Cummins Inc.

Greetings. Welcome to Cummins Inc. Fourth 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Chris Crullo, Vice President of Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the fourth quarter and full year of 2023. Participating with me today are Jennifer Rumsey, our Chair and Chief Executive Officer, and Mark Smith, our Chief Financial Officer. We will all be available to answer questions at the end of the teleconference. Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Security and 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 in the forward-looking disclosure statement in the slide deck in our filings with the Security and Exchange Commission, particularly the risk factor 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 will be discussing certain non-GAAP financial measures, and we will 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 within the investor relations section at Cummins.com. With that out of the way, I'll turn you over to our chair and CEO, Jennifer Rumsey, to kick us off.

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 a 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 U.S. engine manufacturing network to support the industry's first fuel agnostic engine 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 designed specifically for heavy duty and on highway truck applications, offering customers the opportunity to realize reductions in nitrous oxides 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 EV Energy to accelerate and localize battery cell production and the battery supply chain in the U.S. 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 U.S. manufacturing jobs, with production anticipated to begin in 2027. Accelera also reached a further milestone this year of electrolyzer order backlog, totaling over $500 million. In order to meet the growing electrolyzer demand, we began production at our first U.S. 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 in principle to resolve U.S. regulatory claims regarding our emissions certification and compliance process for certain engines primarily used in our pickup truck applications. After four and a half 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 the overall company performance for the fourth quarter of 2023 and cover some of our key markets. Demand for our products remains strong across many of our key markets and regions. Revenues for this quarter totaled $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 U.S. 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 Atmos business. This compares to the fourth quarter 2022 results, which included $19 million of costs related to the separation of the Atmos 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 U.S. 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 system 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 Atmos 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 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 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 the 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 percent 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 percent, 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 a 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 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 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 16th 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?