Greetings, and welcome to the Cummins Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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 Linebarger; 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 will 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 and media. With that out of the way, we will begin with our Chairman and CEO, Tom Linebarger.

Thank you, James, and good morning. The 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. We have now followed that with the largest sequential increase in sales in the company's history. Even with the dramatic increase, however, sales remained below last year's levels. While we have seen increased demand around 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 market. Our engineering group has continued to successfully launch new products during this period; over the last six months, we introduced an entire range of broad Stage 6 products in India and portions of our National Standard VI 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 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 9.3% in the third quarter of 2019. EBITDA margins increased, as we realize more of the benefits of our transformation work in North America. Third quarter revenues for the Components segment declined by 7%. Sales in North America declined by 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 percentage decreased, as the impact of lower volumes was partially offset by the benefits of restructuring and temporary salary reductions. Power Systems sales in the third quarter declined by 13% year-over-year. Industrial sales declined by 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 parts 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 remains weak in the third quarter with sales down 24%, driven by lower demand from both transit and school bus customers. In the domestic highway market, engine sales for construction equipment decreased by 47%, driven by lower demand from 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 the backup power market. Demand for engines in 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. The third quarter industry demand for medium and heavy-duty trucks in China increased by 74% compared to a year ago. While demand declines 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 NSV 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 Foton, along with higher utilization of our engine in Foton 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 Foton, as well as increased use of our engines and JC. While new NSX regulations come into effect for all markets in China next July, there are certain cities and applications where these regulations are already in place. Twelve of our NSX 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 NSX 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, resulting in increased excavator demand. Our market share was 16% this quarter compared to 15% a year ago, driven by the strong performance of our domestic OEM customers. Demand for power generation equipment in China was flat compared to a year ago, with increased demands on 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, industry truck sales more than tripled 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 state government stimulus for infrastructure. Cummins is well positioned to benefit from our recovery in Indian markets, both because of our leading market position, as well as the incremental content we have on engines that meet BSVI 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 – 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 remained 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, parts 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 our 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 and NSVI regulations in China and BSVI 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 16. 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.

Thank you, Tom, and good morning, everyone. I would like you to leave this call with two key takeaways from our financial performance in the third quarter. Number one, we delivered solid decremental margins in the third quarter, which put us on track for full-year performance that will extend our record of raising profitability over successive downturns. This performance is a testament to our operational flexibility, ramping down effectively in the second quarter and then converting additional volume into stronger earnings and record operating cash flow in the third quarter. Number two is a result of the record operating cash flows and the addition of low-cost, long-term financing in the third quarter, the company sits today with strong liquidity, which will allow us to keep investing in our future in the face of any further volatility and return any excess capital to shareholders in the future. Now, let me share some of the key details of our third quarter. Third quarter revenues were $5.1 billion, a decrease of 11% from a year ago. Sales in North America fell 18%, and international revenues were flat. Currency movements negatively impacted revenues by 1%, primarily due to a weaker Brazilian real. Earnings before interest and taxes, depreciation, and amortization, or EBITDA, were $876 million or 17.1% of sales for the quarter, compared to $958 million or 16.6% of sales a year ago, representing a decremental EBITDA of 13%. EBITDA dollars decreased by $82 million over the third quarter last year, driven by the negative impact of lower sales, partially offset by the benefits of prior restructuring actions, temporary salary reductions, lower warranty and material costs, and increased joint venture income in China. During the quarter, we recorded a recovery of previously expensed value-added taxes in Brazil, which boosted revenues and pre-tax earnings by $44 million and primarily benefited the engine business. The variable compensation expense in the third quarter was higher than a year ago as we increased our accrual, reflecting higher expectations for full-year company profitability than we anticipated three months ago. For the full year 2020, variable compensation is projected to be lower than 2019. Gross margin of $1.3 billion, or 26.4% of sales, increased by 50 basis points from a year ago. Lower base compensation expense due to the benefits of restructuring actions, temporary salary cuts, material cost reductions, and the VAT recovery in Brazil more than offset the impact of lower sales and higher variable compensation expense. As a reminder, our gross margin last year was negatively impacted by $37 million in pre-tax charges, as we exited two unprofitable product lines. Selling, general and administrative expenses decreased by $67 million or 11% due to the benefits of restructuring, temporary salary reductions, and reduced discretionary expenses, partially offset by the increased overall compensation. Research expenses decreased by $18 million or 7% from a year ago, but increased by $35 million or 19% from the second quarter, as expected, as we ramped up work at our global technical centers and continued progress on engineering programs following some disruption to operations in the second quarter. Joint venture income increased by $30 million, driven by continued strong demand for trucks in China, and joint venture income in China was a record for the third quarter, as we converted those higher volumes into strong earnings. Other income of $21 million decreased by $40 million compared to a year ago. Last year, we recognized a one-time $35 million cash gain related to the company's foreign exchange hedging program, which did not repeat this year. Net earnings for the quarter were $501 million or $3.36 per diluted share compared to $622 million or $3.97 a year ago. The effective tax rate in the quarter was 26.5%, and income tax expense included unfavorable discrete items of $31 million or $0.21 per diluted share. After a tough second quarter, operating cash flow rebounded to a record inflow of $1.2 billion in the third quarter, driven by strong profitability and lower working capital levels. Our inventory decreased by $185 million in the quarter, even as sales increased 33% from second-quarter levels. Capital expenditures were $116 million in the quarter, down from $153 million a year ago. We expect full-year capital expenditures to be in the range of $500 million to $525 million, unchanged from our prior guidance and down more than 25% from 2019. We continue to return cash to shareholders in the third quarter with $194 million of cash dividends paid out. In August, the company completed an aggregate $2 billion debt offering of 5, 10, and 30-year maturities, taking advantage of extremely attractive long-term interest rates that reflected both favorable market conditions and our own strong credit rating. This long-term financing was used in part to pay down our commercial paper borrowings and reduce our reliance on credit facilities going forward. The company's long-term credit ratings remain unchanged at A+ from Standard and Poor's and A2 from Moody's with stable outlooks. As a result of our strong operating cash flow and the debt offering, we boosted our total liquidity to $6.5 billion at the end of September, which puts Cummins in a strong position to navigate any further volatility that may lie ahead. In October, we announced an increase to our quarterly cash dividend, our 11th straight year of dividend growth. Looking to the fourth quarter, we expect consolidated revenues to remain similar to third-quarter levels. Strong industry orders are expected to lead to strong demand in North American truck markets and improved aftermarket demand. India has shown some signs of improvement from very low levels in demand as the lockdowns have been eased and some economic activities increasing. In China, where demand has been at record levels over the last 6 months, we expect to experience some seasonal declines in the fourth quarter, but demand remained at relatively strong levels. The temporary salary reduction that went into effect in mid-April ended at the end of September as planned. The restoration of salaries will add approximately $90 million of pre-tax expenses in the fourth quarter. In summary, we delivered a strong set of results in the third quarter, including record operating cash flow. I want to thank our employees around the globe for their dedication and commitment to excellence through these last six very challenging months. Following unprecedented decline in demand in the second quarter, we responded well in ramping back up in the third quarter, supporting our customers, and maintaining financial discipline throughout. While many of our markets have improved, the effects of the pandemic can still be felt in many regions and may impact the pace of recovery. We will continue to align our business with market conditions, deliver strong operational performance, invest in the technologies that will fuel profitable growth, and return any excess capital to shareholders. Finally, as Tom previously mentioned, we'll be holding our Hydrogen Day on November 16th, where we will highlight our participation in the hydrogen economy. Additional details and registration can be found on our Investor Relations website. Thank you for joining us today and your interest in Cummins. Now let me turn it back to James.

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

Thank you. Our first question today is coming from Stephen Volkmann from Jefferies. Your line is now live.

Thank you.

Hello?

Can you guys hear me okay?

Yeah, obviously.

Okay, good. Sorry. So yeah, my question, maybe this is a Mark question, I don't know, but I'm trying to just see if I can disaggregate your temporary cost activities from your restructuring benefits? And obviously, I'm trying to start to think about 2021 and figure out what you get to keep and kind of what you have to give back. Can you give us some help with that?

You'll remember that we implemented temporary salary reductions in the middle of April, Steve. So when you do the math, it's about $165 million of full-year lower expenses in 2020. Obviously, that will not repeat. We've restored those salaries in the fourth quarter. The restructuring, I mean, is embedded in our solid decremental margins. And again, we don't have any further major restructuring actions in place, but we have captured the benefits of that $250 million to $300 million in the current year as anticipated.

Okay. I guess what -- that's sort of where I'm trying to go, Mark, is how should we think about incremental margins, assuming there's some small increment next year? Low decrementals, kind of maybe employ low incrementals, but maybe not if you're getting a good chunk of restructuring benefits.

Yeah. I think, just at this point, so it's a very -- I understand the question. It's just too early even to assess our market conditions next year. But you will -- you can see from our results today that we're pushing on all the levers, productivity gains that we can. It's just too early beyond the obvious items to comment much on next year.

Okay, thanks. Worth a try. Appreciate it.

Thank you.

Thanks, Steve.

Thank you. Our next question today is coming from Courtney Yakavonis from Morgan Stanley. Your line is now live.

Hi, thanks guys. If you can just comment a little bit more on the guidance that fourth quarter revenues would be similar to third quarter relative to kind of some of the strength we saw in the international markets versus the increases that we're expecting in North America, if you can just help us understand that? And then relative to what you're expecting in parts relative to the engine side? Thanks.

So the strength in the international market, all being flat, lower down to China, right. There really wasn't any strength to speak of elsewhere in terms of year-over-year growth. There was steady recovery in some markets. But any part of our business that touched China, whether within the component business, even our construction business, within the engine business, data center orders for the power systems, anything that touched China was pretty much up year-over-year. And so that's really what – you've got all flat international revenues for the quarter. It's typical currently that we see some seasonal weakening going into the third – into the fourth quarter every year in China. So we still expect relative to prior year strong demand but weaker sequentially, primarily impacting the components business since all – pretty much all of their revenue was consolidated, and then to a lesser extent, the Engine business. So that's the primary market where we're expecting some seasonal declines. And then yes, truck production build rates, I think, are largely set for the fourth quarter. And then yes, on parts, what we saw in the second quarter was particularly some weaker demand in the bus market, truck parts, particularly on newer model, heavy-duty truck was stable in the third quarter, and we expect steadily improving parts demand in subsequent quarters. The big factor is really China easing, and we're not expecting rapid further acceleration in truck demand right now.

Thanks. Our next question is coming from Jamie Cook from Crédit Suisse. Your line is now live.

Hi, good morning. Nice quarter. I guess two questions. First, the margins in the Distribution business improved again in the third quarter. So can you talk about how to think about those margins longer term, sort of what's structural based on some of the internal self-help you guys have been implementing? And then my second question, Mark, understanding you guys are always conservative, but you are sitting with $3 billion or so in cash. So how do you think about cash flow for the year? What's the right number? At what point do we start to think about putting that cash to use? Thanks.

Good. Yes, so you're right. And I'll start on Distribution, Tony, if you want to chime in. We have had a very focused effort, particularly in North America, on driving margin improvement. A lot of it's coming out of the cost side of the business this year; we've been pleased with the progress this year, Jamie. I think then, you know, then we're really looking to see, you know, as parts and service, which, you know, have been down probably more than in prior cycles due to the severity of the impact of COVID. How that recovers in future years. So I think we've made a lot of progress in the margin improvement over the last couple of years. We certainly expect to hang on to that. And then we'll be looking to build on revenue growth going forward. So avoid giving a specific target, Tony?

Yes, I would just add, Jamie, you know, revenue has been a little weaker in this downturn and DBU than previous downturns. And so we've been really pleased with the cost performance and the restructuring, and focusing going forward is going to be on how do we see better revenue growth as that business comes back? And how do we gain some share in the parts and service business in particular? So that's what we're looking for more about how do we get that business back to a higher revenue level than necessarily trying to get margins up.

Okay. But is there any reason to believe the margins can structurally sort of be now in the double-digit range on an adjusted EBITDA basis?

That has been our goal. That's what we said when we launched this transformation program. So that's what we're trying to do is keep them in the double-digit level going forward. That's our goal. Yes.

Okay, Mark, and then on your cash – sorry, go ahead.

Yes, it's Tom. I mean just to make sure I get them – you get the math right. So our view that we are already in double digits, while facing -- yes, we had some cost -- temporary cost measures that helped, but we had way more headwinds with regard to both sales and then parts and service decline. So our view is that we are on our plan despite pretty heavy headwinds. So we are not only feeling good about where we are, but we're more confident than ever that we're going to be in double-digit margins from now forward. So again, you can imagine some scenarios with COVID that would make it so you might have a quarter or two that weren't. But broadly speaking, our view is that the restructuring stuff has gone better than we expected. So we as Tony said, that was our target, and we feel like we're ahead of target. So that's just -- on the cash side, I'll let Mark fill in some more. But I mean, broadly speaking, we've definitely acted conservatively from a balance sheet this year to protect ourselves against the worst potential outcomes -- economic outcomes from the pandemic. So we've shored up the balance sheet with our debt offering, low-cost financing, and our cash flow has improved dramatically. So we feel good about the position the company is in and expect, barring some significant change in economic conditions, to return to our cash flow plans that we've been operating under for many years. So our plan is to go back to returning as a normalized level, half of our cash flow in dividends and share buybacks. We still have to take all that stuff to the Board. We have to finish our planning work for next year. There's a lot of work left to do. And of course, there's still a pandemic. So we'll keep watching and paying attention. But right now, as we see it, that's where we're headed. Mark, I don't know what you would add.

Yes. I think we've made it clear, we're not trying to hold cash a little -- being cautious this year but I think Tom has made it clear going forward.

Okay. I appreciate the color. Thank you.

Thanks. Our next question today is coming from Adam Uhlman from Cleveland Research. Your line is now live.

Hey guys. Good morning. I was hoping to get your perspective on heavy truck markets. I guess we've seen this spike in spot rates and the orders have been soaring. I guess maybe you could frame up your thoughts on how the cycle plays out from here that would be helpful.

Tony?

Sure, Adam. We're all waiting. Sorry. We're not together, Adam. So this is Tony. Yes. It's been very pleasing to see the growth, particularly in the last couple of months. I think the thing to remember is that the virus is still with us. And although we are very encouraged, I also think we're very cautious about how the market is going to play out next year. I do think that there is a view that demand is higher, the newer trucks and newer products are definitely working better. We get really good feedback from customers. And we've got new products coming out next year that meet the latest greenhouse gas emissions for EPA 2021. So we're excited about the products we have on offer. Our OEM customers are feeling pretty bullish. But at the same time, there's a lot of uncertainty out there. And so we're just -- we're trying to be prudent. We're trying to keep our eye on all the things going on and make sure that we are ready if things come in stronger and we're prepared if things all of a sudden take a downturn. So the main characteristic of this COVID environment is unpredictability and volatility. And so we're just trying to be ready for that as best we can.

I'll just say, Adam, the other thing we look at is really the parts consumption because in prior cycles, this one may not be the same as prior cycles. In prior cycles, we've had a pretty good run of accelerating parts consumption before orders sustainably stepped up. So that's something, we're watching closely by segment and end market. And that should give you some indication from us and other participants in future quarters.

Okay. Got you. And then Mark, the – with these new products coming out for 2021, I guess, the company has been benefiting from lower warranty expense, and there's some structural actions going on there. Should we expect a pause in lower warranty expense next year, or do you think we have more legs lower as you execute on your strategic initiatives? Thanks.

Thanks, Adam. Really good question. I think on the one end, of course, we're always driving for more improvement, but I would say that our expenses at 1.8% or 1.9% of sales for this year have run below expectations. And the principal drivers of the warranty performance are field performance of existing products, field campaigns, and then over a longer period of time, changing emission regulations and then the launch of new products. So – you're right, the launch of new products will continue. We typically start those with higher warranty rates. And this year, the number of field campaigns has been below normal. So we would expect even some tick up in the fourth quarter. And yes, probably, we shouldn't be looking at 1.8% for now as a run rate. So yeah, we'll provide you with an update on that when we get into next year, some tick up from here should be expected – we even expected something this quarter. But that's where we are right now.

Thanks.

Thank you. Our next question today is coming from Joel Tiss from BMO Capital Markets. Your line is now live.

Hi. How is it going guys?

Hi, Joe.

I wonder, Tony, or – can you talk a little bit about any product lines that have been, like, systematically challenged? And I'm thinking over a couple of years, not just because of this. And any areas that you could like to do product line simplification and reduce some of that exposure to drive the gross margins higher, or you're always doing that, and there's nothing that really stands out?

Hey, Joe, I'll go first. I think we did some of that last year, right? So we ended production of one of our engine platforms in the pickup market in North America, which not only – we took a charge this time last year, but that's also improved our operating performance year-over-year, and similarly in one of the transmission lines of business. So yeah, we're always looking at things like that. But I would say, don't see any major changes like that. But there's always some opportunity to trim and prune and improve we would never.

And I wonder if you can talk about the M&A environment out there and what you guys are focused on? Is everything so disrupted that it's not the right time to be looking, or maybe because things are disrupted, there are some unique opportunities? And what area would you be thinking about?

I think – it's Tom. I can step in on that. I mean, for sure, in the second quarter, we were on pause a little bit, making sure that our balance sheet was shored up. But with all the potential outcomes, we took a pause. But things, as I mentioned to Jamie's question, I think things have begun to normalize, at least economically to a place where we feel pretty secure in our balance sheet. And we're looking at restarting our cash flow return, and we will -- of course, we have continued actively looking at the strategic areas where acquisitions would be interesting to us. You probably read a call from our previous calls or Investor Day that we kind of start with strategy first, acquisition second. So we think through what are the areas that we'd like to expand in. And we've talked about those before, but they're all the areas where we feel like our competitive advantages, the things that we bring in terms of technology, global footprint, supply chain, that sort of thing, help us move forward. And then, of course, our new technology areas, the acquisitions like we did with Hydrogenics and battery companies, those were to add new capabilities. So, we're continuing to look in those same areas. I think maybe the one comment I would make is that I expected, given the disruption for valuations to be lower today, so I was -- as you -- kind of like the basis of your question, I expect it that maybe disruption would cause valuations to drop out a little bit. That's actually not happened so much. It doesn't mean that it won't happen, but – and it's maybe because of the private equity dollars are so large. But I would say as we look around using disciplined method to look at what acquisition would mean for our company. I still see acquisition prices relatively lofty. So, we'll continue to look, and we're continuing to talk to people and look for the right thing. But we will just -- we'll remain disciplined and look for the right things at the right price, and if we find it, we'll act. And if we don't, we'll return more cash to shareholders just like we planned.

All right. Thank you very much.

Thank you. Your next question is coming from Jerry Revich from Goldman Sachs. Your line is now live.

Yes, hi. Good morning, everyone.

Hi.

Hey Jerry.

Tom, now that a number of your customers have sharpened their pencils, at least publicly on their hydrogen and alternative vehicle strategies, are they any closer to allocating lower volume diesel engine product lines to you? Can you talk about, if you can, which regions or which product lines you see the most potential for you folks to add value for customers that have lower volumes in those areas?

Jerry, here's the thing. I would say that every customer that we're talking to is doing exactly that pencil sharpening calculations that you talked about. It's a really different environment than it was 10 or 15 years ago, or the calculations were maybe the opposite about how to backward integrate more. Mostly what I hear is maybe backward integrate less. But that said, there's no deal until there's a deal, right? So, again, I can't really preannounce or suggest anyone who's going to go because they're difficult decisions for them to figure out what they want to continue and what they don't. I feel very optimistic that we'll play an increasing role with our major customers on selling them more diesel engines, providing them more components technology in the future than the past. So, I expect market share increase in the future based on the fact that they will decide that their money be spent elsewhere. Exactly where and when, again, I just -- I can't get ahead of my customers on those conversations, but we're talking with everybody about it. We're excited about it. And they have a lot of strategic considerations to make as do we. So, these conversations are complicated and take time. But anyway, there you are. We're in it for sure, and I'm confident that we will win increased share.

I appreciate the color. And Mark, as we look at the fourth quarter sales outlook, flattish sales. Normal seasonality is closer to up 7% sequentially. And you mentioned China, but obviously, North America and other regions are accelerating. So I'm just wondering, are you expecting a slowdown versus normal seasonality, or is it the sort of situation where, look, where – could get hit by the second wave, and we don't want to get into a situation where if it's worse, we're missing numbers. Is there some conservatism in there or other pieces that you're legitimately concerned with?

Yes. The numbers will be what the numbers will be, Jerry. I mean we've been very focused on cost. And then Tony and the team are on this incredible ramp back up again. But let's just use the pickup truck market as an example. If you just said at Q3 in isolation, you would see that, that's in the top 10 quarters in history of pickup truck engine demand. But if you do look back at Q2, you would say it’s 0, right? So you just can't normalize everything that happened in Q3 and say, flat means everything is flat. So I think there will be some rebalancing in some markets. But again, we'll see where it is. Our focus is on cost and delivery and then delivering the calendar results that go with whatever volume were thrown them.

And Jerry as Tony said, we are encouraged by tough market. As these clients said to us, all of customers are projecting stronger volumes which is great for us. So yes we are always cautious, because that’s how we live. But nonetheless we are encouraged by their comments and their vehicles to the market, they are watching fleet customer and what they're ordering, and we're hearing good things from the fleets, too. So yes, we are very encouraged. In China, while we expect seasonal demand, we don't expect a gigantic drop off. We just expect seasonal demand normal. It's just the thing is flying so high now that -- again, we just remain cautious. So just don't hear from us discouragement. We are – the markets are going well, and we're surprised and pleased by how strong they are, and we're encouraged by those. We're just trying to make sure that we balance our enthusiasm with the cautious attitude that's appropriate for a global pandemic.

Glad to hear. Thank you.

Thanks. Our next question today is coming from David Raso from Evercore ISI. Your line is now live.

Hi, thank you. My question is on engine margins for next year, just thinking about the framework, Tom, and given your China comments just now. I'm trying to square up, it looks like next year, you have sort of a sweet spot of strong growth but not yet at those extremely high levels where sometimes there's inefficiency serving the domestic truck market. So on a consolidated margin basis, I'm just curious how you think about the margin structurally versus, say, 2019? Just some sense of what we might not get back to those revenues, are the domestic margins set up in a way where they could be maybe a little closer to '19 than otherwise, given some bit of a sweet spot. But then within the segment, you do have the JV income, which is a big contributor. And thus, maybe if you could share your initial views on '21 for China as that business is debatable, if it's up or not next year. So I just would appreciate your thoughts for an early framework on '21 engine margins?

Well, within China, there are a number of moving parts, David that will add to the complexity. We're expecting a bigger step-up in the penetration of NS VI products. What that will happen to demand. The take up is all to be figured out there. So yeah, we're not in a position right now to give you 2021. I guess Q3 margins were higher than normal for a couple of the factors that we've laid out. But we're still going through our planning cycle for next year as we speak. So it's just too early to say, given everything that's going on. Look, I would just say we are very pleased with the performance of the engine business and the fact that they were able to deliver such strong margins in this very, very challenging environment. And I think it speaks to the strength of the global franchise and the scale we've got in multiple markets, obviously, North America and China has been primary. But yeah, we're not ready to give guidance for next year. I appreciate your asking. We'll look forward to giving an update with Q4 earnings.

Would you mind just to clarify there, just given how high China is today, maybe while you don't want to predict the industry, I'm curious -- and you've given some numbers in the past, But now we're a little bit closer, the incremental content, some of the opportunities are idiosyncratic to the company. If there is a thought that China's volumes are so high this year, they're down next year, but maybe you have some self-help offsets. Can you give us a little bit of a framework, as we've discussed in the past, but now closer to it? What kind of potentially framework revenue impact you could see that is from better NS VI content or increase with photon and so forth? Can you help us a little bit, just frame it?

Yeah. I'll just make a couple of comments, and then James can maybe give you some numbers. But I think this, kind of, couple of dynamics. One, so there's the potential -- or the expectation of higher content for the components business on a consolidated revenue basis as the emissions regulations are rolled out, that's kind of a given, given that we saw -- we specify the after-treatment systems are an integral part of our engine system design. James will give you the numbers in a moment. We hope then, as we move in through these more advanced missions regulations, that we can continue to pick up share. We feel like our NS VI products have been well received. And our penetration of Photon has already been really accelerating over the last couple of years. We're already up to 80%. And it's encouraging to see photons been picking up some share as well. So yes, we're optimistic about, if we set aside the market, which, of course, markets do drive earnings as well, but our position and our ability to add self-help there. And James, you can maybe quantify the revenues.

Yeah. And David, from a revenue impact of that, we've talked broadly before, both between the emissions content in China and in India. That will be roughly $600 million of incremental revenue, and that primarily hits our component segment. I think in addition to that, Tom mentioned in his remarks excitement about the Endurant transmission that we're selling 1,000 units out in the second half of this year. We'll see continued growth of that product in China next year, which will provide customers with even improved fuel economy and hopefully to more market share gains. And so I think that is also some self-help as we look into 2021.

David, this is Tom. As you kind of think through the model, the numbers for this year are so high in the truck market. This is what Mark's saying that right now, it's just hard for us to do that. The weighing one or the other because we know what the content is. We know we've won the share with. We even have forecast for how we think it converts over to NS VI and what growth we see in transmissions. The challenge is just what's the overall market going to be. And we were wrong this year. I mean just to say it straight out, we had pretty balanced assumptions about how well this year would be, and we've been wrong every single quarter on the low side. It's been better than every single quarter. So that's why we're just a little gun shy about doing the overall balance for you. We will do it, of course, when we get done with fourth-quarter earnings. But I just would say that, we're hopeful that we can offset a downturn with a lot of these other content pieces, but it just depends on how big the slope down is.

Yes. I mean that's what's interesting, Tom. I mean historically, your order book could be accelerating every time on the call, you want to say, well, China is going to slow down. And a lot of times, it doesn't. And in this environment, you'd almost say we're at such a high level. And you've seen Volvo and so forth already forecast China down next year. You know, betting man would have said like, well, knowing Tom's history or the way he looks at China, just trying to be cautious with it. And we'll definitely be hearing today baseline – oh, it's definitely down. It seems like what you're seeing enough internally in your own opportunities, it's still an open question, which estimates a little more positive than I would have thought.

So yes, you're right about it. You're right, David. It is an open question, and I appreciate your comments, and I do acknowledge that I have been calling it down more than it has been. So I'll just take that one – and accept it. That hasn't been right. And so anyway, I think it's a good point you raise.

I appreciate it. Thank you.

Thanks. Our next question today is coming from Ann Duignan from JPMorgan. Your line is now live.

Yes. Hi, I'd like to go back to Q4. I mean you've guided to revenue flattish quarter-over-quarter. You called out $90 million in higher compensation expenses. You mentioned perhaps warranty costs coming back up. Could you talk about some of the positives and negatives that we ought to consider beyond those or quantify maybe the warranty impact as we head into Q4? Just so we don't assume that EBITDA is flat, also minus the $90 million. What else should we take into consideration?

Yes. I mean, there's really three main things. There's – you've got the $90 million – it's likely there's some increase in the warranty expense in the fourth quarter. And then, as I said in my prepared remarks, we trued up our variable compensation in the third quarter to catch up for our higher expectation. So I think it's unlikely now that we'll be showing up again in the fourth quarter. JV income, despite all the comments just passed, directionally, I would expect that still to be a little bit lighter in China, just based on seasonality. It's still very strong, just to be clear, year-over-year, but just weaker into the fourth quarter. So those are really the big moving parts. And other than the volume – and we've converted that well when we've received it this year.

Yes. And we hope the volume being higher in the North America truck market is net positive towards incremental margins, too. It's a good market for us. And we're operating at a reasonably efficient level, especially given all the challenges as COVID. We're operating at a good level on the North American truck market. So we're hopeful that, that also helps us some.

Okay. And I think you mentioned also on distribution. If aftermarket were to continue to accelerate, that should be a positive for mix also. Is that a fair statement?

It is a fair statement, and it would benefit a number of businesses, but particularly distribution, yes.

Thank you. Our next question today is coming from Ross Gilardi from Bank of America. Your line is now live.

Good morning, guys.

Hi, Ross.

Hi. How are you?

Okay, great. Thank you. Look, clearly, your overall results are very strong and very impressive. I realize that engines from mining and energy are not big parts of your company anymore, so sorry to focus there. I missed the strong quarter, but wanted to get your perspective on those two end markets. And I think you said, mining engine shipments were down 39%. Was that actually worse in the second quarter? You mentioned coal, and are you starting to view mining or energy as more structurally challenged end markets for Cummins, or is this just a cyclical downturn like prior downturns? And just beyond that, is there any real hope for a real pickup in either mining or energy in 2021, or do these businesses potentially get worse or just kind of flatline at a low level before they get better?

James will do the numbers for you, Ross, just to confirm, first of all.

Yes. Ross, so on the mining engine sales side, as you mentioned, third quarter revenues were very similar to second quarter in the mining overall. And as you mentioned, we continue to see relatively stable demand in miners that are going to be focused more on iron ore and copper and continued weak demand along the coal side of things. But we were flat sequentially on the mining revenues.

And oil and gas was de minimis?

Yes. Oil and gas, very de minimis. So sales in North America at this point on the oil and gas side for new engines, almost nothing. And we've also continued to see very weak demand in oil and gas markets in relation to rebuilds, really kind of highlighting the fact that there are rigs that are not currently being utilized in the market.

And, Ross, maybe just stepping back, I would just say that from a mining point of view, I don't think we see it as a structurally challenged market. Well, it's challenged in the following sense. There tends to be overshots and undershots a lot in the market. You know that well, and you know a lot of mining companies overshot by a lot in the last cycle and really got knocked back hard. And so needless to say, they're all being careful, not overshooting now, which has meant that equipment buying has been more muted, even in good markets, than it was in the previous cycle. So our expectation of the cycle was that it wasn't going to be as good as the last one; I'm sure enough it hasn't been at all. And of course, just general economic demand being dampened, confidence in future demand being dampened by the pandemic has meant that mining is indeed slow. And I think it really won't get a lot stronger until there's confidence built in global economic growth, which means the end of the pandemic. I mean really, I just don't see a way that it changes. Energy is a whole another conversation, and energy has a lot more structural challenge to it, but I'm not the right one to answer it. As you say, we have a participation there, not a huge one. And so, I think, it's better for someone else to comment on that. But it looks more structurally challenged to me than some of the other markets.

Yes. Thank you.

Okay, great. I think with that, that -- sorry.

I'll turn the floor back over to you for any further or closing comments.

Great. Thank you for that. So, again, I just wanted to say thanks to everyone for taking the time to call in today. Appreciate that, as always, and for your continued interest in Cummins. And I'll be available for any follow-up questions here this afternoon.

And let me add my thanks to James. I really appreciate your attention. I'm sorry that I did not invite my dog to this quarterly call. I'll try to include her on future calls, but it was nice to have a noise-free call. Thank you very much for your attention. Bye-bye.

Thanks everyone. Bye.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.