Cummins Inc.

Greetings and welcome to the Cummins Third Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. If you'd like to be placed into question queue, please press star one at any time on your telephone keypad. Once again, this conference is being recorded. It's now my pleasure to turn the call over to James Hopkins, Executive Director of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the third quarter of 2020. Participating with me today are our Chairman and Chief Executive Officer, Tom Leimbarger, our Chief Financial Officer, Mark Smith, and our President and Chief Operating Officer, Tony Satterthwaite. We will all be available for your questions at the end of the teleconference. Before we start, please note that some of the information you will hear or be given today will consist of forward-looking statements within the meaning of the Securities Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs, and intentions on strategies regarding the future. Our actual future results could differ materially from those projected in such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available on the forward-looking disclosure statement in the slide deck and our filings with the Securities and Exchange Commission, particularly the risk factors section of our most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During the course of this call, we'll be discussing certain non-GAAP financial measures, and we refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website at www.cummins.com under the heading of Investors in Media. With that out of the way, we will begin with our Chairman and CEO, Tom Weinberger.

Thank you, James, and good morning. Third quarter continued a period of high demand volatility across our end markets. Three months ago, we experienced the largest sales decline in the company's history and We have now followed that with the largest sequential increase in sales in the company's history. Even with the dramatic increase, however, sales remain below last year's levels. While we have seen increased demand on most of our end markets over the last three months, we continue to see differences in recovery rates both by market and by region, and we expect these differences to continue. Our employees have done a remarkable job of supporting our customers through this period while maintaining a safe work environment. In the third quarter, our supply chain organization continued to support near record levels of truck production in China, as well as ramping up production to meet significantly increased demand in the North American heavy-duty truck and pickup markets. Our engineering group has continued to successfully launch new products during this period. Over the last six months, we introduced an entire range of Bharat Stage 6 products in India and portions of our National Standard 6 portfolio in China. We also recently announced our full product lineup to meet EPA 2021 regulations in North America. While nearly everything about the way we work has changed due to COVID-19, the commitment and capability of our employees has remained intact. Now I'll move to a summary of our third quarter results and a discussion of our major end markets. Mark will then take you through more details of our third quarter financial performance and update you on our balance sheet and liquidity. Revenues for the third quarter of 2020 were $5.1 billion, a decrease of 11% compared to the third quarter of 2019. EBITDA was $876 million, or 17.1%, compared to $958 million, or 16.6% a year ago. The impact of lower volumes and higher variable compensation costs was offset by the benefits of restructuring, temporary salary reductions, reduced warranty costs, and higher joint venture income. The increase in joint venture income was primarily due to continued strong levels of demand in China. Engine business revenues declined by 13% in the third quarter compared to a year ago. Lower production in North American truck markets drove most of the revenue decline. EBITDA margin for the quarter was 18.1%. compared to 14.1% for the same period in 2019. Cost savings related to restructuring activities and salary reductions, as well as increased joint venture income, partially offset the impact of lower volumes. Third quarter results also benefited from a VAT recovery in Brazil. Sales for our distribution segment declined by 14% year over year, with lower revenues in domestic and international markets. Third quarter EBITDA was $182 million, or 10.6% of sales, compared to... Third quarter revenues for the component segment declined 7%. Sales in North America declined 24%, driven by lower truck build rates, while revenues in international markets increased by 26%, driven by higher truck demand in China. EBITDA for the third quarter was $261 million, or 16.9%, compared to 17.3% in the same quarter a year ago. EBITDA percent decreased as the impact of lower volumes was partially offset by the benefits of restructuring and temporary salary reductions. Power system sales in the third quarter declined 13% year-over-year. Industrial sales declined 21%, driven by continued weakness in oil and gas and mining markets. Power generation sales decreased by 7%, with lower revenues in both North America and international markets. EBITDA in the third quarter was 10.3% or $101 million compared to 14% a year ago. The impact of lower volumes more than offset the benefits of cost reduction actions. In the new power business, sales of $18 million were double those from a year ago. EBITDA was a loss of $40 million in line with our expectations. Now I will comment on some of our key regions and markets, starting with North America, and then I'll cover some of our largest international markets. Our third quarter revenues in North America declined 18% to $3 billion, but increased by 49% sequentially. Compared to last year, we experienced lower demand in both on and off highway markets, as well as within our park and service business. Industry production of heavy duty trucks declined 35% in the third quarter, compared to a year ago, but rose 119% sequentially. Year to date, our market share is 33%, driven by the continued strong performance of our products in the field. Production of medium duty trucks decreased by 33% in the third quarter compared to a year ago, but increased 76% from second quarter levels. We continue to maintain our clear market share leadership in the medium duty truck market, with over 80% of new trucks powered by Cummins powertrains in 2020. Total shipments to our North American pickup truck customers increased 4% compared to a year ago and included a catch-up in production by our OEM partner after an extended second quarter shutdown. Demand in domestic bus markets remained weak in the third quarter, with sales down 24%, driven by lower demand from both transit and school bus customers. In domestic off-highway markets, engine sales for construction equipment decreased by 47%, driven by lower demand by rental fleets, who went through a significant replenishment cycle in 2018 and 2019. Revenues for power generation equipment fell by 7%, with lower demand in backup power markets. Demand for engines and oil and gas markets declined by 80%. Now I'll turn to our international markets. International revenues were flat in the third quarter of 2020 compared to a year ago. Third quarter revenues in China, including joint ventures, were $1.7 billion, an increase of 46% compared to a year ago, driven by continued strong demand in both truck and construction markets. In the third quarter, industry demand for medium and heavy duty trucks in China increased by 74% compared to a year ago. While demand declined sequentially, which is normal in the third quarter for China, Total industry production was the highest on record for any third quarter. Demand continues to be driven by improved levels of freight activity and government policies supporting the scrapping of old and S3 trucks. Our market share was 17% in the quarter, up from 16% in the third quarter of 2019, driven by increased truck market share of our partner, Photon, along with higher utilization of our engine in Photon trucks, which now stands at over 80%. Industry sales of light duty trucks increased by 49% in the third quarter, and our market share was 9%, up from 7% last year. Our increased market share was driven by improved truck market share at Photon, as well as increased use of our engines at JAC. While new NS6 regulations come into effect for all markets in China next July, there are certain cities and applications where these regulations are already in place. 12 of our NS6 engine models are now in production, including our entire light duty portfolio, as well as our leading 6.7 and 12 liter products. We've shipped over 50,000 NS6 compliant units so far in 2020 and are seeing strong acceptance of our new engines. In addition, we are now selling our automated manual transmissions into the Chinese market and are on track to sell over 1,000 Endurant AMTs by the end of the year. Third quarter demand for excavators in China increased by 57% from a year ago. The central government is encouraging increased levels of borrowing by local municipalities to support investment in infrastructure and housing projects. So far this year, over $500 billion in local government loans have been issued, targeting infrastructure projects and resulting in increased excavator demand. Our market share with SitChina was flat compared to a year ago, with increased demand from data center customers offset by weaker demand for standby power. Third quarter revenues in India, including joint ventures, were $295 million, a reduction of 14% from the third quarter a year ago. Industry truck sales in India decreased 47%, while power generation sales declined by 45%. While demand in India remains at very low levels, we did see industry truck sales more than triple compared to second quarter levels. While credit availability remains tight, certain segments of the truck market, especially those tied to construction, are seeing a recovery in demand driven by government stimulus for infrastructure. Cummins is well positioned to benefit from a recovery in Indian markets, both because of our leading market position, as well as the incremental content we have on engines that meet BS6 on-highway emission standards, which became effective in April. Outside of India and China, we saw year-over-year revenue declines of 8% in Europe and 15% in Latin America, primarily due to lower truck production. Compared to the second quarter, sales increased by 25% in Europe and increased by 102% in Latin America, as OEMs resumed truck production in both regions. Global sales of mining engines declined 39% compared to a year ago. Demand remains stable among copper and iron ore miners, while sales related to coal mining remain low. I also wanted to discuss our aftermarket revenues during this quarter. Sales of parts declined by 12% in our engine business and 14% in our power systems business. Part sales remain depressed in our power systems business due to low demand in oil and gas markets, as well as lower rebuild activity in mining markets. In our engine business, Part sales were down 12% year over year, but increased 20% sequentially. Compared to last year, we are seeing weaker demand in bus markets and parts for older model trucks. Parts demand for current on-highway truck engines are flat with last year. While demand increased from second quarter levels across most of our end markets, we remain cautious about future demand increases due to the continued spread of COVID-19 in most countries outside of Asia. And while we are encouraged by continued strong demand in China and improving fundamentals in North American truck markets, industry backlogs remain at modest levels. We currently expect consolidated company revenues in the fourth quarter to be similar to third quarter levels, with higher demand in North American truck markets and continued improvement in aftermarket sales, partially offset by lower demand in China. We continue to expect that the pace of market recovery will differ from region to region, and may change based on government actions both to control the spread of COVID-19 or to stimulate their economies and build business and consumer confidence. We continue working hard to support our end users and build strong OEM relationships during this period. In August, we announced the extension of our medium and heavy duty truck engine partnership with Navistar. Cummins will continue to supply engines for Navistar's medium and heavy duty trucks as well as for bus applications through the end of 2026, extending our 80-year relationship with Navistar. Through the development and introduction of new products, we continue to reduce the emissions levels of our products while increasing fuel economy. This includes the launch of our full product lineup for 2021 EPA regulations in North America, NS6 regulations in China, and BS6 regulations in India. We are encouraged by the performance and market acceptance of these products that are already in the field. We also continue to focus on supporting our customers in their transition to carbon neutral technologies. Our revenues doubled in our new power segment this quarter, and we are excited to share more about how we expect our hydrogen production and fuel cell business to develop at Cummins Hydrogen Day on November 16th. We hope you all will be able to attend this virtual event. Now let me turn it over to Mark to discuss our financial performance this quarter, including our record operating cash flow. Mark?