Cummins Inc. (NYSE:CMI) Q4 2023 Earnings Call Transcript
Cummins Inc. (NYSE:CMI) Q4 2023 Earnings Call Transcript February 6, 2024
Cummins Inc. misses on earnings expectations. Reported EPS is $-10.014 EPS, expectations were $4.41. Cummins Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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.
Chris Clulow: 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 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 statements 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 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 will turn you over to our Chair and CEO, Jennifer Rumsey, to kick us off.
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?
Mark Smith: Thank you, Jen, and good morning, everyone. I will acknowledge I have a heavy cold this morning. So if I sound more dour than usual and a little rougher, please take that into consideration. We delivered solid operational results in the fourth quarter, exceeding our expectations for revenue and delivering EBITDA margins in line with our guidance. Compared to 2022, our full year sales grew 21% and our operating cash flow more than doubled to a record $4 billion, reflecting the strong focus of our employees on meeting customer demand and improving working capital. Now let me go into more details on the fourth quarter and full year performance. Q4 revenues were $8.5 billion and EBITDA was a net loss of $878 million, or negative 10.3% of sales.
For the full year, we reported revenues of a record $34.1 billion and EBITDA was $3 billion, or 8.9% of sales. As Jen mentioned, we recorded a one-time charge of $2.04 billion in Q4 to settle the previously disclosed US regulatory claims. Fourth quarter results also included $42 million of costs associated with the voluntary retirement and separation programs. Costs associated with the planned separation of Atmus were $33 million in the fourth quarter and $100 million for the full year, compares to $19 million in the fourth quarter of 2022 and a total of $81 million in the previous year. Full year 2022 results also included $111 million of costs related to the indefinite suspension of our operations in Russia. To provide clarity on the fourth quarter and 2023 full year operational performance of our business, I am now excluding the costs associated with the regulatory settlement, voluntary retirement separation programs, planned separation of Atmus and the indefinite suspension of our operations in Russia in my following comments.
Q4 revenues were $8.5 billion, an increase of 10% from a year ago. Sales in North America increased 8%, driven by improved pricing across multiple end markets and stronger demand for power generation products. International revenues increased 13%, driven by strong global power gen demand, particularly for data centers. EBITDA was $1.2 billion or 14.4% of sales for the quarter, compared to $1.1 billion or 14.5% of sales a year ago. Improved pricing was offset by higher compensation costs, increased investment and development, and capabilities in our Accelera segment. Higher variable compensation costs were driven primarily by stronger operating cash flow, which exceeded our expectations for the quarter and the full year. Now I'll go into each line item with a little bit more detail.
Gross margin was $2 billion or 23.7% of sales, an increase of $201 million or 30 basis points from the prior year. The improved margins were driven by favourable pricing and higher volumes, partially offset by higher product coverage costs and compensation expenses. Selling, admin and research expenses increased by $154 million or 15% as we continue to invest in the development of new products that will drive future growth and also due to higher variable compensation costs. Joint venture income increased $25 million due to slowly recovering demand in China from a low base in 2022. Other income was $50 million, an increase of $17 million from a year ago, primarily due to the recovery of technology fees from customers in the fourth quarter. Interest expense was $92 million, an increase of $5 million from the prior year driven by higher interest rates on the floating rate portion of our debt.
The all in effective tax rate in the fourth quarter was negative 13.3%, principally due to non-deductible costs associated with the regulatory settlement. All in net loss for the quarter was $1.4 billion or negative $10.01 per diluted share, which includes $2.04 billion or $13.76 per diluted share of costs associated with the regulatory settlement, $42 million or $0.22 per diluted share of costs associated with the voluntary retirement and separation programs, and $33 million or $0.17 per diluted share of costs associated with the planned separation of Atmus. Operating cash flow was an inflow of $1.5 billion, $642 million higher than the fourth quarter last year, driven by strong earnings and a lower expansion of our working capital across the business.
For the full year 2023, revenues were a record $34.1 billion, up 21% or $6 billion from a year ago, driven by the inclusion of a full year of Meritor results and strong organic growth. Sales in North America increased 22% and international sales increased 20%. Within those numbers, organic sales growth was 12%, driven by improved pricing, strong global demand for power generation products, continued strength in the North American truck market, and slowly improving economic conditions in China. EBITDA for the year was $5.2 billion or 15.3% of sales for 2023, an increase of $1.2 billion or 110 basis points from the prior year. The increase in EBITDA percent was driven by higher volumes, favourable pricing and logistics costs, and a modest and favourable mark-to-market impact from investments that underpin our company-owned life insurance plans, all of that partially offset by higher compensation expenses.
All in-net earnings were $735 million or $5.15 per diluted share, compared to $2.2 billion or $15.12 per diluted share a year ago. 2023 net earnings include $2.04 billion or $13.78 per diluted share of costs related to the regulatory settlement, $100 million or $0.54 per diluted share of costs related to the separation of Atmus, and $42 million or $0.22 per diluted share of costs related to the voluntary separation programs that we implemented during the fourth quarter. Full-year cash from operations was a record inflow of $4 billion, doubling from a year ago as a result of higher operating income and much lower expansion of working capital across the company. Capital expenditures in 2023 were $1.2 billion, in line with our forecast, and an increase of $297 million from 2022, as we continue to invest in the new products and capabilities to drive growth, particularly related to the fuel agnostic platforms within our core business.
Our long-term goal is to deliver at least 50% of operating cash flow to shareholders, and over the past five years we've returned 56% of operating cash flow in the form of share purchases and dividends. In 2023, we focused our capital allocation on organic investments and dividend growth, returning $921 million to shareholders via the dividend, and debt reduction following the acquisition of Meritor. We currently expect that our priorities for cash deployment in 2024 will mirror those of last year. I'll now summarise the 2023 results for the operating segments and provide guidance for 2024. If I need to say it again, I will, that the results that I'm going to discuss going forward exclude the costs related to the separation of Atmus, the cost associated with the voluntary retirement and separation, and the costs associated with the indefinite suspension of our operations in Russia in 2022.
Component segment revenues were a record $13.4 billion, 38% higher than the prior year. EBITDA was 14.4% of sales compared to 14.2%, an increase of $540 million, or 40%. For 2024, we expect total revenue for the components business to decrease 2% to 7% and EBITDA margins to be in the range of 13.9% to 14.9%. For the Engine segment, 2023 revenues increased 7% to a record $11.7 billion and EBITDA was 14.1% of sales, compared to 14.3% a year ago. In dollar terms, EBITDA increased $74 million or 5%. In 2024, we project revenues for the engine business will decrease 2% to 7% due to expected moderation in the North American heavy-duty truck market, most likely in the second half, or most prominently in the second half of the year. 2024 EBITDA is projected to be in the range of 12.5% to 13.5%.
In the distribution segment revenues increased 15% from a year ago to a record $10.2 billion and EBITDA increased by 28% and improved as a percent of sales to 11.8% compared to 10.6% a year ago. We expect distribution revenues to be between down 3% and up 2% and EBITDA margins to be in the range of 11.4% to 12.4% for the full year. In the power system segment, revenues were also a record at $5.7 billion or 13% higher than last year. EBITDA was 14.7% or 250 basis points higher than 2022 driven by favourable pricing, strong volume and certain cost reduction actions. In 2024 we expect Power Systems revenues to be down 3% to up 2% and EBITDA in the range of 15.2% to 16.2%. Accelera revenues increased $354 million in 2023 with a net loss at the EBITDA level of $443 million.
In 2024, we expect Accelera revenues and now we anticipate that Accelera revcenue will increase in the range of $450 million to $500 million and net losses to reduce to between $400 million and $430 million as we continue to make targeted investments in future technologies, whilst improving the operating performance of our current products. We currently project 2024 company revenues to be down 2% to 5% and company EBITDA margins in the range of 14.4% to 15.4%. Our effective tax rate is expected to be approximately 24% in 2024 excluding any discrete items. Capital investments will likely be in the range of $1.2 billion to $1.3 billion as we continue to make critical investments to support future growth. To summarize, we delivered record sales and strong operating profits in 2023.
Cash generation has been and will continue to be a strong focus as we enter 2024, enabling us to continue investing in new products even during times of economic uncertainty, returning cash to shareholders and maintaining a strong balance sheet. As Jen indicated, we do expect moderation in several of our key markets in 2024, especially in the US truck market as reflected in our guidance. We have already taken actions to reduce costs in the business and are in a good situation to navigate the economic cycle and improve our cycle over cycle performance in 2024. Subject to our mark-to-market conditions, our intention is to split the remaining ownership in Atmus through an exchange offer as our next step in the separation as we seek to reposition our portfolio for the future.
As part of the proposed exchange offer, common shareholders will have the choice to exchange all, some or none of their shares of Cummins' stock for shares of Atmus common stock subject to the terms of the offer. The exact timing of our decision to launch an exchange offer will, as stated earlier, depend on market conditions, but the launch of the tender could occur as early as in the coming days. Our guidance for Cummins for this year assumes the inclusion of Atmus in our consolidated results for the entirety of 2024 and excludes any costs or benefits of the separation. The benefits to Cummins are expected to include a lower number of shares outstanding upon completion of the exchange. We will update our guidance as and when the separation is completed.
Thank you for your interest today. Now let me turn it back over to Chris.
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.
Operator: Thank you. [Operator instructions] Our first question is from Jerry Revich with Goldman Sachs. Please proceed.
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