call, Meritor results are included in our overall guidance for 2023. Within components, Cummins expects revenue contributed by the Meritor business for 2023 to be between $4.7 billion to $4.9 billion, an increase from $4.5 billion to $4.7 billion in our previous guidance. EBITDA is expected to be in the range of 10.3% to 11% of sales, consistent with prior guidance. In summary, coming off a very strong first quarter with visibility to strong demand beyond the first half of the year, we have raised our sales growth outlook for the year to 15% to 20%. We have also revised our forecast for EBITDA to be in the range of 15% to 15.7% from our previous guidance of 14.5% to 15.2%, reflecting very strong incremental margins while continue to invest for the future within our core business and Accelera. Demand in most of our core markets is strong. Our products are performing well, and we are excited about the investments we are making in the future. During the quarter, we returned $222 million to shareholders in the form of dividends, consistent with our long-term plan to return approximately 50% of operating cash flow to shareholders. Strong execution resulted in record sales, EBITDA, net income and earnings per share in the first quarter, despite the continued challenging operating environment. I'm impressed and grateful for the commitment of our employees and leaders around the world who are delivering for our customers and generating strong financial performance at the same time. Our excellent results further enhance Cummins' ability to keep investing in future growth, bringing sustainable solutions that will protect the planet for future generations and return cash to our shareholders. Now let me turn it over to Mark.

Chris Clulow:

Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have any additional questions, please rejoin the queue. Operator, we are ready for our first question.

Jerry Revich:

Yes. Hi, good morning, everyone.

Mark Smith:

Good morning, Jerry.

Mark Smith:

Yes, we've definitely been asking those questions internally as well, Jerry. Really strong results from both. I think pricing, of course, has been positive. I think in both those businesses, we haven't yet seen some of the cost increases that we anticipated for the full year. We had some beneficial moves in commodities that help power systems. So we're not assuming that they continue. And then in distribution, of course, very strong parts margins, and some lag effect before some of the cost increases take place. So we're still expecting strong full year results. Of course, we'll continue to push for improvement everywhere we can. And again, there was modest benefits from one or two corporate items that improved all of the segments. But I think the main takeaway I want you to leave with, we're really pleased with the performance in particular of those businesses. The Distribution business now has established quite a track record of improving margins over time, and we're really encouraged over the last three or four quarters by the progress in the Power Systems business. So we'll keep pushing for more. But I think one or two factors that we're not certain can continue through the subsequent quarters. And we are trying to drive down inventory a little bit, which may have some absorption impact in the Power Systems business a little.

Jennifer Rumsey:

Yes. Great. Thanks for the question, Jerry. So as I commented and you saw start to come through in Q1, our pattern of leveraging emissions regulation change to drive outgrowth in market position as well as added content is playing out in China now following the launch of the NSVI. We've seen that playing out in India with BSVI regulation previously. And we do believe that there's continued opportunity both in the Engine space with future EPA regulations of the ultra-low NOx build rule to -- to some degree, increase our position in the market, although, of course, we have a strong position today in the US market. So content expansion. So that continues to be a tailwind and outgrowth opportunity slowing to some degree in North America on-highway, but there continues to be upside there. And then we are working clearly in our Accelera business to establish position in the electrified powertrain and in particular, our position in key components and as well as integrated powertrain. So batteries, power electronics and motor generators, eAxles, fuel cells. We feel like we've got the right portfolio of technologies and are forming partnerships and getting experience in the market to position ourselves over time as that market starts to electrify.

Tim Thein:

Thank you. Good morning. Mark, maybe just one on -- to start on the Engine segment. You've taken up the full year revenue outlook and as well as JV income and the margin guidance, I believe, was unchanged. So what's working against the top line there in terms of the profit or the EBITDA guidance?

Tim Thein:

Got it. Okay. And then, just on -- wouldn't be a Cummins call without an update on China. And you mentioned that on the on-highway side, you've seen a pickup from a production standpoint is not translating yet on the retail side. What just -- what is the team seeing and hearing, not just on the on-highway, but maybe some of the other key end markets for you. You mentioned excavators, but maybe some of the other ones in China and just kind of what's baked in into the balance of the year for the China operations as a whole? Thank you.

Operator:

Thank you. The next question is coming from Jamie Cook of Credit Suisse. Please, go ahead.

Mark Smith:

Yes. I think, Jamie, I think components continues to do well. The main factor is just really the mix in the business. The underlying businesses are performing well. Again, not such a big help from price/cost in this segment relative to power systems and components. But I think really it's really some minor changes in the mix going forward. We've obviously got strong North America. Meritor continues to improve, but it's still dilutive to that overall segment, but no fundamental .

Jamie Cook:

Okay, thank you. I appreciate it.

David Raso:

Hi. Sort of picking up on trying to look beyond 2023. I'm just curious, the conversations you're having with your off-highway customers for initial thoughts on what they need from you in 2024 relative to on-highway. Just curious if you have any distinguishing features between those different conversations?

David Raso:

Open question on purpose. Off-highway versus on-highway.

Jennifer Rumsey:

And I'll just add, of course, in China, you talked about the emissions changeover. So, there's a dynamic in that market and a question on does China do any action in the economy there that we'll pay attention to. And in Power Systems, same in terms of broader macroeconomic indicators I'm watching that, but we do have places where we're starting to take orders into 2024. And so it's a space that we're just watching closely at this point.

Jennifer Rumsey:

Well, we have emissions change overcoming in some of our markets in 2024. So, of course, that's a factor. But what I would say is we have long-term agreements with some of our customers. We price more regularly with some other customers in the market. We're continuing to pay attention to what's going on with price costs. As Mark said, it's still a mixed picture. And so we're committed to continuing to deliver strong returns and stay on top of price cost as that moves. But right now, this year, we're seeing improvements in some areas, and we're still seeing inflationary pressure and other areas. So it's a little bit difficult in -- 2024, yeah.

Mark Smith:

I think there a lot of factors go into pricing, David, included in input costs, agreements with customers, supplier available. A lot of those things, but that's not a main topic conversation right now at all. I think the thing we're most thinking about is the -- how long does this cycle run on and off-highway and right now, customers are telling us their confidence for the rest of the year is, on average, has gone up, not stayed the same. We recognize and appreciate the same questions really about demand levels for 2024. That's our radar is mostly upon any signals around demand. That's going to be the biggest driving factor of our performance.

Rob Wertheimer:

Almost just following up on that question with maybe a slightly different plant. Your businesses where you, I think, have more pricing control and distribution power systems did really well at margin. And the OEMs that you serve and on-highway truck have had a really good quarter as well. Just overall, is your general sense that you're pricing to those OEMs and components should catch up over time, and there's still your runway to go, or is that too strong?

Rob Wertheimer:

That's a helpful answer. Thank you. And if I can -- I think I've asked this before, I am not – easy to answer, but in Accelera, how should we think about as revenue start to ramp, what margins do? I mean are project level economics going to be consistently positive on the margin line and maybe not more be. Are you still bidding loss-making deliveries as your volumes to come through? How do we sort of think about what the underlying dynamics are of the margin there?

Operator:

Thank you. The next question is coming from Tami Zakaria of JPMorgan. Please go ahead.

Mark Smith:

Yes. So what I'd say is we are making planned investments because we're -- irrespective of the economic cycle, we're expecting to pick up more business. So we're increasing capacity in parts of our business and launching new products. The nature of our business is such that we have to be prepared to ramp up and ramp down based on the economic cycle. So it's hard to predict with great certainty two or three years out. But as a general statement, yes, our CapEx is up this year because we're kind of bullish on our longer-term prospects. And then on pricing cost, of course, it's always competitive and challenging. But I think we're all aware that there's been significant inflation across the industrial space over time, and that's what's really necessitated the price increases and quite frankly, earlier on in the cycle late in 2021. It took us a while before we were able to increase prices. So to an extent, we've been kind of catching up with the trends there. Yes, so that's an ongoing…

Operator:

Thank you. The next question is coming from Steven Fisher of UBS. Please go ahead.

Jennifer Rumsey:

So, first, thanks for the question. I do want to start by saying that Cummins is fully committed to emissions compliance. We have been and we'll continue to cooperate with agencies all along and work through this matter to the best of our abilities. And our updated disclosure today is consistent with what we've done since we first announced our voluntary internal review in 2019 of disclosing transparently throughout this process. So, as Mark said, we think that we are nearing the end. It's premature to speculate though exact timing or exact amount at this point. We feel like the business is well positioned in a strong financial position and continuing to generate strong returns.

Mark Smith:

Well, in first quarter, we were about 2% net positive between price and cost. And as we said on the -- in the earlier remarks, it very much varied by business. And in fact, you can see it, since you're asking a lot of questions about the different margins in the business, you can see that. I mean, the pricing is pretty much set. Aftermarket is one area where we have the potential that were just prices more frequently. That's the nature of the aftermarket business. I don't think that's unique to Cummins. But pretty much, I think, the course is largely set for this year and then, it's really looking for efficiencies in every part of operations, working with customers, working with suppliers. We all enjoy it when the costs are lower. That's just not where we'd be. It's been an unprecedented period of supply constrains, some of which, frankly, we're not out of yet and it's been a period of unprecedented complexity and very, very robust demand. And we've continued to grow our business faster than some of the underlying markets. So that's been a positive, but that’s been a lot of work for our supply chain teams. But I think, largely, it's going to be a net positive for this year, Steve. I don't imagine dramatic changes quarter-to-quarter. The commodities can ebb and flow a little bit, and we saw some benefit copper prices in the Power Systems business. And again, we're using hedging and other techniques to try and smooth out those costs. But I don't expect fundamental changes to the reason for variation in earnings. We're really focused on this demand side. And right now, our confidence has gone up based on the confidence of our customers through the rest of this year.

Operator:

Thank you. The next question is coming from Matt Elkott of TD Cowen. Please go ahead.

Jennifer Rumsey:

It's still early for me to add a lot of response here. We, of course, now are in the passenger rail business with our 95-liter engine. We have a Tier 4 compliant product, and then we've also entered the rail market with certain customers with fuel cells. And so we'll continue to explore opportunities with the product offerings that we have in that market.

Jennifer Rumsey:

Well, there is -- I mean, definitely, what you said is a factor, limitations in supply and high use, right, at high use and then new products are more fuel efficient. So, there's still a lot of factors that are causing customers to -- in commercial trucking to continue to want to buy. There's investments in infrastructure that's driving demand and construction and there's growing investments in the cloud, it's driving data center demand. And so there are some specific indicators for our business that maybe are decoupled from the broader economy. That said, the broader economy does have some influence, which is why we continue to be cautious about where we're making investments and increasing headcount.

Operator:

Thank you. Ladies and gentlemen, unfortunately, we have run out of time for questions. I would like to turn the floor back over to Mr. Clulow for closing comments.

Jennifer Rumsey:

Yeah. Thanks, Chris. Just to wrap up today, I want to again recognize the strong performance of the company in the first quarter, delivering record revenue, EBITDA, net income and earnings per share. We're in a strong financial position and are confident in our strategy and our leaders in the future of the company and look forward to continuing to update you on our progress in future calls.

Operator:

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time or log off the webcast, and enjoy the rest of your day.

Operator:

Greetings, and welcome to the Cummins Inc. Fourth Quarter 2022 Earnings Conference. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Clulow, Vice President of Investor Relations. Thank you. Please go ahead.

Jennifer Rumsey:

Thank you, Chris. Good morning. I’ll start with a summary of 2022, discuss our fourth quarter and full year results and finish with a discussion of our outlook for 2023. Mark will then take you through more details of our fourth quarter and full year financial performance and our forecast for this year. Last year was an incredibly exciting one for Cummins and our stakeholders. We made significant strides in our inorganic growth strategy, most notably through the acquisitions of Jacobs Vehicle Systems, Meritor and the Siemens Commercial Vehicles business. We also navigated complex global supply chain challenges, advanced our preparation for the separation of our filtration business and transition from Tom to me as the CEO. We accomplished all of this and delivered record revenues, EBITDA, and earnings per share in 2022. We did so with the focus on the exciting opportunity in front of us to lead the industry to a broader clean economy and do so in a way that is best for our stakeholders and the planet. Decarbonization is a growth opportunity for Cummins, uniting our business and climate goals. In 2022, we launched our long-term decarbonization growth strategy, Destination Zero, which includes making meaningful reductions in carbon emissions through advanced internal combustion technologies widely accepted by the market today, while continuing to invest in and advance zero emissions technologies ahead of widespread market adoption. As part of our organic growth strategy, we unveiled the industry’s first unified fuel-agnostic internal combustion powertrain platforms, and we continue to see momentum in our electrolyzer technology and green hydrogen production opportunities. Demand for our products remains strong across all of our key markets and regions with the notable exception of China, resulting in strong revenues in the fourth quarter. Fourth quarter revenues totaled $7.8 billion. Excluding the Meritor business, revenues for the fourth quarter of 2022 were $6.6 billion, an increase of 13% from the fourth quarter of 2021, primarily driven by increased demand in many of our North America markets. To provide clarity on the fourth quarter and 2022 full year operational performance of our business and allow comparison to our prior guidance, I’m excluding the Meritor operating results and associated acquisition and integration costs, the costs related to the separation of the filtration business and the costs associated with the indefinite suspension of our operations in Russia. Mark will provide more detail on the reported results in his comments. With these exclusions considered, EBITDA was $1.1 billion or 16.1% of sales in Q4, above our guidance of 15.5% and stronger than the $705 million or 12.1% reported a year ago. EBITDA and percentage improved due to an increase in gross margins with positive pricing, higher volumes, lower product coverage costs and some improvement in logistics costs, all of which offset increases in material costs. Gross margin improvement is key to meeting our long-term goals of increasing the returns in our core business while transitioning our New Power business to break even EBITDA by 2027. In the fourth quarter, Meritor operating performance and financial results showed improvement, and we continue to accelerate value capture opportunities across the business. Our employees have done an excellent job in integrating the Meritor operations and people within Cummins and continue to make strides in identifying cost reduction opportunities. We remain confident in our ability to achieve the $130 million in pretax synergies we referenced upon completion of the acquisition. And in addition, we expect to deliver incremental tax synergies as we integrate the business. Excluding Meritor, 2022 revenues were a record $26.2 billion, 9% higher than 2021. Also excluding Meritor, the costs related to the planned separation of the filtration business and the impact of the indefinite suspension of our Russia operations, full year EBITDA was $4 billion or 15.1% of sales compared to $3.5 billion or 14.7% of sales in 2021. Improved volumes, better price realization and an improved supply chain environment more than offset higher compensation expenses, increased material costs and lower joint venture income for the year. EBITDA percent improved year-over-year in Engine, Power Systems, Distribution and Components segments. Leading the way was the Components segment, which delivered 150 basis points of EBITDA margin expansion. The Power Systems business finished 2022 with another solid quarter and delivered full year EBITDA of 12.2%, up from 11.2% last year. The improvement in performance in this segment over the past six months is encouraging, and you will see from our guidance that we expect further margin gains this year. EBITDA margins in the distribution business increased by 110 basis points. Our reported full year 2022 results include five months of operational performance for Meritor or $1.9 billion of revenue and $26 million of EBITDA, including $115 million of acquisition, integration and purchase accounting related costs. Now, let me provide our overall outlook for 2023 and then comment on individual regions and end markets. Our 2023 guidance includes our expected results of the Meritor business and excludes the costs or benefits associated with the separation of the filtration business. We are forecasting total company revenues for 2023 to increase 12% to 17%, compared to 2022 and EBITDA to be 14.5% to 15.2% of sales, driven by the inclusion of a full year of sales from Meritor, continued strength in the North American truck market, improved demand in power generation markets, overall pricing improvement and slow improvement in the China on-highway markets. Industry’s production for heavy duty trucks in North America is projected to be 260,000 to 280,000 units in 2023, a range of a 5% decline to 2% improvement year-over-year. In medium-duty truck, we expect the market size to be 125,000 to 140,000 units, flat to up 10% from 2022. We expect our deliveries in North America to continue to outpace the market, as the engine partnerships we announced in 2021 continue to phase in. Our Engine shipments for pickup trucks in North America are expected to be 140,000 to 150,000 units in 2023, volume levels consistent with 2022. In China, we project total revenue including joint ventures to increase 7% in 2023. We project a 15% to 25% improvement in heavy and medium duty truck demand and 10% to 20% improvement in demand in the light duty truck market, coming off the low market levels in 2022. Industry sales of excavators in China are expected to decline 25% to 35% in 2023 as the market adjusts to new emissions regulations and digests inventory on hand. We are watching the situation in China closely, with ensuring the safety and well-being of our people as our first priority. The change in the country’s COVID lockdown policy could positively impact our operations in the coming months. The current events make it difficult to gauge. The markets within China are at a low point, as we close out 2022 and our guidance assumes a slow recovery in 2023. In India, we project total revenue including joint ventures to be up 1% in 2023. We expect the industry demand for trucks to be flat to up 5% for the year. We project our major global high-horsepower markets to remain strong in 2023. Sales of mining engines are expected to be down 5% to up 5%, dependent upon the trajectory of commodity prices and supply chain improvement. Demand for new oil and gas engines is expected to increase by 15% to 25% in 2023, primarily driven by increased demand in North America. Revenues in global power generation markets are expected to increase 10% to 15%, driven by increases in non-residential construction and improvements in the data center market. In New Power, we expect full year sales to be $350 million to $400 million, more than doubling our 2022 revenues. We have a growing pipeline of electrolyzer orders, which we expect to convert to backlog and to be delivered over the course of the next 12 to 18 months. At the end of the first quarter of 2022, we shared that we had reached the milestone of a $100 million in electrolyzer backlog. This tripled to $300 million at the end of 2022, demonstrating the strong momentum in this market. With demand continuing to rise, we are focused on adding capacity for electrolyzer production. During 2022 we announced several capacity expansion investments and expect to have more than two gigawatts of scalable capacity in the 2024 to 2025 timeframe across Europe, North America and China. Additionally, we will continue to deliver battery, electric and fuel cell systems along with electric powertrain technologies as adoption continues in the transportation markets. As mentioned, Meritor results are included in our overall guidance for 2023. We are continuing to drive improvement in our margins post-acquisition and expect Meritor to be accretive to earnings per share in 2023. We will continue to provide updates on the progress of our value capture initiatives, which will be focused on the portion of the business within our Components segment. Within Components, we expect Meritor to add $4.5 billion to $4.7 billion in revenue in 2023 with EBITDA margins in the range of 10.3% to 11%, an improvement from the comparable 2022 EBITDA margin of 7.2%. The electric powertrain portion of the Meritor business has been integrated within the New Power portfolio with projected 2023 EBITDA losses of $55 million included in the overall guidance for that segment. In 2023 we anticipate that demand will remain strong in most of our key regions and markets, especially in the first half of the year. While some macroeconomic indicators have weakened in recent months, we have not seen a significant change in customer orders at this time. In summary, we expect full year sales growth of 12% to 17% and EBITDA to be 14.5% to 15.2% of sales. We have taken a number of actions to improve our EBITDA in 2023 and expect to generate very strong incremental margins within our core business and improve the margins of the Meritor business while continuing to invest in our New Power business. Having effectively managed through the challenges of the past couple years we expect improved performance in 2023 and are well positioned to invest in future growth while continuing to return cash to shareholders. Now, let me turn it over to Mark, who will discuss our financial results in more detail.

Chris Clulow:

Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have an additional question, please rejoin the queue. Operator, we’re ready for our first question.

Jerry Revich:

I know it’s early post the acquisition of the Siemens propulsion systems and Meritor, but wondering if you could just comment on what the acceptance has been of the products in the marketplace? Post-Cummins ownership, what’s the pipeline from the developments look like? How is that cross-selling working out versus what you folks had expected before acquiring the assets? Thanks.

Jerry Revich:

Sounds good, Jennifer, thanks. And Mark, can I ask in terms of the pricing that you’re expecting in ‘23 within the outlook? And if you could just touch on the logistics costs embedded in the guide as well. You folks have been running pretty hot to hit deliveries in ‘22. I’m wondering to what extent does that a tailwind within the guidance?

Operator:

The next question is coming from Jamie Cook of Credit Suisse. Please go ahead.

Jennifer Rumsey:

Great. Thanks, Jamie. Let me speak first to what we’re seeing in the market. And we, of course, are paying attention to some of these macroeconomic trends. If you take just the North America truck market as a starting point, while there has been some decrease in spot rates, we still continue to see healthy freight activity and strong backlogs out through the first half, which gives us confidence that the market is going to remain strong, certainly through the first half of the year. And it’s important to note, it’s just not been a typical cycle for us because for the last two years, we’ve been undersupplying to the market demand. They’ve been using that equipment. We’re seeing that reflected in very high aftermarket demand which continues, and these new trucks provide efficiency benefits to the fleet. So, we continue to expect strong North America truck market. In the Power Systems business, again, we have a healthy backlog of products and strong demand across many of our markets. Mining, we’re forecasting to remain around flat, but growth in power generation, growth in the oil and gas business. So, we’re feeling pretty confident about that as well. The biggest uncertainty is really around China. And as I said in my comments, we do project some slow recovery throughout 2023. With the lift of the stringent lockdowns that they had in the last couple of years in December, we expect that that may result in economic strengthening and certainly, less operational disruption, but we’re still monitoring what happens with the COVID waves there, is there any government stimulus into the economy. We feel really well positioned there. We’ve launched our NS VI products, which we think will enable Cummins to grow our position in the market. We’ve launched the automated manual transmission there. We’ve got a new natural gas platform. So, we’re really well positioned as China continues to strengthen and just uncertainty on exactly what the shape of that will look like. I’ll let Mark talk about the margin question.

Operator:

The next question is coming from Stephen Volkmann of Jefferies. Please go ahead.

Mark Smith:

I think it can definitely be better than that. We’re still battling some inefficiencies here and there Steve. We’re still expecting to have aftermarket growth over time. So no, we’re not locked into these margins. I was just trying to be clear on what the underlying factors. I’ve seen a few comments around Engine business margins, but no, I think they can go higher. Getting China, which is the world’s biggest truck market, I know the earnings come through JV, we have the lowest market in a decade. And we think we still got more share to gain there. We’ve got more content in the Components business. So, if I sit here today and say what could be the one thing that could move that could change our guidance most clearly, I would agree with Jen, it would be China, right now. We don’t have visibility. People are more enthusiastic, but the activity hasn’t yet materially picked up. So, that would be one important factor.

Jennifer Rumsey:

Yes. We are focused on continuing to meet more stringent regulatory requirements and do so with products that will provide benefits to the environment and exceed our customer needs. We now have clarity on the EPA 2027 NOx regulations that happened late last year, and they finalize that standard at a 0.035 gram NOx. And our intention is to offer a full product lineup with our new fuel-agnostic engine platforms to meet that regulation, and we’re finalizing our product plans right now with our customers on those. But we really feel well positioned to invest in really as a part of our Destination Zero strategy, reduce CO2 and NOx impact to the environment and offer products -- market-leading products to our customers with that regulation.

David Raso:

Hi. Thank you. The China guide, the up 7%, I assume that includes consolidated and JV revenue, sort of how you usually kind of speak to it.

David Raso:

Even -- maybe can you update us on the mix of your end markets? It feels like the consolidated off-highway, the construction exposure you have that shows up in the P&L more so than JV, and the JV is more of the on-highway. I’m surprised with the mix because that construction business at this stage must be pretty small after the declines we’ve seen. So, to have truck up double digit for China, for heavy and light, even though the excavator is down a lot, the mix would suggest you’d be up more than 7%, if truck is up double digit and at now relatively small construction business is down. Are there other businesses keeping it only at 7%? Is there a share comment there? Just trying to understand why only up 7% with that China end market guide?

Jennifer Rumsey:

Just on your share, we expect to continue to grow our share in the China market with the launch of the NS VI product. So, that’s assumed in our guidance.

Mark Smith:

No. We did get some sizable tech fees and other things from the early part of last year, which kind of helped -- the wrong word, we were entitled to those based on product launches, but no, I don’t think there’s anything significant there.

Mark Smith:

Right. So, I think the answer to that is, we’ll need to keep working that down. I think we’ve got some floating rate exposure. It’s not all fixed, and probably, the debt reduction will come in the second half of the year, but let me come back to you on that, David.

Rob Wertheimer:

Hi. I know it’s still early days, but you’re starting to see some ramp in electrolyzers. And I guess there’s obviously a lot of uncertainty as to what the ultimate margin structure is going to be, New Power or clean energy generally. So I wonder if you have any thoughts on when you see clarity, any thoughts on where gross margins might trend. Maybe you’re still heavily investing, but the gross margins are improving, or just your thoughts on how the curve of profitability is shaping up in clean tech.

Mark Smith:

Yes. Rob, one thing I’ll add is, for the gross margin on a project basis, we’re at gross margin positive last year, which is a good early indicator. We have other costs that are going in, too, for capacity expansion and other things that obviously offsets that, but it’s a good indicator that we’re on the right path for profitability as we move forward with more volume.

Jennifer Rumsey:

I mean one of the advantages we have here is we’re able to leverage our existing footprint and capability that we have as a part of the broader comment. So, you saw us announce recently, we plan to use our Fridley manufacturing facility for electrolyzer production in North America. So, we are tapping into that strength we have in our footprint and supply chain capability to help build out profitable both product as well as supply chain. And that’s an advantage that I think Cummins has here.

Nicole DeBlase:

Maybe just on the distribution margins. It looks like you guys aren’t expecting margin expansion there, even though sales are up 2% to 7%. I guess what is the reason for that?

Nicole DeBlase:

Okay, understood. Thanks. And then I guess Power Systems stood out to me. On the other side, it’s just the margins look really impressive year-on-year in 2023. Is price/cost the biggest driver of that, or is there any other big drivers of the margin expansion that you guys are expecting?

Jennifer Rumsey:

For that business, it’s important to keep in mind, you see a very long -- we have a very long lead time on orders. So, as costs accelerated, it took a while for us to pass on some of the price increases to offset that, and that is in part what drove the strong margin improvement from ‘21 to ‘22.

Matthew Elkott:

If you can give us a sense of how much of a growth moderation can we expect in the second half? I’m assuming that will be the case directionally because you’ll have the Meritor comps. And also, it sounds like you guys are more cautious on the second half. So, how much of a growth moderation are we expecting?

Matthew Elkott:

Got it. That’s very helpful. And then, just one follow-up on the New Power front. It’s been about a year since you guys announced the fuel agnostic engine. So, any update on that and the receptiveness from customers in your conversations? And also, I think back in August PACCAR announced that they’re using your new natural gas engine. So, is there anything new on that front as well?

Operator:

The next question is coming from Noah Kaye of Oppenheimer. Please go ahead.

Jennifer Rumsey:

At a high level, the different categories of investment in New Power, of course, there’s big investments happening in electrolyzers, and we talked about the growth and capacity investments that we’re making there. The other buckets include investments in batteries, other electrified components in the electric powertrain and then in fuel cells. So, we’re investing end of the prime mover as well as some of the key components to position ourselves as our current markets start to move to electrified powertrains to be both the powertrain provider as well as provide key components similar to the model we have today with Engine business and Components. You want to talk about allocation of investment?

Noah Kaye:

That’s helpful. And then just to give us some expectations around the cadence of earnings this year, obviously, you’re guiding to EBITDA, not EPS. But thinking about China JV modestly improving, getting better synergies, capture on Meritor throughout the year, but then maybe some offset from potential deterioration in some end markets. So, just any guideposts you would give us on first half versus second half, the EBITDA or even EPS?

Operator:

The next question is coming from Tami Zakaria of JPMorgan. Please go ahead.

Mark Smith:

Absolutely. Yes, we’re working very hard on that. I mean personally, along with many members of the Meritor, Cummins team. So yes, and we’ll talk about those as we go along, but yes, we’re feeling confident about that progress towards that $130 million.

Mark Smith:

We’ll try and get as much as we can -- both helps the long-term interest of that business and improve the cost structure. So yes, we expect the results clearly to improve, especially in the Components segment. We’re assuming that’s all in for now. If we get more, then we’ll be happy to report. We won’t get more than $130 million, just to be clear. That’s a year three number, but we’re making good progress.

Jennifer Rumsey:

Yes. So, let me just reiterate the guidance that we had within the Components business. We have $4.5 billion to $4.7 billion in revenue and EBITDA margins for the Meritor business, 10.3% to 11% compared to in 2022, that was 7.2%. And some of that is progress on price/cost in that business, operating efficiency as well as synergy cost savings.

Mark Smith:

I think you should just expect sequential improvement through the first half of the year from the Q4 levels.

Unidentified Analyst:

Hey, guys. Thanks for taking our questions on for Steve Fisher. Just in terms of the power generation market, can you talk a little bit more about what’s driving that market to be so robust this year? We might have expected data centers weakening a little bit. It sounds like you’re expecting that to be up still again this year. But, if you could just talk about some of the drivers in that market.

Mark Smith:

I think it’s fair to say, it’s pretty broad-based across multiple markets, broad parts of the economy. Yes, the data center gets a lot of attention. It is a significant individual segment, but we’re seeing robust underlying demand for power generation across multiple segments.

Jennifer Rumsey:

Yes. How I would describe it is, the inflation reduction act and the investments around that are really going to be key to enable the adoption rate that we anticipate is going to drive an acceleration in hydrogen investment. The details around that investment are being clarified right now. So, it’s going to take several years before you really see that translate into actual projects and business. Definitely, it’s going to drive growth in the hydrogen market in the U.S. between now and 2030 as that -- as those incentives come in place to both put the hydrogen production in place as well as drive adoption of some of these technologies, which today, frankly, just cost more. So, you need those incentives in order to start to drive customer adoption and bring down the costs and make them more viable in the market. I mean, in the short run, we’re investing more because we’re building up capacity as are others in the industry. So, the faster we go in the short run could consume more cash. But obviously, we want the market to move, and we expect to deliver good gross margins once we get this kind of investment phase. So, it could go faster. It’s quite a long incubation period, so very different from, say, our on-highway engine business, while we take an order. And then typically, we’re shipping in a few weeks. It’s not been that typical in the last 12 months versus sometimes more than a year between headline announcements to actually putting equipment into place and sometimes even more than a year. But we are encouraged, strong adoption for our technology, and yes, business is doing well on the business development side.

Michael Feniger:

When we look at China revenue, the consolidated plus JV in 2022, it’s basically the lowest it’s been over three, four years. I think slightly below 2019. I’m just curious, in those three years, how profitability looks maybe post some restructuring optimization? If units in China recover, are you more profitable in each of those units than maybe you were in the past?

Michael Feniger:

Thank you. And we’ve seen quite a few emerging suppliers in the EV, e-mobility space really struggled in the last 12 months with deliveries or profitability. Do you see some of those dynamics driving OEM conversations back to you and traditional suppliers as we start looking ahead to some of these key dates and trying to adopt more of this altered powertrain?

Mark Smith:

And I think also our footprint, our reputation for dependability, wherever our customers operate, is leading us to be approached in new segments by global large industrial players. So, it’s not just in the market that we operate in today, we’ve been approached to expand into different market applications. That’s particularly exciting.

Chris Clulow:

Thank you all for your participation today. That concludes our teleconference. I really appreciate the interest. And as always, the Investor Relations team will be available for questions after the call this afternoon. Take care.

Operator:

Good day, ladies and gentlemen, and welcome to the Cummins, Inc. Q3 2022 Earnings Conference Call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host, Chris Clulow, Vice President of Investor Relations. Sir, the floor is yours.

Jennifer Rumsey:

Thank you Chris and good morning. I will start with a summary of our third quarter financial results, then I will discuss our sales and end market trends by region, and I will finish with a discussion of our outlook for 2022. Mark will then take you through more details of both our third quarter financial performance and our forecast for the year. Before getting into the details of our performance, I want to take a moment to highlight a few major events from the third quarter. On August 3rd, Cummins completed the acquisition of Meritor, a leading global supplier of drivetrain, mobility, braking, aftermarket and electric powertrain solutions for the commercial vehicle and industrial markets. The integration of Meritor’s people, products and capabilities in axle and brake technology will position Cummins as a leading provider of integrated powertrain solutions across the internal combustion and electric power applications. We've been excited to welcome our new colleagues into our company. The company announced several collaborations that further enable our customers to achieve their decarbonization goals and advance our destinations Euro strategy. During the third quarter, Cummins announced collaborations with Werner Enterprises, Transport Enterprise Leasing and Versatile to deliver 15-liter hydrogen internal combustion engines when available. The X15H hydrogen engine, part of Cummins’ fuel agnostic platform, will enable a more-timely solution to reduce carbon emissions by providing customers with an option that has powertrain installation commonality and end user familiarity. The New Power business continued to expand its green hydrogen presence globally as demand continues to rise in the key markets of North America, Europe, and China. Cummins announced it will expand PEM electrolyzer manufacturing capacity at its Oevel, Belgium, factory to 1 gigawatt. The company also announced it will begin producing electrolyzers in the United States, underscoring our continued dedication to advancing the nation’s green hydrogen economy. Electrolyzer production will take place at our Fridley, Minnesota facility, starting at 500 megawatts of manufacturing capacity annually and scalable to 1 gigawatt in the future. In addition we continue to make progress and preparing for the separation of our filtration business. The addition of Meritor and the planned separation of the filtration business are positive mood moves for our future. However, there are upfront costs associated with both transactions, which you can see from our press release and earnings materials, heavily influenced, our reported results this quarter. We expect that the most significant costs associated with both transactions are behind us and we look forward to updating you on our progress in future quarters. Now, I will comment on the overall company performance for the third quarter of 2022 and cover some of our key markets starting with North America before moving on to our largest international markets. Demand for our products remained strong across all of our key markets and regions with the notable exception of China, resulting in strong revenues in the third quarter. Third quarter revenues totaled $7.3 billion. Excluding the Meritor business, third quarter revenues were $6.6 billion, an increase of 11% from the same quarter in 2021. EBITDA in the third quarter was $884 million or 12.1% of sales. Excluding the Meritor business results and the $25 million related acquisition and integration cost, EBITDA was $907 million or 13.8% of sales compared to $862 million or 14.4% of sales a year ago. Third quarter results include cost of $16 million or $0.09 per diluted share related to the planned separation of the filtration business. Adjusting for these costs, EBITDA without Meritor and filtration cost was $923 million or 14% of sales. My comments moving forward will exclude the results of Meritor, the costs associated with its acquisition and the costs associated with the expected separation of our filtration business. Our EBITDA percentage declined in the third quarter for three main reasons; first, we saw a 32% drop in joint venture income from the third quarter of 2021, driven primarily by the slowdown in the China markets; second, we increased investments in research and development as we continued to invest in the products and technologies that will create competitive advantage in the future, particularly in the engine and new power segments; and finally, we made an investment in our people, through a one-time bonus in recognition of their intense work and commitment to meet customer demand and navigate supply chain and other challenges. This bonus did not apply to company officers. A motivated and highly effective workforce is critical to delivering our customers, executing on our strategy, and creating shareholder value. And this bonus will pay dividends over time in the retention and engagement of our people. We continue to make positive progress in improving gross margins of our business and offsetting the impact of elevated supply chain and other inflationary costs that we have experienced since the start of 2021. Gross margin percentage improved in the third quarter, compared to the third quarter of 2021, as the benefit of higher volumes and pricing exceeded the manufacturing, logistics, and material cost increases and higher product coverage costs during the quarter. Our third quarter revenues in North America grew 19% to $4 billion driven by improved pricing, higher volumes, and higher after market demand. Industry production of heavy duty trucks in the third quarter was 64,000 units, up 23% from 2021 levels, while our heavy duty unit sales were 25,000, up 15% from 2021. Industry production of medium duty trucks was 29,000 units in the third quarter of 2022, an increase of 26% from 2021 levels. While our unit sales were up 27,000, up 20% from 2021. We shipped 41,000 engines just to Stellantis for use in their Ram pickups in the third quarter of 2022, down 4% from 2021 levels. Engine sales to construction customers in North America increased by 16% over 2021 due to strong capital spending by rental companies and pricing. Power Systems North America sales were up 30% compared to 2021 driven by higher volumes and strength in aftermarket. Power Systems North America industrial sales were up 122% compared to the third quarter of 2021 driven by strong oil and gas demand. North America power generation sales also increased by 10% from the third quarter of 2021. Our International revenues decreased by 1% in the third quarter of 2022 compared to a year ago. Third quarter revenues in China, including joint ventures, were $1.2 billion, a decrease of 18% due to lower sales and on highway and construction markets. Industry demand from medium and heavy-duty trucks in China was a 164,000 units, a decrease of 25% from 2021. Weaker new vehicle demand, contracted property investment, and economic impacts from the shutdown as the country continues to respond to the COVID-19 outbreaks have pushed the market to the lowest level in a decade instead of our projected recovery of the market in the second half of the year. Our sales in units including joint ventures were 30,000 a decrease of 27%. The light duty market in China decreased 8% from 2021 levels to 387,000 units in the third quarter while our units sold including joint ventures were 24,000, a decrease of 30%. Industry demand for excavators in the third quarter was 57,000 units, an increase of 3% from 2021 levels and our units sold were 7,800 units, a decrease of 8%. Sales of power generation equipment in China decreased 29% in the third quarter, due to the economic impacts of the COVID-19 resurgence. Third quarter revenues in India, including joint ventures were $614 million, an increase of 18% from the third quarter a year ago. Industry truck production increased by 37% while our shipments increased 20%, lagging the industry production due to the lower growth in the heavy commercial vehicle segment. Demand for power generation increased in the third quarter as economic activity continued to improve, resulting in record revenue in the quarter for that market. Now, let me provide our outlook for 2022 including some comments on individual regions and end markets. To provide clarity on our projections, we will first provide guidance excluding the results of Meritor from the acquisition date through the end of 2022. We will then provide a view of the expected Meritor results for 2022. Based on our current forecast, we are maintaining full year 2022 revenue guidance of up 8% versus last year. This guidance reflects stronger performance in North America and a continued weak market outlook in China, as well as the indefinite suspension of our operations in Russia. We are forecasting higher demand in global mining, oil and gas, and power generation markets, and expect aftermarket revenues to increase compared with 2021. EBITDA is now expected to be approximately 15% of sales, excluding the Meritor results and costs associated with the acquisition and integration, the cost of the indefinite suspension of our operations in Russia and the costs associated with preparing for the expected separation of our filtration business. This is below our previous guidance of approximately 15.5% of sales as a result of the lower than expected market in China in the second half of 2022, and the one-time employee bonus investment made in the third quarter. This guidance reflects our expectations of increased profitability in the fourth quarter, as we continue to drive the improvements we've seen throughout the year on pricing relative to inflationary cost and improve our operating efficiency. Based on our current forecast we expect production of heavy duty trucks in North America to be at 260,000 units in 2022, a 15% increase year-over-year. The supply chain constraints in our industry is expected to continue to limit our collective ability to fully meet the sustained strong end customer demand. In North America medium-duty truck market we are continuing to project the market size to be 120,000 to 130,000 units, a 5% to 10% increase from 2021. We are projecting our engine shipments for pickup trucks in North America to be flat compared to 2021 consistent with prior guidance. In China we now project total revenue including joint ventures to decrease 25% to 30% in 2022, an update to our previous guidance of down 20% to 25%. We now project a 55% reduction in heavy and medium-duty truck demand and a 15% to 20% reduction in demand in the light duty truck market compared to a 50% decline and 15% reduction respectively in our previous guidance. Industry sales of excavators in China are expected to decline 30% from record levels in 2021 consistent with our prior guidance. Despite the difficult economic and market environment in China we have continued to improve our presence in the region through the down cycle and are well positioned for continued out growth across our end markets in the region. As we look ahead industry volume of NS6 products will continue to increase as the new regulations are implemented more broadly. Our technological expertise and emissions experience positions us well to outgrow the market and support our partners through this transition. With our NS6 share continuing to run ahead of our NS5 share. We also continue to ramp production and expand our presence in automated manual transmissions, as our market share increases and the heavy-duty market is increasingly adopting this technology. In India, we project total revenue including joint ventures to increase 15% to 20% in 2022, an improvement from our previous guidance of up 15%. We expect industry demand for trucks to increase approximately 30% in 2022. Strong performance in power generation within India is also contributing to this improved outlook. Most major global high-horsepower markets are expected to remain strong through the end of 2022. Sales of mining engines are now expected to be up 5% compared to the prior year, an improvement from our previous guidance of flat. Demand for new oil and gas engines is expected to increase by 120% consistent with our prior guidance. Strong demand in the U.S. and other oil and gas markets amid energy and security has fueled this strong outlook. Revenues in global power generation markets are expected to increase 10%, driven by increases in non-residential construction. This is an increase from our prior guidance of 5% driven by the increased production as supply chain constraint slightly eased and improved pricing. We are projecting aftermarket sales to increase 15% to 20% from 2021 consistent with our previous estimate. This strong outlook is driven by parts demand within our North America On-Highway business, as well as global Power Systems markets. In New Power we expect full year sales to be approximately $180 million down from our previous guidance of $200 million due to customer scheduling and supply chain impacts. We have a growing pipeline of electrolyzers which we expect to convert to backlog and be delivered over the course of the next 12 to 18 months and we are seeing increased momentum in North America following the passage of the Inflation Reduction Act. Additionally, we will continue to accelerate our collaboration with customers on both electrified power and fuel cell applications in 2022. This was demonstrated in the third quarter as we successfully launched the Cummins HD 120 fuel cell system in China by delivering 52 units to the Lin-gang Government for a bus application. For Meritor, we are expecting full year revenue since the date of acquisition to be between $1.7 billion to $1.9 billion. EBITDA is expected to be approximately 4.5% of sales during the same period, including the impact of required purchase accounting and integration costs. This represents the financial impact of Meritor across our Components and New Power businesses. During the quarter, we returned $245 million to shareholders in the form of dividends and share repurchases, consistent with our plan to return approximately 50% of operating cash flow to shareholders for the year. As I sum up the third quarter, I want to emphasize that we are making progress in our strategy to lead in decarbonizing our industry. Although profitability dropped from the second quarter levels, the fundamentals of our business have not changed. Our products are performing well, leading to record demand from customers and rising market share in some of our core markets. This is the direct result of the contribution from our outstanding workforce. I do want to acknowledge the clear improvement in the financial performance of the Power Systems business this quarter, and I'm enthusiastic about the prospects for future earnings growth. We do expect total company profitability to improve in the fourth quarter from third quarter levels, as implied in our guidance for the fourth quarter. We are committed to improving the underlying financial performance of our business and delivering strong incremental margins through the remainder of 2022 and beyond. Now let me turn it over to Mark.

Christopher Clulow:

Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have an additional question, please rejoin the queue. Operator, we are ready for our first question.

Stephen Volkmann:

Great. Good morning guys. Thank you. Mark, I'm interested in your guidance. Mark, you kind of have my head spinning here. I apologize for that, it's a busy day. But how are you going to report the next quarter in terms of Meritor? I assume that will be in the numbers, but you'll probably adjust out maybe the purchase accounting, I'm just trying to figure out sort of on a like-for-like basis, kind of how we're supposed to think about the next quarter?

Stephen Volkmann:

Okay, all right, fair enough. Maybe just a quick switch then, we've seen a couple of months now of pretty amazing heavy truck orders in the United States, North America. And I'm curious kind of what you're hearing as you talk to customers and sort of the outlook longer term, I mean, are you guys starting to slot in deliveries for these big orders that we're seeing and just kind of any color that you can give us there would be great?

Stephen Volkmann:

Okay, thanks. I will pass it on. Appreciate it.

Operator:

Our next question comes from Jamie with Credit Suisse. Please state your question.

Jennifer Rumsey:

Yes, great. Thanks, Jamie, for the question. Good to hear from you. We have, as you noted, taken up our R&D spend in particular in the Engine business and the New Power business where we have strategic investments in the fuel-agnostic platform and growing investments in electrolyzers and other key New Power technologies. And so we will continue to make those investments. And as we have in the past, we're going to manage through the cycles and improve performance, underlying financial performance of the company through the up and the down cycles while still making these key strategic investments that will position us to outgrow over time. We are looking closely at our priorities for next year. We are starting to more closely manage any headcount addition, so that we make sure that we're continuing to invest in key strategic areas while also managing those investments for potential downside scenarios. So we are more closely scrutinizing those priorities right now.

Jamie Cook:

Okay, thank you. I appreciate it.

Robert Wertheimer:

Thanks and hello, everybody. My question would be and I'm not sure it's an easy one to answer off the cuff. But when you look at your blended pricing on engines versus the OEM pricing on trucks across your customer base or if you wanted to specify North America, do you feel like you're caught up in that regard or do you have a couple of hundred bps to catch up? And could you lay out the time frame at which you would catch up if you think you are behind the OEM prices, which have a little bit more flexibility?

Mark Smith:

And just to confirm, the reason -- one of the reasons why we're ahead on price and material cost this year was, in fact, we bore a lot of those costs in the second half of 2021.

Mark Smith:

Yes, yes.

Jennifer Rumsey:

Sure, on the supply chain side, we continue to see improvement and we also still have issues. So at this point, electronic component continues to be our biggest risk and disruptor. But as you said, there continue to be these dynamic lockdowns in China, congestion in certain ports that is more in the East Coast, more in Europe. And so we continue to see some supply chain disruption. So from where I sit, quarter-over-quarter it's been improving and we've been taking build rates up and able to drive some operational improvement, and those issues are not completely gone. And so that is, in part, influencing this continued expectation that we'll see improvement going into Q4 and into next year.

Mark Smith:

Thanks Rob.

Mark Smith:

David, you there?

Mark Smith:

15.5 ex Meritor.

Mark Smith:

Compared to core -- yes.

Mark Smith:

No significant momentum at all there right now, Dave, so that's certainly not part of the improvement from Q3 to Q4.

David Raso:

And when it comes to the power gen business, and within that you obviously have some of the mining. Can you give us a little perspective, I mean, early look at 2023, how you're thinking about that business, just given the recent results were pretty healthy?

David Raso:

Thank you very much.

Operator:

Our next question comes from Jerry with Goldman Sachs. Please state your question.

Mark Smith:

Good morning Jerry.

Mark Smith:

What I would say is, yes, we've got line of sight into improving demand in New Power business I would expect at this point in time without getting into specific numbers, both growth in battery electric systems and electrolyzer sales next year. So I think the momentum is going to continue in New Power. And then yes, we've got strong customer demand on the eAxle side. Again, I don't think that's going to be a dramatic change relative to a $27 billion company. But demand is strong. I've got clearest visibility into the New Power side right now.

Jerry Revich:

Super. And can I ask, the initial customer response on the Meritor integration. Can you talk about what those conversations have been like, particularly as it pertains to selling eAxle and conventional axles to traditional Cummins customers that haven't been Meritor customers? And if you could touch on within the Meritor margin guidance, what's the inventory step-up that's embedded, that's depressing results looks like by at least two points, but I'm wondering if you could outline that relative to the full year guide on Slide 14 for Meritor? Thanks.

Mark Smith:

Yes, a lot of focus on demand and delivery right now as there is in other parts of our business, Jerry. So we aren't short of demand. We need to keep raising those production rates.

Jerry Revich:

Any in the fourth, Chris?

Jerry Revich:

Super, thank you.

Tami Zakaria:

Hi, good morning. Thank you for taking my questions. So I have a couple of modeling questions. So my first question is, I saw in your presentation that Meritor's GAAP EBITDA rate I think you said, was 4.5%. And so can you help us with what it would have been on a non-GAAP basis because as we think about incorporating Meritor in our model, let's say for next year, what non-GAAP EBITDA rate should we be using and do you expect that rate to improve over the next few years just to better integrate that business?

Mark Smith:

But also the performance in the short run, of course, is going to be dependent on the market. And we'll give you all of those elements, both in the Q4 and as we get to next year. I realize it's messy and appreciate everyone's patience as we've tried to work out the best disclosures to give you all this information. We'll continue to err on the side of sharing more and not less to make it as clear as possible.

Mark Smith:

Yes, it won't be present even in the fourth quarter results and that's one of the factors why our EBITDA margins will -- not the only factor but one of the factors why our margins will be better in the fourth quarter.

Mark Smith:

Thanks Tami.

Steven Fisher :

Thanks, good morning. So lots of puts and takes, but just to kind of summarize at a high level, is the overall message that basically your power gen business is a bit better than you're expecting, China is a bit worse and the China drag is just kind of a bit bigger than you have the benefit from power gen and you have slightly higher investments in New Power, I mean, is that sort of the key summary of it of the core business? And then you gave the 15.5% margin implied for Q4. Is there any bridge you can give us from Q3 EBITDA to Q4, I know you just mentioned, obviously, the $56 million of employee costs, is there any other sort of just direct bridge you can give us to help go from Q3 to Q4?

Steven Fisher :

Okay. And would you agree with that sort of the summary I gave of kind of what the main puts and takes of the core business were?

Steven Fisher :

Okay. That's very helpful. And then just in terms of the heavy-duty truck market in North America, I'm curious how much visibility you have to the second half of 2023 at this point. I know you talked earlier about the order strength. I guess I'm just curious how far into 2023 the OEMs have given you their work plans and the confidence you have there relative to the first half? Thank you.

Steven Fisher :

Perfect, thank you.

Operator:

Our next question comes from Matt with Cowen. Please state your question.

Jennifer Rumsey:

Yes, really it was more of the latter. So of course, we're always looking at pay and what's happening with the market as it relates to labor costs. But really, we felt very strongly that given the tremendous effort of our employees over the last 18 months to deliver revenue at the level we did and work through all of the supply chain challenges and continue to commit to deliver key strategic growth initiatives, and given the environment where they are experiencing higher inflation, the impact to them, and the labor market is tighter. We felt that this onetime recognition was very appropriate to show appreciation, to mitigate attrition, and really motivate people to be connected to delivering and continuing to deliver for the company.

Jennifer Rumsey:

Yes, we do see that demand continuing into next year. Of course, in oil and gas with the energy challenges, there's a lot of demand to invest there. And we'll have to continue to monitor those economic indicators over time. But right now in both of those markets, we continue to see strong demand holding into 2023.

Matthew Elkott:

Thanks very much.

Operator:

Our next question comes from Noah with Oppenheimer. Please state your question.

Jennifer Rumsey:

Yes. I mean, the Inflation Reduction Act is going to drive investment in infrastructure to support some of these clean energy technology. So we expect, over time, we'll see increased electrolyzer demand, as I alluded to earlier, and that could also provide benefit to underlying construction demand in the U.S. It's early, right, to actually see the specific impact of that. But certainly, it should provide a positive benefit.

Jennifer Rumsey:

Sorry. Did I respond on the wrong one?

Christopher Clulow:

Yes, thanks, Noah. I think the Infrastructure Bill is similar -- actually it's having a very similar outcome, whereas obviously, the IRA is driving more into the New Power space. We are seeing some good momentum in that space. And we benefit that whether through the rental companies or some of the other construction equipment in North America has remained strong through this year and is carrying forward that momentum as those -- we continue to build out and there's a lot of work to be done, as you know. So that is certainly helping us.

Mark Smith:

Yes. On a percentage basis, it's clearly going to be dilutive in the early part of the ownership and the goal is to keep working that up over time.

Mark Smith:

No. I mean, we're working on that. We've got teams dedicated to that, working on that every day. Still feel confident about the numbers we gave earlier of $130 million pretax by year three. And I will say we're finding some other synergies as well in taxes and other things that are not included there. But lot of work still ahead of us, a lot of good progress to start and, of course, integrating the employees, that's a lot of work but we're off to a good start. I will say the business -- that business is also very busy with demand and supply challenges just as we are in our core. So we very much appreciate the hard work of the employees. We're listening towards driving synergies and improvement in their operations. They're all very busy and we appreciate that.

Mark Smith:

Thanks Noah.

Christopher Clulow:

Thank you, everyone -- much, everyone, for joining. As always, we will be available this afternoon to answer any questions that you may have from the Investor Relations perspective, and I appreciate your attendance today. Thank you.

Operator:

Greetings, and welcome to the Q2 2022 Cummins Inc. Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chris Clulow, Vice President, Investor Relations. Please go ahead, sir.

Thomas Linebarger:

Thank you, Chris. Brilliant. Good morning, everybody. I just -- I had to start by telling you about some rough math I did before I walked in today. And I believe this is my 70th earnings call. It's also going to be my last. I'm very grateful to the analysts and investors who are part of this journey with me. Many of you help me better understand the perspective of our shareholders, which influenced how we ran the company, how we developed our strategies and priorities, and how we communicated about our results and plans for the future. I always try to ensure that the senior leaders in the company understood your views and perspectives, and they understood who they were really working for. Some of you have been at this work almost as long as I have, and your commitment to understanding our company and its potential has been remarkable. I just want you to know that it meant a lot to me. I'm very proud to have served as the CEO for this company for 10 years, as a senior executive for more than 20 years. It was an honor and a privilege. This company stands for more than its products and technology, its revenue or its earnings, and even its performance for customers all over the world. The people that work here are exceptional humans, not just exceptional workers. That's why this transition was so important to me. It is perhaps the most important work of my entire career. And I have a smile a mile wide today because of the quality of the individual that replaces me and the strength of the team beneath her. Jennifer Rumsey is a once in a generation leader. She combines the leadership and technical skills needed, with the characters and values required and the inspiration of a CEO that can take this company to places where I could not. I'm as proud as I was on the day I took the job to see her succeed me. Jen?

Mark Smith:

Thank you, Jen, and good morning, everyone. We delivered strong results in the second quarter, especially in the context of a challenging global business environment. As Jen mentioned, our second quarter results included a $47 million benefit from adjusting the reserves related to the suspension of our operations in Russia and $29 million of costs related to the separation of the Filtration business. To provide clarity on operational performance, I'm going to exclude the impact of these items in my comments. We have provided a breakdown of the costs associated with Russia and the filtration separation costs by line item and by segment in our earnings material to help you understand the underlying performance more clearly. Now let me go into more details on the second quarter performance. Second quarter revenues of $6.6 billion were up 8% from a year ago. Sales in North America were up 15%, while international revenues declined by 2% due to a sharp slowdown in China. Foreign currency fluctuations, primarily a stronger U.S. dollar, reduced sales by 1%. EBITDA was $1 billion or 15.7% of sales for the quarter compared to $974 million or 15.9% a year ago. The lower EBITDA percent was driven primarily by negative other income and lower joint venture earnings in China. Gross margins improved year-over-year and from the first quarter. Now let me go into more detail by line item. Gross margin of $1.7 billion or 25.6% of sales increased by $208 million or 140 basis points. The benefits of stronger volumes and higher pricing more than offset higher freight and material costs for this quarter. Of course, we have been facing increased costs for an extended period of time. And now our gross margins have returned back to 2019 of pre-COVID levels. Selling, admin and research expenses increased by $16 million or 2%, primarily due to higher research costs supporting future growth, partially offset by lower variable compensation expense. Joint venture income declined by $42 million versus a year ago. Lower demand for trucks and construction equipment in China was the primary driver of the decline in earnings. Other income was a negative $18 million, $87 million worse than a year ago. We experienced $48 million of mark-to-market losses on investments that underpin our unqualified benefit plans in the second quarter, and this compares to gains of $20 million a year ago. This variation in this one category explains most of the change in other income. Net earnings for the quarter were $678 million or $4.77 per diluted share compared to $600 million or $4.10 from a year ago. The earnings per share increased due to higher earnings, lower taxes and a reduced share count resulting from share repurchase activity. The all-in effective tax rate in the second quarter was 17.3%, including $36 million or $0.25 per diluted share of favorable discrete items. Operating cash flow in the quarter was an inflow of $599 million compared to $616 million a year ago. I will now comment on segment performance and our guidance for 2022. For the Engine segment, second quarter revenues increased 11% from a year ago, while EBITDA decreased from 16.1% of sales to 15.2% of sales, as the benefits of stronger volumes and pricing actions in our consolidated earnings were more than offset by lower joint venture income in China. In 2022, we expect the revenues to be up 10%, up 2% from our prior guidance. The increase in sales primarily driven by higher demand for engines and parts in North America. 2022 EBITDA is projected to be approximately 14.5%, in line with our prior guidance. In the Distribution segment, revenues increased 17% from a year ago to $2.3 billion, a record quarter for the segment. EBITDA increased as a percent of sales to 11.2% compared to 10.5% sales a year ago, primarily due to stronger parts, whole goods, and sales and pricing actions. We expect 2022 Distribution revenues to be up 11% year-over-year and EBITDA margins in the range of 10.5% of sales, both in line with our prior guidance. Components segment revenue decreased 2% in the second quarter, primarily driven by weaker demand in China. EBITDA increased from 15.1% of sales to 18.2% of sales, driven by the benefits of pricing actions which offset material cost increases and lower warranty expense. We expect revenues to increase 3% for the year, down from an increase of 6% in our prior guidance, primarily to a lower outlook in China. EBITDA margin is expected to be 16.75% of sales, in line with our prior guidance. In the Power Systems segment, revenues increased 5% and EBITDA decreased from 12.2% to 10.6% of sales, as the benefit of stronger volumes and pricing were more than offset by higher material and logistics expenses. In 2022, we expect revenues to be up 8% and EBITDA is projected to be approximately 11% for Power Systems, unchanged from our prior year guidance. In the New Power segment, revenues were $42 million, up 75% from a year ago due to stronger demand for battery electric systems. Our EBITDA loss was $80 million in the quarter, as we continue to invest in the products infrastructure and capabilities to support future growth and was in line with our expectations. In 2022, we still expect revenues for the New Power business to be approximately $200 million, up 72%. And net EBITDA losses are still expected to be in the range of $290 million for New Power, also unchanged from our prior guidance. As Jen mentioned, we are maintaining our '22 expectations of company revenues to be up 8% and our EBITDA margins of approximately 15.5% of sales. This guidance excludes expenses outside of the normal course of business associated with the separation of the Filtration business, the pending acquisition of Meritor or the indefinite suspension of our operations in Russia. We expect earnings from joint ventures to decline 25% in 2022, excluding the impact of suspension of our business in Russia. And this is down from our prior guide of a decline of 20% due to continued weakness -- or further weakness, in fact, in the China truck market. We are projecting our effective tax rate to be approximately 21.5% for this year, excluding discrete items. Capital expenditures were $147 million in the quarter, up from $125 million a year ago. We still expect that our full year capital investments will be in the range of $850 million to $900 million. We returned $240 million to shareholders through dividends and repurchase of shares in the second quarter, bringing our total cash returns of $758 million for the first half of the year. We still anticipate returning approximately 50% of operating cash flow to shareholders in the form of dividends and share repurchases. While high inflation and rising global interest rates present risks to global economic growth, we did not experience any significant changes in aggregate demand from our customers over the past quarter. Our focus remains on raising financial performance cycle-over-cycle in our core business, while investing in technologies that will deliver future profitable growth, including in new markets, new applications and with new customers. We continue to advance our strategy in the second quarter, delivered record quarterly revenues and earnings per share, and recently announced an 8% increase in our quarterly cash dividend, the 13th straight year of dividend increases. Thank you for your interest today. Now let me turn it back over to Chris.

Operator:

[Operator Instructions]. Our first question is from Jerry Revich with Goldman Sachs.

Jennifer Rumsey:

Thanks, Jerry.

Thomas Linebarger:

Thank you, Jerry.

Jennifer Rumsey:

Great. Thanks, Jerry. Yes, we continue to experience an environment where supply chain is limiting our production in most of our markets. And as you've seen, the team here has worked really hard to navigate that and continue to deliver as much product as we can to our customers who are also experiencing issues. Some of those issues have lessened. We continue however to experience constraints, in particular, in the electronics space, microprocessors and other electronic components. We've seen improvement in our premium freight and also are closely monitoring what's going on with the standard freight rates. So while we have some improvement off the peak, we're still running at high levels as we continue to navigate disruptions caused by a combination of supply constraints and COVID-related disruptions.

Mark Smith:

Well, at one point, last year, we were running probably 4x the normal level of premium freight, and that's come down. It has been that we've seen sequential improvement over the last 3 or 4 quarters, but we're still running 2x to 3x kind of extra costs right now. And then you'd asked about decremental margins, Jerry, in the event there's a slowdown. What I would say to you is we have to embrace these cycles when they come. We have a very experienced team that's navigated through several of them. I'm very proud of our record of raising cycle-over-cycle performance at the peak and trough. I can't give you exact decremental margins, but know that we will adjust plan outcome to operate the wells to continue to as and when the next cycle comes. That's all I can say really at this point.

Mark Smith:

I think the biggest challenge in the second half -- well, it's baked into our guidance, is that we see a drop-off in earnings in China. We typically see about a 25% to 30% lower JV income in the second half of the year, and we're projecting that again. You've heard from some of our important customers what their trajectory looks like on the top line going into the third quarter. Yes, there's still a lot of moving parts, still a lot of challenges we're working through. We've maintained our full year guidance. We're slightly behind the EBITDA percent for the full year through the first half of the year, but we're on track, not expecting extraordinary variation, at least from what we know today.

Timothy Thein:

Yes. Tom and Jen, congrats to you both. Yes. And Tom, I trust you'll be dialing into that 71st call, just so you can hear Chris read through the legal disclaimer.

Timothy Thein:

Yes. So yes, Tom, maybe one for you, just higher level. Obviously, you've observed a number of cycles during your time. And I'm just curious, you mentioned that you guys weren't seeing anything of note. But obviously, there's a lot of broader concerns regarding the potential for either a recession is here or on our doorstep. And I'm just curious, if you have conversations with customers, what would you be alerting the team for in terms of signposts or indications of -- if that begins to, in fact, come through, where would you be watching? And what kind of, again, signals would you be kind of leading the team for?

Jennifer Rumsey:

Yes. Great, great. Thanks, Tom. As Mark and Tom have said, we're in a cyclical business. We have a strong team that understands how to navigate and manage over the cycles and use the cycles to strengthen the business and emerge stronger. And this is not a typical cycle because, coming out of the COVID-19 -- early part of COVID-19 pandemic, we have seen really strong demand that has been constrained by supply chain constraints across the industry. And we have been unable to meet our collective customer demand in these markets outside of China. That have been strong now for 18 months. You see that showing up in very high aftermarket demand as well as customers have been using these products heavily and had higher parts demand as they worked to keep them running. So despite the fact that we do see some decrease in spot rates, some reduction off of really high indicators, when I talk to customers and look at some of these backlogs and freight activity, it's still very strong. And they still would like us to supply more than we're able to. So the conversations are all focused on where are we at with supply constraints and can we ship more to them. We continue to monitor those overall indicators. At this point, end customer demand is strong. Aftermarket demand is strong. Used truck prices continue to be elevated. And also recall, with higher fuel prices, these more fuel-efficient, next-generation products are attractive to customers. And so we'll continue to stay close to it and monitor what happens. But right now, we see supply being the constraint through this year outside of China.

Jamie Cook:

Congrats, Jennifer. And congrats, Tom, and thank you for all the support throughout the years. I wish you well. And I'm sure you're going to miss all our very insightful questions on earnings calls. I guess, Jennifer, my first question for you, understanding that you and Tom have been working closely together, and you co the Destination Zero strategy. You both obviously worked closely with and have buy-in. But sort of every CEO puts their own sort of stamp on a company. So just sort of -- as you're thinking about leading the company, sort of maybe nuances or differences relative to Tom or how you're thinking about the company just slightly differently? And then I guess just my second question, and I'll -- Jennifer, this is for you or for Mark. It's probably unfair, but I'll ask it anyway. Understanding you can't control a downturn if we have one, but I feel like Cummins' downturn theoretically in 2023 could be different as you think about, one, we have -- we're adding Meritor, you have market share wins. I guess we won't have the Filtration business. And maybe China is actually okay in this downturn because we're still -- the markets are depressed. So any way you want to sort of put buckets around how that could be additive to a normal downturn? Sorry for an unfair first question, Jennifer.

Thomas Linebarger:

And by the way, I'll miss you, Jamie.

Mark Smith:

I think you just described most of my work plan from Tom, we'll be working on all of those. Thank you.

Steven Fisher:

Not sure if I missed this, but what was your first half aftermarket growth? I know you raised the full year of 15% to 20% from 15%. Just kind of wondering what you're assuming for kind of the second half trajectory within that guidance if some of the market activity is kind of slowing that down at all?

Mark Smith:

Yes. Q2 was a little stronger than Q1. As Tom and Jen mentioned, there have been some supply chain challenges. So these are little bit, and demand remains strong.

Jennifer Rumsey:

Yes. Good question. So obviously, we've moved forward with our JBS acquisition and Meritor will complete this week. We're continuing to make these key investments in the future. And we are still in the process on the separation of our Filtration business as we've disclosed previously and monitoring the environment as that continues.

Operator:

Our next question is from Rob Wertheimer with Melius Research.

Jennifer Rumsey:

Yes, yes. Great question. So we did -- we delivered the highest revenue in the second quarter to date from our New Power business at $42 million and made a lot of progress across all parts of the business. So you saw announcements of new partnerships on fuel cells, both on and off-highway, where we think long term the market will move. Continuing to make progress and having lots of conversations on the electrolyzers and demonstrating the capability of our PEM electrolyzer solutions there. And we believe, as we demonstrate some of those larger installations of PEM electrolyzer, that the market's going to increasingly move towards that solution and that we're well positioned competitively. The market is lumpy at this point. And a lot of our focus is on building up capacity and scale to meet the demand. And so we will -- Amy and I will continue to be talking about what are those key milestones that we see in the market and in our scale-up activity and how that's evolving. We still feel very optimistic. And with this energy challenge that we see in the global world, expect that the focus and interest in green hydrogen will continue to grow. And lastly, with the Meritor acquisition, that's another key component that we think positions us well in the electric powertrain. And we'll be building on the business that we have and very complementary to our existing New Power business and electrified powertrain. So overall, well positioned for the future with New Power.

Jennifer Rumsey:

Yes. Great. So we're hopeful that the Inflation Reduction Act will get passed. It has many key provisions that we think are important for advancing lower carbon solutions, and it fits well with our Destination Zero strategy. It's really critical that there's investment to build out infrastructure and to make these technologies more affordable as they scale in advance. So we are -- have been active and advocating for some of the key energy provisions in that act, and we'll continue to do that as our Congress considers it.

Matthew Elkott:

So after the initial COVID shutdowns in China, we saw a pretty record recovery in the remainder of 2020 and into 2021. I understand we're highly unlikely to see anything like that after the current lockdowns. But do you have any sense of how things could play out when or if China moves fully past lockdowns like most of the rest of the world has? And a longer picture question related to China as a follow-up. You've seen some western companies, like some automakers reconsider JVs in China. Do you guys still see your JV model in China as the right strategy? Any updated thoughts on that would be appreciated.

Operator:

Our next question is from Noah Kaye with Oppenheimer.

Jennifer Rumsey:

Yes. No. It's a great question. And within that, Inflation Reduction Act, as you noted, there is incentive for hydrogen production, which is significant, as well as incentives for other clean vehicles and clean fuels. It's important to note that there's also incentive for things like biodiesel and renewable natural gas within that. So a lot of things that will help drive advantage. We have had active conversations in recent years in Europe and growing conversations in the U.S. The Bipartisan Infrastructure bill also put some significant investment in hydrogen infrastructure. And so we believe that this will continue to add to that and are really focused on scaling up our product and production to meet the demand that we think will be there. So it's hard for me to mention specifically to you right now. As I said, we'll continue to talk about what we see as the key milestones in that business, growing revenue and growing our return from the electrolyzer business over time.

Jennifer Rumsey:

Yes. So you've seen us increasing our investments, in particular in both New Power and Engine business, as we invest in the technologies and electrolyzers in New Power and also these next-generation fuel-agnostic platforms and engine business. We have the scale advantage globally to do that. Those are investments that we will continue to make. And we're also looking at driving efficiency and improvement in parts of our business that can adjust with the cycle. And so we'll continue to deliver on our financial commitments and strong returns through the ups and downs as we invest in those key areas for our future.

Jeffrey Kauffman:

And like everybody else, Tom, thank you for your leadership, and Jennifer, best of luck in the future. I wanted to focus a little bit. You discussed supply chain costs and talked a little bit about what was going on with raw material costs. If we looked at the inflationary part of cost of goods sold, how do those costs stack up against each other, in terms of how much of the increase in expense is more on the raw input side versus how much more are we spending on supply chain than we normally would? And also noting that in recent weeks and months, supply chain costs while still high have been easing, raw material costs while still high have been easing. And I'm just kind of curious, is any of that built into the guide at this point, maintaining the margins where they are?