Greetings, and welcome to the Q3 2024 Cummins Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Chris Clulow, Vice President of Investor Relations. Thank you. You may begin.

Thanks, Julian. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the third quarter of 2024. 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 Securities 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 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 will be discussing certain non-GAAP financial measures, and we'll 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. I will now turn you over to our Chair and CEO, Jennifer Rumsey to kick us off.

Thank you, Chris, and good morning. I'll start with a summary of our third quarter accomplishments and 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 third quarter financial performance and our forecast for the year. Before getting into the details on our financial performance, I want to take a moment to highlight a few major accomplishments from the third quarter. In September, we started full production of our X15N natural gas engine at our Jamestown Engine plan, which is the first version of our 15-liter helm platform to launch in the U.S. the X15N delivers performance, durability and power required in a variety of applications and is an excellent alternative for fleet looking to significantly reduce their carbon footprint. This is an important milestone in the execution of our Destination Zero strategy as we work to reduce the impact of our products today while investing in cleaner power solutions for the future. Some of North America's largest and most demanding heavy-duty fleets are actively engaged with Cummins, following their own tests of the natural gas engine in the field. For example, UPS has purchased 250 Kenworth X15N powered trucks in a move the company highlights as an important part of decarbonizing its ground fleet. Cummins had the opportunity to further showcase our Destination Zero strategy in action through our diverse portfolio of power solutions at the recent IAA transportation event in Hannover, Germany. At this event, we displayed our fully integrated powertrain concept featuring our helm engine platforms and e-components. I also personally had an opportunity to hear feedback from Cummins' customers on the challenges they are experiencing with their decarbonization strategies.…

Thank you, Jen, and good morning, everyone. We delivered strong revenue and profitability in the third quarter. Given the strength, we are maintaining our full year revenue guidance and have increased our expectations for EBITDA percent to be at the top end of our prior guidance range. Third quarter revenues were $8.5 billion, flat from a year ago as organic growth offset the reduction in sales driven by the separation of Atmus. Sales in North America decreased 1%, while international revenues gained 2%. Foreign currency fluctuations negatively impacted sales by 1%. EBITDA was $1.4 billion or 16.4% of sales for the quarter compared to $1.2 billion or 14.6% of sales a year ago. That those year ago numbers included $26 million of costs related to the separation of Atmus. The benefits of pricing, strong operational efficiency and the absence of the Atmus separation costs were the primary drivers behind the improved profitability. Now let's look at each line item in a bit more detail. Gross margin for the quarter was $2.2 billion or 25.7% of sales compared to $2.1 billion or 24.6% last year. The improved margins were primarily driven by favorable pricing, which varied across our different segments, and operational improvements. Selling, admin and research expenses were $1.2 billion or 13.8% of sales compared to $1.2 billion or 14.3% last year, which included costs related to the separation of Atmus. Joint venture income of $99 million decreased $19 million from the prior year, primarily driven by lower technology fees in our engine business, costs incurred in the start-up of the AMPLIFY Cell Technologies, our battery cell joint venture, which is reported within Accelera and was formed last quarter. Other income was $22 million, an increase of $29 million from a year ago or improvement, driven by mark-to-market gains on…

Thank you, Mark. Now we'll begin our question-and-answer session. [Operator Instructions] Operator, we're ready for our first question.

[Operator Instructions] And our first question comes from Steven Fisher, UBS.

Congrats on the beat and raise. It's hard to find those in machinery world these days. Nevertheless, I think there were some investors that were a little concerned that maybe the Q4 guidance looks a little conservative after the strong Q3. I don't know how much of that is related to the storm impact in Components. But I guess the bigger picture question here is, even though it's maybe a little early, do you think there are enough positives to offset the rest of the downturn that we have in the heavy-duty truck market, however long that may last to keep EBITDA growing over the next year?

Yes. So let me just comment first, Steve. Thanks. Great to hear from you. Let me comment a little bit on the fourth quarter and what we expect. There's really 3 factors that I'd point to in the revenue guide for fourth quarter. We expect further softening in the heavy-duty market. I talked about the product changeover with [indiscernible] that will drive further volume reduction in that pickup truck business. And then just working days with year-end will be fewer, and we see across many of our markets, fewer working days associated with the holidays and normal maintenance and [indiscernible] during that period of time. So those are really the factors. As you can see, we're -- the team has done a great job of continuing to focus on profitability across the business, delivering strong decremental margins where we've seen reductions in heavy-duty, which takes a lot of effort. I just want to acknowledge the great work of the team and then leveraging some of the places that we have strength with really strong performance, of course, power gen that impacted Power Systems and DB. And we expect that to continue as we go into next year.

Okay. And maybe just building on that last part there, I mean, how would you describe the momentum in Power Gen right now? I mean, is that new record revenues in the quarter? You're sold out on the 95 liters. Where are you on the capacity utilization on 50 and 78? What's driving the further upside from here? Is it mainly pricing? Or can you kind of push out more volumes?

It's really both. So over the course of this year, we've worked on strategic pricing and offsetting some of the inflationary costs that we've seen and pricing for value in that business. And we've been working on capacity in the supply base and our own operational improvements and launching the new [indiscernible] product. So all of those things have given us improvement over the course of the year. 95-liter is at capacity, but we've been able to increase capacity through these improvements by about 30% on that product in '24 of the new products. And then as we talked about previously, we are investing right now to double capacity in the 95-liter. That will come online late next year as we go into '26. We don't see any end in sight in terms of demand in that market. We're the rebuilds up on the 95-liter out the [ '27 ]. So really focused on how do we leverage the capacity we have now, investment we have now while we're bringing more online late next year.

And I think, Steve, the only thing I'd add to your first question is, we're not -- we're building our plans with a relatively modest start on heavy-duty truck to the first half of next year with what we see right now. So hear your comments and questions, and we're very focused on kind of managing through the cycle.

I will say, I mean, in terms of the impact of Helene and Milton, we're back to regular operation in that business and trying to just work through some of the backlog that built up during the period that we were most severely impacted, but it's been a really tremendous effort by the team there. We have multiple facilities in the Western North Carolina region within Cummins Drivetrain and breaking systems that have been dealing with the impact of that working.

Our next question comes from Angel Castillo, Morgan Stanley.

Congrats on a strong quarter. Just wanted to dive a little bit deeper into some of the dynamics that are maybe impacting the next couple of years. I saw some headlines around maybe the California Omnibus low NOx regulation, and some states maybe delaying the kind of model year '25 to maybe model year '26 type enforcement. Just any comments or maybe read-throughs to what maybe that tells you about the underlying kind of enforcement of those regulations and the potential for kind of prebuy into '25, just any broader read-through to maybe or just industry demand for your engines?

Yes. I mean what we've seen, of course, this year is the [indiscernible] bus regulations have gone into place. As we get into '27, we see commonization again between EPA and CARB, which we believe is a positive for the industry. What happens between now and then in terms of different states following those CARB regulations, as you noted some have pushed out, it's a little bit difficult to predict. But certainly, you see lower volumes this year in CARB even with some of the flexibilities that they've put in place to sell 200-milligram NOx product and strong demand nationwide. And so we're watching that space closely. I would say, overall, as Mark noted, we're projecting softening as we go into next year in the heavy-duty truck market and then still anticipating, depending on economic conditions, the prebuy likely starting at some point during '25 ahead of the '27 regulations.

That's very helpful. And then just wanted to circle back on the prior question around 2025 for power generation. I think you indicated you kind of see growth in power systems and momentum continuing there. Just curious, it seems like your power generation guide of 15% to 20% was unchanged despite continued strong performance there. Can you talk about 2025, just early indications based on your backlog? Should we anticipate kind of that 15% to 20% type growth to persist into next year? Or how do you kind of see that based on kind of pricing and backlog indications today?

I mean, really that demand in that market is going to remain strong. So it's all about what we can do in terms of capacity and managing our supply base.

And that's one of the factors that gives us confidence going at the start of the year, that strong backlog and then, of course, distribution should be -- continue to be pretty resilient absent a big economic shock.

Our next question comes from Kyle Menges, City.

I was hoping I noticed within Power Systems, the Industrial portion actually pretty strong growth in the quarter despite certainly some competitors not showing great results in mining this quarter. So just would love to hear kind of what's driving that reacceleration and growth in that industrial portion and just how you're thinking about that into 4Q and into 2025?

I mean, overall, our guidance is pretty flat in the mining market. We've seen some rebuilds demand that you're seeing in those results, but really not significant shifts in that market right now.

Yes. I think overall, Kyle, I'd just add, yes, the mining is really the key market for us in the industrial side, as you know, and that has remained pretty resilient from our perspective, where it's moved a little down the world. We've maintained a pretty good both in the first-fit side as well as in the aftermarket, which drives the rebuild.

Don't overread in one quarter it.

Got it. And then just a follow-up on Power Systems. -- looks like with the new guidance going to be doing incrementals of about 60% in 2024. So it would be helpful if you could frame just how we might think about incremental margins in that segment and in 2025? And I guess why wouldn't it be kind of close to 40% to 60% again? And what factors maybe could cause weaker incrementals next year for that...

I do get a use of pushing the Power Systems business a bit hard, so I'll probably stay off the 40% to 60%, but here's what I'd say. Part of the improvement was really a reprioritization and cost kind of reset at the start of this journey, which has really been going on for a couple of years now. So you get that benefit early on, and then there's been a lot more focus on pricing capacity and efficient capacity improvements. So yes, we still think there is more to come on the top line and the bottom line. I don't think we can continue to expect 40% to 60% incremental margins. We will provide specific updates here in February. But with what we know today, we would expect more improvement going into next year.

And our next question comes from Jerry Revich, Goldman Sachs.

I'm wondering if you folks can just expand on the margin performance in engine, really outstanding results in the third quarter. The guidance implies margin expansion in the fourth quarter on lower sales. You mentioned operating efficiencies in the prepared remarks. Can you just expand on where those efficiencies are versus pre-COVID levels? And it feels like there's momentum into '25 even if demand is softer, just given where the exit rate looks to be in the fourth quarter versus the cost structure in the first. But I'm wondering if you could just expand around those points, if you don't mind?

Yes. I think there's been a lot of improvement pre-COVID, no doubt about that, but we're still not all the way back to those kind of 2019 operating levels. So I still think there's more room to come on operational efficiencies. And then we've talked about kind of being at the peak part of this investment cycle. Of course, the strong medium-duty demand has really helped in this environment and our positions continue to strengthen there. So that's really helped. And whilst we have flagged, and it is going to happen, there is going to be short, but sharp reduction in pickup truck engine production in the fourth quarter, we view that as largely temporary. And I think that with all the information we have today that that's going to resume. So I think the top line will face some first half year pressure on heavy duty relative to the first half of this year, but yes, continuing to focus on operating costs. I mentioned briefly in my remarks that we've really been making adjustments to our organization structure and costs since for the fourth quarter of last year. And whilst that hasn't been dramatic in any period, I think that helps set us up well going into next year. Just so you didn't miss it, I did point out not to make a huge deal, but we did get some extra pricing, which helped in the third quarter that was retroactive back to the start of the year. So we won't get all of that again in the fourth quarter, but nevertheless, I think the cost base, the operational efficiencies, maybe not in the short term, but maybe in the medium term, we get some boost from China as well because our earnings are okay, but far from what the full potential of China is in the engine business. So I think there's a lot to look forward to, but the exact timing of earnings accelerating the engine business isn't clear yet. So we've kind of got to focus on the cost and efficiency certainly through the next 9 months.

Super. And can I shift gears and ask about the natural gas engine demand now that you've opened up a full rate production. Can you just update us on your expectations of natural gas share in the market 6 to 12 months out based on the demand and the performance of the production ramp that you alluded to in the prepared remarks, please?

Yes. I mean we've said that we think we could get up to a -- potentially 8% share in the market with the natural gas product. We had several big fleets that we're testing it during development. And I noted the [indiscernible] UPS has played. So how they start to ramp up volume, get increasing confidence in the strong performance and efficiency. Fundamentally, in most places, it can provide, not only a reduction in CO2 for fleets that want to lower the CO2 footprint, but also reductions in operating costs because of the fuel price differential between natural gas and diesel. And so fleets that are interested in pursuing that, I think over time, we'll ramp up a target for me to exactly predict because it also depends on some of the economic conditions that are impacting [indiscernible] today of what that will be over 12 months. But we're excited to have that product out now with Kenworth and Daimler will be launched as well in '25. So they'll be positioned with that in the market also.

And our next question comes from Jamie Cook, Truist Securities.

Nice quarter. I guess my first question, you guys have talked about adding capacity on the large engine side. One of your peers came out last quarter and talked about adding even additional capacity in large engines because of demand. So I'm wondering if you're making any changes to your capacity increase that you've talked about historically? And then to what degree do -- how much incremental capacity are you adding that could potentially benefit 2025? And then my follow-up question, Mark. Again, I know someone asked the questions on Q4 versus Q3 margins, and there's an implied step down, but how much was that repricing that you talked about that helped the engine business that maybe we view as onetime? And then within Components, how much of an impact was the hurricanes?

Thanks, Jamie. I'll take the first one and let Mark take the second one. So over the course of this year, what you've seen is new products for power generation, capacity within the constraints of the equipment and our supply chain that we have today going up about 30% on the 95-liter. And so that, of course, is going to carry over into next year. And the mantra and power systems right now is just one more, and how do we continue to squeeze every shift, every day, one more out of what we have within our current constraints. And so we'll continue to focus on that and then, of course, working to try to get that doubling of capacity for the 95 by next year. We're continuing to look at it. We want to be smart about where we can make reasonable investments to take capacity up further where we see strong market conditions. So nothing really specific to say right now, but just that we're continuing to look at our footprint and where there may be opportunities.

On the second part, the first thing I said, we're going to get natural -- I will answer the specific questions you Jamie. I just want to share that we're going to get natural variations from quarter-to-quarter, but I just want to remind that we're very focused on the cost side, on the efficiency side, of course, getting value for the products, which are helping our customers be successful is also important. So yes, the the kind of retroactive element of the pricing was about 50 basis points ballpark for the company in the quarter. There is a go-forward benefit just not as much as that. And then the costs you're talking you're talking low tens of millions of dollars between components and the elimination segment where we incurred some costs for the impacts of Hurricane Helene. So there are puts and takes. There are some positives, there are some negatives in the results. I think the revenue guide, you can see we haven't changed because we are very clear the heavy, medium and pickup truck production and the way that the very well-run customers like to work is to have predictability around the production level. So I think the revenue is well pinned. And I think the key for us is maintaining this strong cost and efficiency discipline as we go into next year and continue to focus on preparing ourselves for more demand and growth in the future and raising these margins as we set out at the Analyst Day and generating more cash, that's a big focus.

Our next question comes from Tami Zakaria, JP Morgan.

Good morning. Thank you so much. So I sort of adding one more question on incremental margin because I think it's really the start of your performance in recent quarters. So when I look at your incremental margin in the third quarter, it's almost 50% ex the filtration separation, which is quite impressive versus a long-term target of over [ 25 ]. So do you believe your incremental margin target can move up for the long term given the pargeneration product success, engines are seeing some retroactive pricing as well it seems and you have a lot of new products coming in, in the next couple of years. So would you consider revisiting your long-term incremental EBITDA margin target as you begin next year?

I don't think -- I think we'll give guidance just for the year, and then we'll see how we do. There's a lot of moving parts to our portfolio. Of course, we're feeling like we've done a pretty good job in our core business. Since we had our Analyst Day, incrementally, there have been more headwinds to the Accelera side of the business. But overall, we're pleased with this year. Let's focus on finishing strong for this year. We'll give you our full guidance with all its technicolor when we get to February. So I appreciate the question, but today, we're not going to talk about longer-term targets.

Our next question comes from Rob Wertheimer, Melius Research.

Just a clarification. On the retroactive pricing, I wonder if you can describe what that is or how much continues? And more fundamentally, whether that indicates that you have any enhanced pricing power through engines, if that was something new and different and then I have a more substantial question after that.

I don't think we should read anything into it other than it's been a protracted discussion. It's back to January 1 Rob. So that's just sometimes things take a while to resolve.

Yes. As a reminder, Rob, that's in our light-duty space. So it was more localized there.

Perfect. Okay. That helps a lot. Just more fundamentally, obviously, you and largest competitor in large engines are seeing a lot of demand, and your customers must be telling you that you have a big role to play years and years ahead. Is it very clear that even the biggest hyperscale data centers will use RESIP engines on backup. I wonder if you can just talk about what your customers are telling you about the changing sort of design and scope and scale of data centers and where you fit in for the next decade to come?

Yes. I mean, I think at this point in the next decade, we think reciprocating engines are going to be the solution for backup power. Of course, they're looking at different potential options for prime power and evaluating what that looks like, but other technologies that we might use from from a lead time cost, reliability, it's hard to match what a diesel gen set can do for backup power. So we really think that's going to be a solution for some time.

And our next question comes from David Raso, Evercore.

Back to the prebuy question, I know we're sitting here on election day, so curious to get your thoughts if anything around the election could alter your thoughts around...

I'm surprised you made it this far without that question, David.

Make sure if you could answer the timing of your introduction of a '27-compliant engine, can you take us through your thoughts around that, the idea of maybe introducing that early, building some credits? Obviously, the nat gas engines already are providing some credits as well. Can you just take us through how you're thinking about the timing of your introductions? And obviously, woven within that, anything you want to comment on on whoever wins the White House and Congress how that impacts your thoughts?

Yes. I mean, at the end of the day, Cummins is going to do what we've always done. We're going to work across party lines and engage on issues that are important for our business and our industry, and we'll do that. We've done that with the bid administration of the pass administration will do with the next administration. And what's really important to us and our industry is having that regulatory and legislative stability. And we do not expect any change regardless of the outcome of the election on the [ '27 ] regulations for our industry. So as we have in the past, we're really -- we have a history of being first into the market with products that comply with new regulations and deliver increased value to our customers, and we're always focusing on the landscape, what's the right product at the right time, how do we take -- consider regulatory flexibility and credits as a part of that strategy. And given all that, we do intend to launch the diesel version of the 15-liter helm platform in '26 ahead of the '37 regulation. And with that launch, not only deliver a lower NOx product into the market, but also one that had significant improvement in fuel efficiency and operating costs to decline to 7% efficiency improvement in that product that will deliver value to our customers and then looking to how do we further strengthen our position in that market through these regulatory changes. And this is really consistent with our past strategy, and what's worked well for Cummins over the years is delivering value to our customers through these regulatory changes and strengthening our position in the market. So that's our intention. We've got the 15-liter natural gas out now. We'll add a diesel version of that in '26 and then launch our midrange products at the start of '27.

The early introduction of the I assume you were thinking first quarter '26 with the new model years. Can you help us though, it appears in the channel there is some sense that there might be a prebuy of your engines in 25 to get in front of that early '26 introduction. Can you help us a bit, a, is that maybe helping some of the truck orders we're seeing in the industry? I mean you are 40% of the trucks out there. So prebuying cummins would impact total industry numbers pretty meaningfully. And the cost of the new '27 engine coming out early in '26, can you give us some sense of the cost to the customer? And the follow-up will be, how much is the warranty versus the components? I'm just trying to get a sense how much you're bring all '27 costs into '26. It's a case of...

Yes. So let me try to frame it to hope you're thinking that, of course, the specifics on pricing, we're still discussing that with customers, the exact timing and transition between the current and the next-generation 15-liter in '26, we're still in discussions with our customers. So I'm not going to give exact answers there. What I will say is that we are adding meaningful engine and aftertreatment content and technology to both comply with the lower NOx regulation as well as deliver better fuel efficiency and operating cost and value to our customers. And that will be added as we launch this new product in '26. The requirement for a longer emissions warranty does not take effect until '27. So customers that buy this this new high-efficiency market-leading products in '26 will not be [indiscernible].

Our next question comes from Noah Kaye, Oppenheimer.

And related to this transition, I guess, is probably one of the biggest R&D investments the company has ever made. So as we start to kind of get past that. Can you maybe think -- help us think about the direction of R&D spend? It seems like maybe an obvious place to get leverage on future growth. But you did $1.5 billion of spend in '23, going to be around that range for '24. How should we think about that level of spending going forward?

Yes. I mean you've got it. We're investing at a record level, high level with these new platforms that we're bringing into the market. We think those will position us well for the future. And so you'll see some normalization of that. Now the exact shape of that is going to depend, frankly, on how regulations evolve and what the -- what I call the bridge period of technology looks like and how that transitions to zero emissions. But we'll see that coming off of our peak as we get past the '27 product launches, and we'll continue to be investing in R&D to create differentiation and value in the market to grow the business over the long term.

So if you're launching next -- late next year -- or sorry, I think you said '26, then implies we'll start to back down on those peaks.

[indiscernible]

Okay. And then just sort of switching gears -- can you characterize the durability of strength in medium duty. I think the 6 and 7 classes have done pretty well. There's still some backlog there. but just talk about the demand you're seeing now in the market and whether that kind of continues into next year. You already kind of commented on some of your expectations for heavy duty. So medium-duty color would be helpful.

Yes. I mean, for the year, we're seeing medium -- North America medium-duty up a little bit, flat to up 5%. We're continuing to see pretty strong demand. I mean you've seen a little bit of inventory and normalization of backlog, but we continue to see really strong demand. And with future regulations on that horizon, we expect that's likely to continue into next year.

And our next question comes from Tim Thein, Raymond James.

The first question is just on the Distribution business. And I'm curious what, if any, mix impact, there could be given the -- if you look at the strength that we've seen and you're projecting to continue for some time in power gen, that's now running at, call it, 10 points higher as a percentage of distribution revenues from a couple of years ago. And while some of that's coming as we've seen parts come down. So maybe in historical terms, that's a mix negative, just as the whole goods grows as a percentage of revenues, but maybe just given the strength in demand and tightness in supply, that's not the case. So maybe just your thoughts on just the mix within distribution and how to think about that going forward?

Yes. I mean, as you noted, that typically whole goods is mix margin negative compared to aftermarket for us. If you just step back and look at the business in total, you've got to consider what we've done around inflationary pricing and operational efficiencies have tried to flex up to higher volume, and we're going to continue to focus on those operational efficiencies. But power generation gross revenue mix compared to aftermarket will be negative on the margin line.

Got it. Okay. And then maybe 1...

Tim, that's where we continue to drive on those operational efficiencies and other areas and, of course, continue to drive as much of the parts business as we can underline. But the most important thing is we're meeting customer expectations and growing earnings in an efficient way.

Got it. And then, Mark, just on the gross margin color that you gave earlier, was the -- you highlighted pricing several times. Was there -- was that -- was all of that from this retroactive deal you had in the light duty? Or was there maybe just...

I mean year-over-year, there's other pricing, it just -- it was appropriate for the engine to note for the engine business that that was a particular fact. But no, there was other pricing and the overall expectations haven't significantly changed for the rest of the business. Quite frankly, this other pricing we'd expect it to get it at the start of the year and it's just taking time. The most important thing is it's been reset. It's more of a timing issue and a concentration in Q3, we always anticipated something in our full year numbers. So on a full year basis, there's not much to say, but it just came in a more lumpy fashion because of the catch-up nature.

Thank you for our last question. I would now like to turn the floor back to Chris Clulow for closing remarks.

Great. Thanks very much. I appreciate everyone joining today. That concludes our teleconference. I appreciate your participation and continued interest. As always, the Investor Relations team will be available for questions after the call.

We thank you for your participation. You may disconnect your lines at this time.