Good day, everyone, and welcome to the Cummins, Inc. Q3 2022 Earnings Conference Call. All lines are in listen-only mode, and we will open the floor for questions and comments after the presentation. It is now my pleasure to hand the call over to Chris Clulow, Vice President of Investor Relations. Chris, you have the floor.

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 you will hear today will consist of forward-looking statements as defined by the Securities Exchange Act of 1934. These statements reflect our forecasts, expectations, hopes, beliefs, and intentions regarding future strategies. Our actual future results may differ significantly from those projected due to various risks and uncertainties. More information about these risks and uncertainties is in the forward-looking disclosure statement in the slide deck and our filings with the Securities and Exchange Commission, especially the risk factors section of our most recent Annual Report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During this call, we will discuss certain non-GAAP financial measures, and we will direct you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with the financial statements and a copy of today's webcast presentation are available on our website in the Investor Relations section at cummins.com. With that out of the way, I will hand it over to our President and CEO, Jennifer Rumsey, to kick us off.

Thank you Chris and good morning. I will start with a summary of our third quarter financial results, then I will discuss our sales and end market trends by region, and I will finish with a discussion of our outlook for 2022. 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 of our performance, I want to take a moment to highlight a few major events from the third quarter. On August 3rd, Cummins completed the acquisition of Meritor, a leading global supplier of drivetrain, mobility, braking, aftermarket and electric powertrain solutions for the commercial vehicle and industrial markets. The integration of Meritor’s people, products and capabilities in axle and brake technology will position Cummins as a leading provider of integrated powertrain solutions across the internal combustion and electric power applications. We've been excited to welcome our new colleagues into our company. The company announced several collaborations that further enable our customers to achieve their decarbonization goals and advance our Destination Zero strategy. During the third quarter, Cummins announced collaborations with Werner Enterprises, Transport Enterprise Leasing and Versatile to deliver 15-liter hydrogen internal combustion engines when available. The X15H hydrogen engine, part of Cummins’ fuel-agnostic platform, will enable a more timely solution to reduce carbon emissions by providing customers with an option that has powertrain installation commonality and end user familiarity. The New Power business continued to expand its green hydrogen presence globally as demand continues to rise in the key markets of North America, Europe, and China. Cummins announced it will expand PEM electrolyzer manufacturing capacity at its Oevel, Belgium, factory to 1 gigawatt. The company also announced it will begin producing electrolyzers in the United States, underscoring our continued dedication to advancing the nation’s green hydrogen economy. Electrolyzer production will take place at our Fridley, Minnesota facility, starting at 500 megawatts of manufacturing capacity annually and scalable to 1 gigawatt in the future. In addition, we continue to make progress and preparing for the separation of our filtration business. The addition of Meritor and the planned separation of the filtration business are positive moves for our future. However, there are upfront costs associated with both transactions, which you can see from our press release and earnings materials, heavily influenced our reported results this quarter. We expect that the most significant costs associated with both transactions are behind us and we look forward to updating you on our progress in future quarters. Now, I will comment on the overall company performance for the third quarter of 2022 and cover some of our key markets starting with North America before moving on to our largest international markets. Demand for our products remained strong across all of our key markets and regions with the notable exception of China, resulting in strong revenues in the third quarter. Third quarter revenues totaled $7.3 billion. Excluding the Meritor business, third quarter revenues were $6.6 billion, an increase of 11% from the same quarter in 2021. EBITDA in the third quarter was $884 million or 12.1% of sales. Excluding the Meritor business results and the $25 million related acquisition and integration cost, EBITDA was $907 million or 13.8% of sales compared to $862 million or 14.4% of sales a year ago. Third quarter results include a cost of $16 million or $0.09 per diluted share related to the planned separation of the filtration business. Adjusting for these costs, EBITDA without Meritor and filtration cost was $923 million or 14% of sales. My comments moving forward will exclude the results of Meritor, the costs associated with its acquisition and the costs associated with the expected separation of our filtration business. Our EBITDA percentage declined in the third quarter for three main reasons; first, we saw a 32% drop in joint venture income from the third quarter of 2021, driven primarily by the slowdown in the China markets; second, we increased investments in research and development as we continued to invest in the products and technologies that will create competitive advantage in the future, particularly in the engine and new power segments; and finally, we made an investment in our people, through a one-time bonus in recognition of their intense work and commitment to meet customer demand and navigate supply chain and other challenges. This bonus did not apply to company officers. A motivated and highly effective workforce is critical to delivering for our customers, executing on our strategy, and creating shareholder value. And this bonus will pay dividends over time in the retention and engagement of our people. We continue to make positive progress in improving gross margins of our business and offsetting the impact of elevated supply chain and other inflationary costs that we have experienced since the start of 2021. Gross margin percentage improved in the third quarter compared to the third quarter of 2021, as the benefit of higher volumes and pricing exceeded the manufacturing, logistics, and material cost increases and higher product coverage costs during the quarter. Our third quarter revenues in North America grew 19% to $4 billion driven by improved pricing, higher volumes, and higher aftermarket demand. Industry production of heavy-duty trucks in the third quarter was 64,000 units, up 23% from 2021 levels, while our heavy-duty unit sales were 25,000, up 15% from 2021. Industry production of medium-duty trucks was 29,000 units in the third quarter of 2022, an increase of 26% from 2021 levels. While our unit sales were up 27,000, up 20% from 2021. We shipped 41,000 engines just to Stellantis for use in their Ram pickups in the third quarter of 2022, down 4% from 2021 levels. Engine sales to construction customers in North America increased by 16% over 2021 due to strong capital spending by rental companies and pricing. Power Systems North America sales were up 30% compared to 2021 driven by higher volumes and strength in aftermarket. Power Systems North America industrial sales were up 122% compared to the third quarter of 2021 driven by strong oil and gas demand. North America power generation sales also increased by 10% from the third quarter of 2021. Our International revenues decreased by 1% in the third quarter of 2022 compared to a year ago. Third quarter revenues in China, including joint ventures, were $1.2 billion, a decrease of 18% due to lower sales in on-highway and construction markets. Industry demand from medium and heavy-duty trucks in China was 164,000 units, a decrease of 25% from 2021. Weaker new vehicle demand, contracted property investment, and economic impacts from the shutdown as the country continues to respond to the COVID-19 outbreaks have pushed the market to the lowest level in a decade instead of our projected recovery of the market in the second half of the year. Our sales in units including joint ventures were 30,000, a decrease of 27%. The light-duty market in China decreased 8% from 2021 levels to 387,000 units in the third quarter while our units sold including joint ventures were 24,000, a decrease of 30%. Industry demand for excavators in the third quarter was 57,000 units, an increase of 3% from 2021 levels and our units sold were 7,800 units, a decrease of 8%. Sales of power generation equipment in China decreased 29% in the third quarter, due to the economic impacts of the COVID-19 resurgence. Third quarter revenues in India, including joint ventures, were $614 million, an increase of 18% from the third quarter a year ago. Industry truck production increased by 37% while our shipments increased 20%, lagging the industry production due to the lower growth in the heavy commercial vehicle segment. Demand for power generation increased in the third quarter as economic activity continued to improve, resulting in record revenue in the quarter for that market. Now, let me provide our outlook for 2022 including some comments on individual regions and end markets. To provide clarity on our projections, we will first provide guidance excluding the results of Meritor from the acquisition date through the end of 2022. We will then provide a view of the expected Meritor results for 2022. Based on our current forecast, we are maintaining full-year 2022 revenue guidance of up 8% versus last year. This guidance reflects stronger performance in North America and a continued weak market outlook in China, as well as the indefinite suspension of our operations in Russia. We are forecasting higher demand in global mining, oil and gas, and power generation markets, and expect aftermarket revenues to increase compared with 2021. EBITDA is now expected to be approximately 15% of sales, excluding the Meritor results and costs associated with the acquisition and integration, the cost of the indefinite suspension of our operations in Russia and the costs associated with preparing for the expected separation of our filtration business. This is below our previous guidance of approximately 15.5% of sales as a result of the lower than expected market in China in the second half of 2022, and the one-time employee bonus investment made in the third quarter. This guidance reflects our expectations of increased profitability in the fourth quarter, as we continue to drive the improvements we've seen throughout the year on pricing relative to inflationary cost and improved operating efficiency. Based on our current forecast, we expect production of heavy-duty trucks in North America to be at 260,000 units in 2022, a 15% increase year-over-year. The supply chain constraints in our industry is expected to continue to limit our collective ability to fully meet the sustained strong end customer demand. In North America, the medium-duty truck market size is projected to be 120,000 to 130,000 units, a 5% to 10% increase from 2021. We are projecting our engine shipments for pickup trucks in North America to be flat compared to 2021 consistent with prior guidance. In China, we now project total revenue including joint ventures to decrease 25% to 30% in 2022, an update to our previous guidance of down 20% to 25%. We now project a 55% reduction in heavy and medium-duty truck demand and a 15% to 20% reduction in demand in the light-duty truck market compared to a 50% decline and 15% reduction respectively in our previous guidance. Industry sales of excavators in China are expected to decline 30% from record levels in 2021 consistent with our prior guidance. Despite the difficult economic and market environment in China, we have continued to improve our presence in the region through the down cycle and are well-positioned for continued growth across our end markets in the region. As we look ahead, industry volume of NS6 products will continue to increase as the new regulations are implemented more broadly. Our technological expertise and emissions experience positions us well to outgrow the market and support our partners through this transition. With our NS6 share continuing to run ahead of our NS5 share. We also continue to ramp production and expand our presence in automated manual transmissions, as our market share increases and the heavy-duty market is increasingly adopting this technology. In India, we project total revenue including joint ventures to increase 15% to 20% in 2022, an improvement from our previous guidance of up 15%. We expect industry demand for trucks to increase approximately 30% in 2022. Strong performance in power generation within India is also contributing to this improved outlook. Most major global high-horsepower markets are expected to remain strong through the end of 2022. Sales of mining engines are now expected to be up 5% compared to the prior year, an improvement from our previous guidance of flat. Demand for new oil and gas engines is expected to increase by 120% consistent with our prior guidance. Strong demand in the U.S. and other oil and gas markets amid energy and security has fueled this strong outlook. Revenues in global power generation markets are expected to increase 10%, driven by increases in non-residential construction. This is an increase from our prior guidance of 5% driven by the increased production as supply chain constraints slightly eased and improved pricing. We are projecting aftermarket sales to increase 15% to 20% from 2021 consistent with our previous estimate. This strong outlook is driven by parts demand within our North America On-Highway business, as well as global Power Systems markets. In New Power, we expect full year sales to be approximately $180 million down from our previous guidance of $200 million due to customer scheduling and supply chain impacts. We have a growing pipeline of electrolyzers which we expect to convert to backlog and be delivered over the course of the next 12 to 18 months, and we are seeing increased momentum in North America following the passage of the Inflation Reduction Act. Additionally, we will continue to accelerate our collaboration with customers on both electrified power and fuel cell applications in 2022. This was demonstrated in the third quarter as we successfully launched the Cummins HD 120 fuel cell system in China by delivering 52 units to the Lin-gang Government for a bus application. For Meritor, we are expecting full-year revenue since the date of acquisition to be between $1.7 billion to $1.9 billion. EBITDA is expected to be approximately 4.5% of sales during the same period, including the impact of required purchase accounting and integration costs. This represents the financial impact of Meritor across our Components and New Power businesses. During the quarter, we returned $245 million to shareholders in the form of dividends and share repurchases, consistent with our plan to return approximately 50% of operating cash flow to shareholders for the year. As I sum up the third quarter, I want to emphasize that we are making progress in our strategy to lead in decarbonizing our industry. Although profitability dropped from the second quarter levels, the fundamentals of our business have not changed. Our products are performing well, leading to record demand from customers and rising market share in some of our core markets. This is the direct result of the contribution from our outstanding workforce. I do want to acknowledge the clear improvement in the financial performance of the Power Systems business this quarter, and I'm enthusiastic about the prospects for future earnings growth. We do expect total company profitability to improve in the fourth quarter from third-quarter levels, as implied in our guidance for the fourth quarter. We are committed to improving the underlying financial performance of our business and delivering strong incremental margins through the remainder of 2022 and beyond. Now let me turn it over to Mark.

Thank you, Jen, and good morning everyone. Several factors influenced our reported results in the third quarter, and I'll go over them to clarify the company's underlying performance and allow for comparison to our previous guidance. The main point I want you to take away is that our business fundamentals remain strong. As you know, we completed the acquisition of Meritor in August and are currently focused on integrating the business. Our third quarter results included two months of Meritor's operational performance, contributing $737 million in sales but also a total EBITDA loss of $23 million, which reflects the effects of purchase accounting and acquisition integration costs. Additionally, our results incorporated $16 million in costs related to the planned separation of the filtration business. To clarify our operational performance excluding the acquisition, I will omit these impacts in my upcoming comments. Now, let's dive into our third quarter performance. Revenues reached $6.6 billion, a rise of 11% year-over-year. Sales in North America increased by 19%, while international revenues saw a slight decline of 1% due to decreases in China, the suspension of operations in Russia, and adverse foreign currency fluctuations, with a stronger U.S. dollar reducing reported sales by 3%. EBITDA was $884 million or 12.1% of sales. When excluding results from the Meritor business, acquisition and integration costs, as well as expenses from the filtration separation, EBITDA stood at $923 million or 14% of sales for the quarter, compared to $862 million or 14.4% a year prior. The decrease in EBITDA percentage was mainly due to increased engineering support costs, a boost in engineering spend for new product development, reduced joint venture earnings in China, and a one-time bonus to recognize employee commitment, totaling $56 million. This bonus notably influenced the results of all operating segments. Now, let's break it down by line item. Gross margin was $1.6 billion or 24.7% of sales, up by $213 million or 100 basis points from last year, thanks to increased volumes and higher pricing that offset higher material and labor costs. Selling, administrative, and research expenses rose by $110 million or 13%, mainly due to heightened research costs related to crucial product development for our Destination Zero strategy. Joint venture income fell by $30 million from last year, primarily because of weakened demand for trucks and construction equipment in China. Other income was $10 million, down $22 million from a year ago, due to $29 million in mark-to-market losses on investments linked to our qualified benefit plans. In contrast, we had a gain of $1 million on these investments last year. Interest expenses climbed by $33 million, largely because of financing costs from the Meritor acquisition. For the quarter, net earnings were $468 million or $3.30 per diluted share, down from $534 million or $3.69 a year ago, primarily due to an increased effective tax rate. The total effective tax rate for the quarter was 32.7%, including $57 million or $0.40 per diluted share related to unfavorable discrete items linked to the filtration business separation. Our operating cash flow was $382 million, compared to $569 million in Q3 of the prior year. Now, let’s review segment performance and our guidance for 2022. In the Engine segment, third quarter revenues increased 8% year-over-year to $2.8 billion, while EBITDA decreased from 15.2% to 13.1% of sales due to rising manufacturing costs and lower joint venture income in China offsetting pricing benefits. For the entire year, we anticipate revenues will rise by 10%, consistent with our previous guidance, while EBITDA is projected at approximately 14.25%, slightly revised down from our earlier guidance of 14.5% because of a softer outlook in China and the one-time employee bonus. The Distribution segment saw revenues grow 14% year-over-year to $2.2 billion, with EBITDA percentage increasing to 10% compared to 9.8% a year ago, fueled by strong demand for parts, engines, and power generation equipment. We still expect 2022 Distribution revenues to be up 11%, aligned with prior guidance, and EBIT should be around 10.5% of sales, as previously forecasted. In Components, revenue increased by 10% in the third quarter, largely due to robust demand in North America, and EBITDA rose from 14.1% to 16.2% of sales due to pricing actions and lower warranty expenses. We project full-year revenue growth of 3% and expect EBITDA margins to remain approximately at 16.75%, unchanged from three months ago, particularly affected by the Meritor acquisition. In the Power Systems segment, revenues climbed 16% to $1.3 billion, setting a record for the segment. EBITDA improved from 11.5% to 14.3%, thanks to higher volumes, strong pricing, and increased aftermarket demand. For 2022, we anticipate revenues will rise 10%, up from earlier guidance of 8%, with EBITDA projected at around 11.25%, also increased from 11%, due to better pricing and sustained sales strength. In the New Power segment, revenues reached $45 million, up 96% from last year driven by increased demand for battery electric systems. We recorded an EBITDA loss of $86 million this quarter as we continue investing in the necessary products, infrastructure, and capabilities for future growth. For the full year, we now expect New Power revenues to total around $180 million, slightly lowered from the earlier estimate of $200 million due to delays in customer projects and some supply chain constraints, although underlying demand for battery systems and electrolyzers continues to rise. The anticipated net expense for this segment is now $310 million versus $290 million previously forecasted, reflecting increased investments in expanding electrolyzer production and new product introductions. As Jen mentioned, we continue to project total company revenues to increase by 8% for 2022, and we now anticipate EBITDA margins of about 15% for the full year. Importantly, this guidance excludes the Meritor business and associated acquisition costs, the indefinite suspension of operations in Russia, and expenses from preparing for the separation of the Filtration business. This outlook indicates an improvement in profitability for the fourth quarter. We expect joint venture earnings to decrease by 25% to 30% this year due to ongoing challenges in China and the suspension of our Russian operations, slightly worse than the prior guidance of down 25%, mainly because of conditions in China. Our effective tax rate is now projected at about 22% for 2022, an increase from our previous guidance of 21.5%. Excluding Meritor, our capital expenditures for the quarter amounted to $179 million, up from $150 million last year, and we maintain our full-year capital expenditure guidance of $850 million to $900 million. In the third quarter, we returned $245 million to shareholders through dividends and share repurchases, bringing the total cash returned to shareholders to $1 billion year-to-date. For the full year, we still aim to return around 50% of operating cash flow to shareholders via dividends and repurchases. Finally, we expect Meritor revenues for the five months under our ownership to be between $1.7 billion and $1.9 billion, with EBITDA around 4.5%, inclusive of purchase accounting impacts. In closing, I want to emphasize that Cummins is in a strong position, enhancing our leadership in core markets while positioning the company for future strength through investment in new products and capabilities. We are also adjusting our portfolio of businesses while returning cash to shareholders. We expect to deliver stronger profitability in the fourth quarter, as indicated in our full-year guidance. Thank you for your interest today. Now, let me turn it over to Chris.

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 are ready for our first question.

Okay, our first question comes from Stephen Volkmann with Jefferies. Please state your question.

Great. Good morning guys. Thank you. Mark, I'm interested in your guidance. Mark, you kind of have my head spinning here. I apologize for that, it's a busy day. But how are you going to report the next quarter in terms of Meritor? I assume that will be in the numbers, but you'll probably adjust out maybe the purchase accounting, I'm just trying to figure out sort of on a like-for-like basis, kind of how we're supposed to think about the next quarter?

Yes, we understand it's complex. We're aiming to clarify our performance against our guidance for the Cummins business before the Meritor acquisition, for which we have adjusted our guidance, and we'll explain the reasons behind this. We'll then introduce the Meritor performance. Our goal is to provide projections for both areas. We will report all together, and as we did this quarter, we'll separate the results for the business pre-Meritor and Meritor specifically, along with various components to give a more comprehensive view. Next year, we'll transition to all-in reporting, but will keep sharing details about Meritor so you can feel assured about our progress in integrating and growing that business. In short, Q4 will resemble this quarter. The impact from purchase accounting will diminish in the next quarter and beyond. We will report with and without those figures to maintain clarity in our performance on both fronts. That's our primary objective.

Okay, alright, fair enough. Maybe just a quick switch then, we've seen a couple of months now of pretty amazing heavy truck orders in the United States, North America. And I'm curious kind of what you're hearing as you talk to customers and sort of the outlook longer term, I mean, are you guys starting to slot in deliveries for these big orders that we're seeing and just kind of any color that you can give us there would be great?

Yes, Steve. We continue to see strong heavy-duty customer order interest. The conversations that I have with both end customers and OEMs are around how we're working through supply constraints that continue to exist and increase production rates. And this has just not been a typical cycle, so all of those fundamentals for the business remain strong. We project that the market will remain strong into next year because they've been using the trucks at a high rate. They've not been able to replace at the level that they want to. And as well, these new trucks that are coming out, new powertrains have improved efficiency and as you see higher fuel prices, that's also attractive. So we continue to watch the broader economic indicators and what that may mean over time. Right now, we're continuing to work to increase production rates and see strong underlying demand.

Okay, thanks. I will pass it on. Appreciate it.

Thanks Steve.

Our next question comes from Jamie with Credit Suisse. Please state your question.

Hi, good morning. I have two questions. The R&D expenses have increased significantly compared to the previous quarter. While I know we're still investing, should we consider this as a new baseline for R&D going forward? Will R&D costs be consistently higher, and what does that mean for 2023? My second question relates to SG&A; even if we exclude the $15 million from the one-time bonus, SG&A also saw a notable increase. I'm trying to understand our spending in light of macroeconomic concerns. I know your customers currently report strong performance, but are we taking any precautions in case the economy starts to weaken? Thank you.

Yes, great. Thanks, Jamie, for the question. Good to hear from you. We have, as you noted, taken up our R&D spend in particular in the Engine business and the New Power business where we have strategic investments in the fuel-agnostic platform and growing investments in electrolyzers and other key New Power technologies. And so we will continue to make those investments. And as we have in the past, we're going to manage through the cycles and improve performance, underlying financial performance of the company through the up and the down cycles while still making these key strategic investments that will position us to outgrow over time. We are looking closely at our priorities for next year. We are starting to more closely manage any headcount addition, so that we make sure that we're continuing to invest in key strategic areas while also managing those investments for potential downside scenarios. So we are more closely scrutinizing those priorities right now.

Yes, and I would just add to that. We have lowered our administrative costs for three consecutive quarters. There is a strong emphasis on trying to control our costs, particularly as the increase in selling, general, and administrative expenses was mainly driven by our aftermarket and Power Systems businesses, which are experiencing upward pressure along with other factors.

Okay, thank you. I appreciate it.

Our next question comes from Rob with Melius Research. Please state your question.

Thanks and hello, everybody. My question would be and I'm not sure it's an easy one to answer off the cuff. But when you look at your blended pricing on engines versus the OEM pricing on trucks across your customer base or if you wanted to specify North America, do you feel like you're caught up in that regard or do you have a couple of hundred basis points to catch up? And could you lay out the time frame at which you would catch up if you think you are behind the OEM prices, which have a little bit more flexibility?

Yes, Rob, I would describe it this way. Since the beginning of 2021, we have faced supply challenges and inflation, which have increased costs and inefficiencies in our business. For 2022, we expect a 400 basis point improvement in pricing, compared to a 230 basis point impact on costs. This means we are ahead for the year regarding the price/cost balance, and we are also focused on enhancing operational efficiency. However, we still have work to do to return to where we were at the start of 2021. We are able to adjust prices more quickly in our aftermarket business, but in areas like the Power Systems business with high backlogs or long-term contracts, it takes time for those adjustments to take effect as we negotiate with customers. Additionally, metal market fluctuations and other contractual agreements also take time to impact our pricing.

To confirm, one of the reasons we are ahead on price and material costs this year is that we absorbed a significant amount of those costs in the second half of 2021.

Are you still there, Mark?

Yes, yes.

Okay, sorry. Got it, got it. And then could you give a general comment on just supply chain, do you feel like we've peaked out on risk, China may be doing lockdowns again, so if you take that after globally how does the risk of upside/downside on cost and supply chain feel to you? And I'll stop there. Thanks.

Sure, on the supply chain side, we continue to see improvement and we also still have issues. So at this point, electronic components continue to be our biggest risk and disruptor. But as you said, there continue to be these dynamic lockdowns in China, congestion in certain ports that is more in the East Coast, more in Europe. And so we continue to see some supply chain disruption. So from where I sit, quarter-over-quarter it's been improving and we've been taking build rates up and able to drive some operational improvement, and those issues are not completely gone. And so that is, in part, influencing this continued expectation that we'll see improvement going into Q4 and into next year.

Alright, thank you.

Thanks Rob.

Our next question comes from David with Evercore. Please state your question.

Yes, I am. Sorry about that. Just so I can understand exactly the fourth quarter, sort of what you're adding back to 3Q, can you tell us what is your implied EBITDA margin for the fourth quarter, just so I can level set?

15.5 ex Meritor.

So 15.5 for the fourth quarter?

Yes, compared to core.

Then when I think about China, obviously, it's a big driver in the EBITDA margin, just given a lot of the truck business comes in as JV income. I know the consolidated aspect of construction activity there for your business. But obviously, truck, looking forward, how should we think about what you're seeing in China just from what you normally would see around Chinese New Year, obviously, with the Congress they just had their stimulus, a lot of things going on, I'm just curious, I thought Beijing Photon, in particular, was a little weaker than I would have thought, but I'm just curious what you're seeing on the truck side in particular?

No significant momentum at all there right now, Dave, so that's certainly not part of the improvement from Q3 to Q4.

Yeah, as you mentioned, Congress has elected Xi to a third term. We usually observe some seasonal trends in that market, but it's hard to make predictions at this time. Therefore, as Mark indicated, we are not expecting any improvements before the end of the year.

And when it comes to the power gen business, and within that you obviously have some of the mining. Can you give us a little perspective, I mean, early look at 2023, how you're thinking about that business, just given the recent results were pretty healthy?

Yes, the Power Systems markets, like the U.S. truck market, continue to show strength. We have a significant backlog, so we anticipate continued strength heading into next year.

Thank you very much.

Thanks David.

Our next question comes from Jerry with Goldman Sachs. Please state your question.

Yes, hi, good morning everyone.

Good morning Jerry.

Hey Mark. I'm wondering if you folks can talk about, as we head into 2023, you've got a number of tailwinds in terms of electrolyzer production ramping up, the eAxles ramping up at Meritor and maybe some medium-duty engine production ramping based on your recent wins. Looking at the new product contribution 2023 versus 2022, can you just outline for us the magnitude of tailwind, it feels like the electrolyzer opportunity is tracking ahead of expectations, but maybe I can get you to expand on that, if you don't mind.

What I would say is, yes, we've got line of sight into improving demand in New Power business I would expect at this point in time without getting into specific numbers, both growth in battery electric systems and electrolyzer sales next year. So I think the momentum is going to continue in New Power. And then yes, we've got strong customer demand on the eAxle side. Again, I don't think that's going to be a dramatic change relative to a $27 billion company. But demand is strong. I've got clearest visibility into the New Power side right now.

Yes, and on the electrolyzers, as I talked about some of the investment in production capacity. So we're in the early stages of building up that production capacity, building up the backlog. It's going to be lumpy at this point, and it's going to grow, as Mark said, over time. And we still feel really good. In fact, the Inflation Reduction Act and the climate provisions around that are strengthening the hydrogen outlook in the U.S.

Super. And can I ask, the initial customer response on the Meritor integration. Can you talk about what those conversations have been like, particularly as it pertains to selling eAxle and conventional axles to traditional Cummins customers that haven't been Meritor customers? And if you could touch on within the Meritor margin guidance, what's the inventory step-up that's embedded, that's depressing results looks like by at least two points, but I'm wondering if you could outline that relative to the full-year guide on Slide 14 for Meritor? Thanks.

Yes, we're obviously in the early days of integrating the Meritor business, excited to have that as part of us, starting to have conversations with customers at a strategic level. And it's a positive for them that we have added Meritor to our portfolio and can talk about how we're serving them both in the core businesses and New Power business going forward. Early days and those conversations are both on operational and supply as well as the strategic opportunities that we have.

Yes, a lot of focus on demand and delivery right now as there is in other parts of our business, Jerry. So we aren't short of demand. We need to keep raising those production rates.

And Jerry, on your question on the inventory step-up, there's a good reconciliation in the earnings deck, which talks through the complicated picture that is Meritor for this quarter. It's about $32 million was the impact in the third quarter of that inventory step-up.

Any in the fourth, Chris?

Just a small bit. Most of that inventory burns off quickly as you would expect, Jerry.

Super, thank you.

Our next question comes from Tami with J.P. Morgan. Please state your question.

Hi, good morning. Thank you for taking my questions. So I have a couple of modeling questions. So my first question is, I saw in your presentation that Meritor's GAAP EBITDA rate I think you said, was 4.5%. And so can you help us with what it would have been on a non-GAAP basis? Because as we think about incorporating Meritor in our model, let's say for next year, what non-GAAP EBITDA rate should we be using and do you expect that rate to improve over the next few years just to better integrate that business?

Let me try to clarify this a bit. The U.S. GAAP results for Meritor were essentially breakeven in the second quarter. As mentioned, our guidance for the full year of 2022 is about 4.5%. This indicates that when considering the purchase accounting in both Q2 and a little in Q3, the EBITDA for the fourth quarter should be around 9%. This represents an increase from approximately 7.3% operating EBITDA when we account for some of the fluctuations in the third quarter. We're expecting to see continued improvement in the future, both through the synergies we achieve and other business enhancements. This provides some insight into our trajectory moving forward, and I'm available to discuss this further if you're interested.

But also the performance in the short run, of course, is going to be dependent on the market. And we'll give you all of those elements, both in the Q4 and as we get to next year. I realize it's messy and appreciate everyone's patience as we've tried to work out the best disclosures to give you all this information. We'll continue to err on the side of sharing more and not less to make it as clear as possible.

Got it. That's super helpful. And another quick one from me from a modeling perspective, the bonus that you gave to employees this quarter, as we lap it next year, we should be treating it as one-off for now, right?

Yes, it won't be reflected even in the fourth quarter results, and that's one of the reasons our EBITDA margins will be better in the fourth quarter.

Okay, awesome, great. Thank you so much.

Thanks Tami.

Our next question comes from Steven with UBS. Please state your question.

Thanks, good morning. So lots of puts and takes, but just to kind of summarize at a high level, is the overall message that basically your power gen business is a bit better than you're expecting, China is a bit worse and the China drag is just kind of a bit bigger than you have the benefit from power gen and you have slightly higher investments in New Power, I mean, is that sort of the key summary of it of the core business? And then you gave the 15.5% margin implied for Q4. Is there any bridge you can give us from Q3 EBITDA to Q4, I know you just mentioned, obviously, the $56 million of employee costs, is there any other sort of just direct bridge you can give us to help go from Q3 to Q4?

Yes, there are really three core elements to that bridge, Steve: the bonus we've mentioned, a little bit of improvement in pricing from Q3 to Q4; and then we did have some operational challenges concentrated in one or two areas and we expect those to improve. And those three elements are the key drivers of the margin rebound. No improvement in China baked in, no significant increase in expenses expected in the fourth quarter.

Okay. And would you agree with that sort of the summary I gave of kind of what the main puts and takes of the core business were?

Yes. And the only other thing is we continue to incur these mark-to-market losses so we didn't call them out. At some point, that will stabilize and rebound. Those were present in the third quarter but at a lower rate than in the second quarter.

Okay. That's very helpful. And then just in terms of the heavy-duty truck market in North America, I'm curious how much visibility you have to the second half of 2023 at this point. I know you talked earlier about the order strength. I guess I'm just curious how far into 2023 the OEMs have given you their work plans and the confidence you have there relative to the first half? Thank you.

Yes, I mean we are of course talking about outlook and forecast with our OEM customers and staying close to them on that. At this point, we've got about a nine-month backlog based on strong orders in September and October. And we'll continue to stay close to them to watch how that outlook evolves in the second half of the year.

Perfect, thank you.

Thanks Steve.

Our next question comes from Matt with Cowen. Please state your question.

Good morning, thank you. Can you just talk about the rationale behind doing a one-time bonus rather than further pay increases, I mean, is it that just you didn't want to lock in to pay increases ahead of a possible moderation of labor costs overall in the economy or did something specific happen in the quarter that made it necessary to do the bonus in order to not have a lot of attrition?

Yes, really it was more of the latter. So of course, we're always looking at pay and what's happening with the market as it relates to labor costs. But really, we felt very strongly that given the tremendous effort of our employees over the last 18 months to deliver revenue at the level we did and work through all of the supply chain challenges and continue to commit to deliver key strategic growth initiatives, and given the environment where they are experiencing higher inflation, the impact to them, and the labor market is tighter. We felt that this one-time recognition was very appropriate to show appreciation, to mitigate attrition, and really motivate people to be connected to delivering and continuing to deliver for the company.

I understand your point. Looking at the bigger picture, you anticipate strong demand in mining and oil and gas for the remainder of the year. Do you think this momentum will carry into 2023? Specifically regarding mining, is the current demand primarily driven by equipment replacement? It seems we've been on the verge of an equipment replacement cycle for the last decade with several false starts. Do you believe this time could lead to a multiyear replacement cycle in mining?

Yes, we do see that demand continuing into next year. Of course, in oil and gas with the energy challenges, there's a lot of demand to invest there. And we'll have to continue to monitor those economic indicators over time. But right now in both of those markets, we continue to see strong demand holding into 2023.

Yes, we're pretty much sold out for this year. There are some regional factors, increased coal production in India. There's some local factors as well as the overall security and availability of energy across borders.

Thanks very much.

Thank you.

Our next question comes from Noah with Oppenheimer. Please state your question.

Alright, thanks for taking my questions. Just sticking with Off-Highway first. You mentioned that it's really the engine sales to some of the construction customers in North America, that growth being driven by CAPEX from rental companies and pricing. Have you started to see any benefits kicking in from IIJA yet, is that sort of a demand tailwind for 2023 or potentially beyond?

Yes. I mean, the Infrastructure Bill is going to drive investment in infrastructure to support some of these clean energy technology. So we expect, over time, we'll see increased electrolyzer demand, as I alluded to earlier, and that could also provide benefit to underlying construction demand in the U.S. It's early, right, to actually see the specific impact of that. But certainly, it should provide a positive benefit.

Sorry, I know we've had a lot of legislation out of Washington. I was talking about the IIJA, the Infrastructure Bill.

Sorry. Did I respond on the wrong one?

Yes. It sounds you have multiple shots on goal, but just wondering if you can talk through kind of any impact from the Infrastructure Bill so far?

Thank you, Noah. I believe the Infrastructure Bill is producing similar outcomes, particularly as the IRA is increasingly focused on the New Power sector. We are experiencing positive momentum in that area. Our benefits come from rental companies and other construction equipment in North America, which have remained strong throughout this year and are sustaining that momentum as we continue to expand, with plenty of work ahead. This situation is certainly advantageous for us.

Okay, great. And then I know a couple of folks have asked about Meritor impact going forward for next year. So I know we won't be precise here, but just for everybody's modeling, as we think about Components margin, I mean you annualized this year 7.5% EBITDA margin, add some synergies capture and some growth, it's still going to be a margin headwind in Components of probably a couple of hundred bps, right, as we look at 2023, is that a good starting point?

Yes. On a percentage basis, it's clearly going to be dilutive in the early part of the ownership and the goal is to keep working that up over time.

And any early color on the cadence of the synergies capture that you can give us?

We are actively working on that with dedicated teams making progress every day. I remain confident in our previous guidance of $130 million pretax by year three. Additionally, we are discovering other synergies related to taxes and other areas that haven't been factored in yet. There is still much work ahead, but we have made a good start, especially with employee integration, which involves a lot of effort. The business is experiencing high demand and supply challenges, similar to our core operations. We greatly appreciate the hard work of our employees as we focus on driving synergies and improving operations, and they are all very busy.

Okay, thanks so much for the color.

Thanks Noah.

That was our final question, and that concludes the Q&A session of this call. I'll turn it back over to Chris for closing remarks.

Thank you, everyone, for joining. We will be available this afternoon to answer any questions you may have from the Investor Relations perspective, and I appreciate your attendance today. Thank you.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.