Greetings, and welcome to the Cummins Incorporated Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Clulow, Vice President of Investor Relations. Thank you, Chris. You may begin.

Great. Thank you very much. Good morning everyone and welcome to our teleconference today to discuss Cummins’ results for the third quarter of 2023. Participating with me today are Jennifer Rumsey, our Chair and Chief Executive Officer, and Mark Smith, our Chief Financial Officer. We will all be available to answer questions at the end of the teleconference. Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs, and intentions on strategies regarding the future. Our actual future results could differ materially from those projected in such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the forward-looking disclosure statements in the slide deck and our filings with the Securities and Exchange Commission, particularly the Risk Factors section of our most recently filed Annual Report on Form 10-K and any subsequently filed Quarterly Reports on Form 10-Q. During the course of this call, we will be discussing certain non-GAAP financial measures, and we will refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release, with a copy of the financial statements and a copy of today’s webcast presentation, are available on our website within the Investor Relations section at cummins.com. With that out of the way, I will turn you over to our Chair and CEO, Jennifer Rumsey, to kick us off.

Thank you Chris and good morning everyone. I'll start with a summary of our third quarter financial results. Then I will discuss our sales and end market trends by region. I will finish with a discussion of our outlook for 2023. Mark will then take you through more details about our third quarter financial performance and our forecast for the year. Before getting into the details of our performance, I'm excited to first highlight a few major events from the third quarter that demonstrate the continued execution of our strategy. On September 6th, Accelerate by Cummins, Daimler Truck and Bus and PACCAR, along with EV Energy joined forces to accelerate and localize battery cell production and the battery cell supply chain in the United States. The planned joint venture will manufacture battery cells for electric commercial vehicles and industrial applications, creating highly desirable manufacturing jobs in the United States in the growing clean technology sector. Total investment by the partners is expected to be in the range of $2 billion to $3 billion for the 21 gigawatt hour factory with production expected to begin in 2027. We see this partnership as an opportunity to share investment with two long-standing partners while advancing a key technology solution for our customers and industry and collectively to accelerate the energy transition in the United States. In October, Cummins completed its acquisition of two Faurecia commercial vehicle manufacturing plants and their related activities, one in Columbus, Indiana and one in Roman Netherlands. This acquisition is a natural addition to the Cummins Emission Solutions business and will help ensure we meet current and future demand for low emission products. Lastly, Cummins announced several collaborations with our natural gas X15 engine that further enable our customers to achieve their decarbonization goals. Freightliner announced they are working with Cummins to offer the new X15 natural gas engine in its heavy-duty Freightliner Cascadia trucks. Also, Cummins and Knight Transportation, Inc. announced that the industry's largest full truckload company has successfully tested Cummins' new X15 engine in Southern California, using renewable natural gas to realize reductions in nitrous oxides and greenhouse gas without compromising performance. The X15 N, which will launch in North America in 2024, is the first natural gas engine to be designed specifically for the heavy-duty on-highway truck application. Now, I will comment on the overall company performance for the third quarter of 2023 and cover some of our key markets, starting with North America before moving on to our largest international market. Demand for our products continued to be strong across many of our key markets and regions. Revenues for the quarter were $8.4 billion, an increase of 15% compared to the third quarter of 2022, driven by the addition of Meritor and strong demand across most global markets. As a reminder, the third quarter of 2022 included two months of consolidated operations for Meritor following the completion of the acquisition on August 3rd of 2022. EBITDA was $1.2 billion or 14.6% compared to $884 million or 12.1% a year ago. Third quarter 2023 results include $26 million of costs related to the separation of the filtration business. This compares to third quarter 2022 results, which included $77 million of costs related to the acquisition, integration, and inventory valuation adjustments of Meritor and $16 million of costs related to the separation of the filtration business. Excluding those items, EBITDA percentage of 14.9% in the third quarter of 2023 represented an improvement from the 13.3% we delivered in 2022. We benefited as the benefits of higher volume and pricing exceeded increased selling administrative, research and development expenses and inflation costs. The third quarter of 2022 also included a one-time employee recognition bonus of $56 million. Research and development expense increased in the third quarter as we continue to invest in the products and technologies that will create advantages for us in the future, particularly in the Engine, Components, and Accelera segments. In addition, operating cash flow for the third quarter of 2023 was a record inflow of $1.5 billion compared to the $382 million in the third quarter of 2022 as we continue to focus on our working capital management within the business. I'm proud of our leaders and employees for their efforts in driving down costs and operational focus to achieve this record result for the quarter, and we will continue to focus on strong cash generation moving forward. Our third quarter revenues in North America grew 16% to $5.2 billion compared to last year, driven by the addition of Meritor and strong demand in our core markets. Industry production of heavy-duty trucks in the third quarter was 74,000 units, up 1% from 2022 levels, while our heavy-duty unit sales were 29,000, up 18% from last year, reflecting strong demand for our products. Industry production of medium-duty trucks was 37,000 units in the third quarter of 2023, an increase of 7% from 2022 levels, while our unit sales were 32,000, up 19% from 2022. We shipped 41,000 engines to Stellantis for use in their Ram pickups in the third quarter of 2023, flat with 2022 levels. Engine sales to construction customers in North America decreased by 8%, driven primarily by high inventory in the channel. Revenues in North America Power generation increased 15% as industrial and data center demand improved and supply constraints eased modestly. Our international revenues increased by 13% in the third quarter of 2023 compared to a year ago with the addition of Meritor and strong demand across most markets. Third quarter revenues in China, including joint ventures, were $1.6 billion, an increase of 24% as markets continue to recover compared to a very weak third quarter of 2022. Industry demand for medium- and heavy-duty trucks in China was 243,000 units, an increase of 48% from last year. Our sales and units, including joint ventures, were 41,000, an increase of 36%. In light-duty markets in China, we saw an increase of 14% from 2022 levels at 442,000 units, while our units sold, including joint ventures, were 26,000, an increase of 12%. Industry demand for excavators in the third quarter was 40,000 units, a decrease of 30% from 2022 levels. The decrease in market size is due to weaker activity in construction. Our units sold were 7,000 units flat with 2022 levels as increased penetration at new and existing customers offset the declining market. Sales of power generation equipment in China increased 5% in the third quarter, primarily driven by slight improvement in non-data center markets. Third quarter revenues in India, including joint ventures, were $730 million, an increase of 13% from the third quarter a year ago. Industry truck production increased by 17%, while our shipments increased 23%. Power Generation revenues decreased by 16% due to the second quarter ahead of emissions regulation changes. Now, let me provide our outlook for 2023, including some comments on individual regions and end markets. Based on our current forecast, we are raising full-year 2023 revenue guidance to be up 18% to 21% versus last year. We are also narrowing our EBITDA guidance range to be 15.2% to 15.4%. We now expect higher full-year revenues in our Components segment and higher profitability in our Power Systems segment, offset by decreased profitability in our engine business as a result of softening aftermarket and off-highway markets. We are raising our forecast for heavy-duty trucks in North America to be 280,000 to 300,000 units in 2023 after a strong third quarter. Our current guidance forecasts lower industry truck production in the quarter. While orders remain relatively strong, inventory management, truck component shortages limiting our OEM production rates and fewer working days are all contributing to our view for the quarter. In North America, the medium-duty truck market, we're maintaining full-year 2023 market size guidance of 135,000 to 150,000 units, up 5% to 15% from 2022. While we continue to work to increase our production through rebalancing across our global plants and improving the supply base, industry production continues to be limited due to other supply chain constraints. Consistent with our prior guidance, our engine shipments for pickup trucks in North America are expected to be 140,000 to 150,000 units in 2023, volume levels in line with 2022. Additionally, we maintain our guidance for North America construction to be down 10% to flat, driven by high channel inventory and softening market conditions. In China, we project total revenue, including joint ventures, to increase approximately 15% in 2023, driven by share growth, better volumes, and content increase. We project a 15% to 25% improvement in heavy- and medium-duty truck demand and a 10% to 20% improvement in the light-duty truck market coming off the low market levels in 2022, and that's consistent with the prior guidance. Despite the slow pace of recovery in the China truck market, we are continuing to see strong performance for the 15-liter natural gas engine, which we launched in 2021. Due to the expanding fuel cost differential, approximately 20% of the heavy-duty market is expected to be natural gas-powered by the end of 2023. In the short time since launching our new natural gas product in China, our share has been ramping up with strong customer reception in the heavy-duty market, and we expect momentum to continue into the fourth quarter. We look forward to launching the 15-liter natural gas engine in North America in 2024. We expect China construction volume to be flat to down 10% in line with prior guidance, consistent with the tepid economy and weaker overall activity. In India, we project total revenue, including joint ventures, to be up approximately 6% in 2023, consistent with our prior forecast. We expect industry demand for trucks to be flat to up 5% for the year. We project our major global high horsepower markets to remain strong in 2023. Sales of mining engines are expected to be flat to up 10%, consistent with our prior guide. Revenues in the global power generation markets are expected to increase 15% to 20%, consistent with our prior guide, with the strong performance driven primarily by improvement in the data center and mission-critical markets. For Accelera, we expect full-year sales to be $350 million to $400 million and also maintain our EBITDA guidance of the expected loss of $420 million to $440 million for 2023. Within components, Cummins expects revenues contributed by the Meritor business for 2023 to be $4.7 billion to $4.9 billion, and EBITDA is expected to be in the range of 10.5% to 11%. In summary, we are raising our guidance on sales of up 18% to 21% and narrowing our EBITDA guidance range from 15.2% to 15.4%. Our guidance for the full year implies weaker revenue in the fourth quarter. While demand remained strong in several markets, softening in the aftermarket demand, a continued weak outlook in China, continued industry supply constraints impacting North America truck production, and inventory management efforts across many markets are some of the factors driving the lower fourth quarter run rate. In view of the lower forecasted revenues, we have initiated actions to reduce costs in our business, particularly in selling and administrative costs. In order to lower costs as we move into next year, we are offering a voluntary retirement and a voluntary separation program in select regions and parts of our business for eligible exempt employees. We will continue to monitor our end markets closely and assess the need for further action while continuing to invest for our future. During the quarter, we returned $238 million to shareholders in the form of dividends. Our long-term strategic goal is to return approximately 50% of operating cash flow to shareholders. The strong execution from the second quarter of 2023 continued into the third quarter, driving record operating cash flow despite the ongoing challenges in our operating environment. As we look forward to the opportunities ahead, we have a strong, capable leadership team who will help us successfully navigate an exciting and changing future. Today, I was also pleased to announce several promotions on my leadership team, which will be effective January 1 of next year. First, Srikanth Padmanabhan, currently Vice President and President of the Engine Business, will take on a newly created role of Executive Vice President and President of Operations. In this role, Srikanth will be an important worker that will redefine and drive improvements in how we operate as a company through the energy transition and ensure the success of our operational priorities. Throughout his more than 30 years at Cummins, Srikanth has worked across many of Cummins' businesses and regions and consistently pushed the boundaries of customer-focused innovation to position Cummins as the leading powertrain supplier of choice in the transition to a net-zero future. Srikanth is a result- and people-driven leader and is the perfect choice to lead this work. Second, Brett Merritt, currently Vice President of On-Highway Engine Business and Strategic Customer Relations, will assume the role of Vice President and President of the Engine Business, replacing Srikanth when he takes his new role. Brett has spent more than 25 years in the automotive and commercial vehicle industry and more than 14 at Cummins. The past 11 years spent leading and growing On-Highway Business from 800,000 engines in 2012 to 1.2 million engines last year. Brett is an experienced business leader and a trusted partner to many of our key customers, and I'm excited for Brett to lead this segment. Bonnie Fetch, currently Vice President of Global Supply Chain, will assume the role of Vice President and President of our Distribution Business, replacing Tony Satterthwaite, who has been acting as Interim Head of DBU. Bonnie, who previously led supply chain for DBU, has led Cummins' global supply chain and manufacturing organization, including Cummins' new and ReCon parts business since early 2022, where she led her team in navigating the many complex supply chain challenges as well as improving operational and functional performance. With more than 30 years of experience, including 20 years at Caterpillar before coming to Cummins, including General Management, HR, and Supply Chain Leadership, makes her uniquely qualified for this role. I'm excited for her to leverage her broad experience to run this segment. This is a period of change for our company, and it's also an exciting one. I want to end by thanking our Cummins employees who continue to work tirelessly to meet our customer needs and respond to the strong demand levels by ensuring quality products, strengthening our relationships and navigating continued supply chain challenges. Our results reflect our focus on delivering strong operating performance, investing in future growth, and bringing sustainable solutions to decarbonize our industry while returning cash to shareholders.

Thank you, Jen, and good morning, everyone. Third quarter revenues were $8.4 billion, up 15% from a year ago. Sales in North America increased 16% and international revenues grew 13%. Organic sales growth was 10%, driven by improved pricing and strong demand for our On-Highway and power generation products. 5% of the total increase in sales was driven by the addition of Meritor. EBITDA was $1.2 billion or 14.6% of sales for the quarter including $26 million of costs associated with the planned separation of Atmus. EBITDA in the third quarter of 2022 was $884 million or 12.1% of sales, including $16 million of costs associated with the planned separation of Atmus, and $77 million of our integration and inventory valuation adjustments related to the acquisition of Meritor. Excluding the Atmus separation costs and Meritor adjustments, Underlying EBITDA for the third quarter was 14.9% compared to 13.3% a year ago. The higher EBITDA percentage was driven by favorable pricing to cover rising input costs and improved logistics costs, partially offset by higher variable compensation associated with the stronger overall company financial performance. In addition, we issued a one-time employee recognition bonus in the third quarter of last year, totaling $56 million. To provide clarity on operational performance in comparison to our guidance and excluding costs associated with the planned separation of Atmus and the acquisition integration and inventory valuation stats related to the acquisition of Meritor in my following comments. As a reminder, we completed the acquisition of Meritor in August of 2022, resulting in one additional month of operational performance in Q3 this year compared to last year. Now I'll go into more detail by line item. Gross margin for the quarter was $2.1 billion or 24.6% of sales compared to $1.7 billion or 22.9% last year. Gross margin increased by 170 basis points, driven by favorable pricing and logistics costs and the impact of the one-time employee bonus last year, partially offset by higher variable compensation expenses. Selling, administrative, and research expenses were $1.2 billion or 14.1% of sales compared to $997 million or 13.6%, with the increase primarily driven by both higher variable compensation and higher engineering costs associated with new products across the company. Income from joint ventures was $118 million, $48 million higher than the previous year, driven by the receipt of technology fees and slowly improving demand in China, which boosted the operational results. Other income was a negative $7 million or $20 million lower than a year ago, driven by foreign currency translation. Also included in other income was $28 million of mark-to-market losses on investments. Interest expense increased by $36 million, primarily due to higher interest rates on the floating rate portion of our debt. The all-in effective tax rate in the third quarter was 21.4%, including $5 million or $0.03 per diluted share of favorable discrete items. All-in net earnings for the quarter was $656 million or $4.59 per diluted share, including $26 million or $0.14 per diluted share of costs associated with the separation of Atmus. All-in net earnings in the third quarter of last year were $400 million or $2.82 per diluted share, which included $16 million of costs associated with the planned separation of Atmus and $77 million of acquisition and integration costs associated with the acquisition of Meritor. All-in operating cash flow was a record quarterly inflow of $1.5 billion, $1.1 billion higher than last year, driven by solid earnings and continued focus on working capital management. Generating strong operating cash flow remains a key focus area for the company, and we were pleased with the progress in the third quarter. I will now comment on segment performance and our guidance for 2023. As a reminder, 2023 guidance includes a full year of operations for Meritor and Atmus and excludes any costs of benefit related to the separation of Atmus. Guidance also excludes the impact of any cost reduction activities within Cummins in the fourth quarter. As Jen mentioned, we're raising our revenue guidance for the company to 18% to 21%, up slightly from our previous guidance of 15% to 20%, driven by strong demand in North America. EBITDA is now expected to be 15.2% to 15.4% compared to our previous range of 15% to 15.7%. And we are also narrowing the EBITDA ranges for most of our business segments. Components segment revenue was $3.2 billion, an increase of 20%. EBITDA was 14.2%. Back with the prior year, while EBITDA dollars increased from $384 million to $461 million. Cummins Meritor revenues in the third quarter were $1.2 billion, and EBITDA was $129 million or 11% of sales, a significant improvement from last year and in line with our expectations. For the Components Segment, we now expect total 2023 revenues to increase 35% to 40%, a 3% increase from our previous revenue guidance with EBITDA in the range of 14.2% to 14.7% compared to our previous range of 14.1% to 14.8%. Within Components, Meritor revenues are expected to be $4.7 billion to $4.9 billion, consistent with prior guidance. EBITDA is expected to be in the range of 10.5% to 11% compared to our previous forecast of 10.3% to 11%. Lots of small changes in the individual segment guidance as we get closer to the end of the year. For the Engine segment, third quarter revenues were $2.9 billion, an increase of 5% from a year ago. EBITDA 13.5% compared to 13% in 2022 driven by operational improvements and the impact of the one-time employee bonus in the prior year. In 2023, we project revenues for the Engine business will increase 2% to 7% and consistent with our prior projection and EBITDA in the range of 13.6% to 14.1%, a slight decrease from our previous guide of 13.8% to 14.5% due to a continuing softening in our aftermarket revenues and some weaker demand in some off-highway markets. In the Distribution segment, revenues were $2.5 billion, 13% higher than last year. EBITDA increased as a percent of sales to 12.1% compared to 10% of sales a year ago, driven by stronger volumes, improved pricing, and the impact of the one-time employee bonus last year. We expect distribution revenues to be up 10% to 15%, consistent with prior guidance and narrowing the expected EBITDA range to 11.9% to 12.4%. In the Power Systems business, revenues were $1.4 billion, an increase of 7%. And EBITDA increased from 14.3% to 16.2%, continuing a trend of the last six quarters of improving margins driven by pricing, higher volumes, operational, and cost reduction activities. In 2023, we expect revenues to be up 8% to 13%, consistent with the prior guidance. And we're raising the expected EBITDA to be in the range of 14.8% to 15.3%, up from our previous projection of 14.3% to 15%. Seller revenues more than doubled to $103 million, driven by electrolyzer project delivery, higher demand for battery electric systems in the North American school bus market, and the addition of the Siemens Commercial Vehicle business electric powertrain portion of the business. Our EBITDA loss in the segment of $114 million will continue to support strong future growth. Our guidance for the topline and the bottom line remains unchanged with revenues in the range of $350 million to $400 million and net losses of $420 million to $440 million. Our effective tax rate for the year is expected to be approximately 22% in 2023, excluding any discrete items. Our outlook for capital investments is unchanged and expected to be in the range of $1.2 billion to $1.4 billion. We will continue to focus on deploying cash to fund investments that drive profitable growth, debt reduction, and returning cash to shareholders through dividends this year. In summary, we delivered strong sales, solid profitability in the third quarter, and record operating cash flow. We'll continue to focus on managing working capital delivering strong margins and investing in the products and technologies that will drive future growth. As we indicated last quarter, we see signs of softening aftermarket demand and weaker demand in some industrial parts. These, combined with fewer production days in the fourth quarter, are expected to contribute to lower revenues and profitability. Have initiated some steps to reduce costs, as Jennifer outlined, and we'll continue to monitor our end markets closely and assess the need for further actions. Our priorities in 2023 for capital allocation, as I've said, to reinvest for growth, increase the dividend, and reduce debt. In July, we announced a 7% increase in the dividend, our 14th consecutive year of quarterly dividend growth. And through the end of the third quarter, we have reduced debt by $390 million. Furthermore, in October, we reduced debt by a further $650 million, consistent with our plans for the year. Thank you for your interest today. Now, let me turn it back 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're ready for our first question.

Thank you. Our first question is from Jerry Revich with Goldman Sachs. Please proceed with your question.

Yes, hi. Good morning everyone. Jennifer, congratulations on the joint venture with PACCAR and Daimler. As we look forward to what that means for Cummins' product availability and offering within EVs, can we just expand on that in terms of what's the opportunity to bundle it with e-Axles, battery management systems? And if you could just talk about, is there a plan to use the plant to source batteries globally for your customers? Or is this strictly focused on the U.S. initially? Just would love your broader comments. Thank you.

Yes. So Jerry, I'll add a little bit more color to what we're doing with this partnership. As I said, this partnership is really focused on battery cell manufacturing. So, we have previously been investing and focusing on battery packs, e-Axles, motors, inverters, and other key components and integrated powertrains for the electrified powertrain. Together with our partners, we saw the need to bring production of battery cells into the U.S. and really design what we think is going to be a winning cell solution for commercial vehicles and industrial applications. So, this will be supplied into the battery packs that Cummins will produce. The cell will also go to PACCAR and to Daimler trucks here in North America for their battery cells; really, it's targeted at the U.S. market and having a domestic offering that we think will be strong for the market. The chemistry here, for this, we will continue to offer battery packs around the world and chemistries, including LSP and NMC. But this one is focused on LFP technology, which, again, together, we think is going to be a winning commercial vehicle battery cell chemistry; lower cost, better durability, less dependency on some of these minerals that can be harder to source and also improve safety. So, really good opportunity for us and also to stay closely connected with those two partners as we're launching these electrified powertrains. Our intent is to offer that battery cell through our packs to other commercial vehicle and industrial applications here in the U.S. as well.

Okay. It's super. And Mark, can I ask just a shorter-term question on the Engine segment? You folks had pretty solid performance in the quarter and for the year. The reduced margin rate at the midpoint seems like a big step down in profitability implied for the fourth quarter versus the third quarter. Can you just talk about is that a significant production cut, China JV? Or is that just taking the midpoint of the range versus thinking about the broader, maybe higher-end potential outcomes?

Yes, I think it's not related to China. It is related to the fact that we're going to have fewer production days. That's consistent with the industry forecast for lower heavy-duty truck, which isn't a surprise, but that's what we've kind of been projecting for a couple of quarters. The thing that's really changed through the course of the year, Jerry, is the decline in the aftermarket, particularly running through the engine business. No doubt, some of that's related to customers rationalizing inventory. I don't, I think the underlying rate of decline is less than the headline rate because we've gone from a period of everybody trying to keep up with demand and now, like ourselves, many companies are looking at inventory levels and trying to right-size. But just to give you a sense, within the engine business between the first quarter of 2023 and the fourth quarter, parts revenues are down about 18%. So that's kind of been slipping each time we've looked at it. So that's the one changing trend. I don't think it's foretelling a huge decline. I just think it's mostly inventory adjustments. But that, combined with the lower production days, the lower absorption means that, yes, even though revenues are holding up for the fourth quarter, it's going to be a little bit tougher. And that's one of the reasons, not the only reason why we've decided to initiate the actions that we discussed earlier. We're not predicting a precipitous decline in our revenues at all. We don't have a visible, clearly a leveling off or a slight decline in some areas, but we feel it's prudent both to do the cost reduction actions, continue our focus on cash flow and debt reduction this year that should leave us with the best chances of being very successful in 2024.

One quick note to add, Jerry. It doesn't change our overall guidance for the engine business, but it is a difference between Q3 and Q4 is our JV income does step down because of license fees timing. So, we had a lot of that happen in the third quarter that steps down about 40 basis points for engine business margin from Q3 to Q4. So hopefully, that helps.

Thank you. Our next question is from David Raso with Evercore. Please proceed with your question.

Thank you. I'm curious, the cost-out decisions. How much is that related to what you're seeing on the horizon in 2024 and if you can give us any insight on what that is? And maybe margins in 2023 being maybe a little more of a, let's say, a heavier lift to expand margins than maybe we see across the machinery space broadly. Just curious how much is it sort of structural to what 2023 is playing out versus what you're seeing in 2024? And obviously, any sense of magnitude the cost outs would be really helpful. Thank you.

Yes, David, I'll start and then Mark can add if he wants to add anything. As we said, we see that many of our markets have leveled off. We're seeing some drifting down in some of the markets, aftermarket, off-highway. And we are continuing to focus on ongoing improvement in profitability and performance of our business and using softening markets as a further opportunity to take costs out. So, we still see a lot of strength as we go into next year. We're not going to provide guidance for 2024 today. What I will say is if you look at backlog, heavy-duty truck, and medium-duty truck continues to look quite strong as you go into the first half of the year. Power generation is very strong. And so we're not seeing any precipitous drop-off, but we think it's wise to take some cost-cutting actions here in Q4 and then continue to monitor the situation. And if we need to take further action, of course, we would continue to do that.

And we'll give you a fuller assessment on the next quarterly earnings call about both the cost and the benefit impact. Of course, what we're announcing today is voluntary actions, so we don't know what the exact take-up is going to be and then our assessment of what is the kind of momentum in markets going forward. There will be some other smaller actions around facilities and other things. But we'll lay that out in detail in the next quarter when we've got a more holistic or hopefully, clearer view of the full year next year.

That's helpful. Maybe you can educate me on something. I'm a little confused by the comment in the fourth quarter engine margin. And I appreciate Chris' comment about the JV income, how that will impact 3Q to 4Q, but you highlighted a lower parts impact benefit in the fourth quarter. But then when I see the Components business, which obviously has a lot of parts as well, it seems like you're implying a strong fourth quarter on margins for components. So, can you educate me on why the difference one division is getting hit on parts and really the parts division you would think for aftermarket, even more so components, is having a step-up in margins in the fourth quarter, at least appears to be?

Yeah, I think it's pretty stable. I think that's just the dynamics we're seeing between the two different businesses right now.

Well, both of those segments are anticipating lower volumes for North America, medium- and heavy-duty truck market in Q4 for the reasons that I outlined here. Frankly, there's a combination of focus on inventory reduction and supply constraints that are continuing to prevent OEMs from building to the full demand, and we expect to see that in Q4 impact our revenues for both of those segments.

All right. Thank you very much.

Thank you. Our next question is from Rob Wertheimer with Melius Research. Please proceed with your question.

Hey, I have two. One is just on the parts destock that you have mentioned and that makes sense. I'm just curious if you have any sense as to how much channel inventory people carry if you're all the way through that, half the way through. If you just quantify that potential if you're able to?

It's a bit challenging to determine. On the Power Systems side, we typically notice a pattern of destocking every year as we approach the fourth quarter. We're observing some of that now, along with fewer rebuilds, especially in the segment of the oil and gas market that we service. However, regarding the engine segment on the on-highway side, it appears to be following a more consistent trend over multiple quarters. This is partly due to focusing on prioritizing new OEM builds as we progress through the cycle and navigate supply chain challenges. Additionally, parts have been in a catch-up mode, and we are now seeing that truck utilization has stabilized. Companies are working harder on inventory management, and it feels like we are nearing the bottom of that situation. Naturally, this is influenced by the economic climate and the underlying level of truck utilization. So, if you ask me today whether I believe we are on a clear path toward significantly lower parts in Q1, I would say no. It seems we are in a stronger position compared to the last three quarters based on the information we have.

Perfect. And then if I can ask kind of a bigger picture question in China. It's obviously been very weak for a lot of industrials. Maybe it's bottomed in all your end markets maybe in some. I wonder if you could just give just your high-level view of what's going on in the economy there, whether fleet dynamics mean you have to be in recovery mode, whether that's true of trucks or power gen? Or just maybe give an overview of China, what you see in different parts of your business on the recovery? Thank you.

Yeah. So when we look at the China market, I mean overall, economic activity has continued to be pretty weak there. We've seen improvements in 2023 compared to 2022 when they were heavily impacted by COVID lockdowns, even more extreme weakness. So you've seen some improvement. We've seen the strong demand for natural gas heavy-duty engines because of the cost delta between natural gas and diesel there. We've kind of come through the emissions change over in an on-highway market. And so if we see recovery and continued recovery in the economy there, I think that will continue to positively impact our business. And with the product investments that we've made, the emissions changes will offer more content, and we think continue to increase our penetration. So we'll watch and see if any of the government stimulus does start to drive positive momentum and economic activity, but it's been relatively weak this year.

Yeah. I mean just to give you a sense, I know we don't like talking about months, but July was like the lowest in a decade, right, in some of our JV production. It's crept up since there, but it has been tough. Again, it's not worse than we thought, but that just gives you a sense of how weak it was in the summer. Hopefully, there's upside from here, but we don't have good visibility to that.

Yeah, the RMB1 billion bond that's planned, I think that's encouraging to see the government moving that won't impact the fourth quarter, but hopefully, it drives more infrastructure growth next year. We'll wait and see that we're up.

Thank you. Our next question is from Tami Zakaria with JPMorgan. Please proceed with your question.

Hi, good morning. Thank you so much. So I just wanted to ask about the Power Systems business. Margins came out really strong. Sales growth is strong as well. But when we look at the fourth quarter guide, it seems like you're guiding to a step down of almost 200 basis points sequentially. So just wanted to get a sense of what's driving that. Is this conservatism? Or is there something that we need to be aware of for the fourth quarter for the segment?

The good news is that they've been performing really well, and we expect this to continue. As I mentioned earlier, we usually see a decrease in parts purchases from customers, especially in the industrial sector, during the fourth quarter. This trend is not new and typically occurs every Q4, which is likely the primary negative factor contributing to this situation. However, the underlying demand remains strong, and there have been no significant changes to pricing or the cost structure.

Got it. That's very helpful. And the next question is R&D spend. The R&D spend over the last five years has stepped up notably. How should we think about that spend, let's say, in the next couple of years, and any color on that?

Yes, Tami, as you noted, it's a period of increased R&D investment that we think will position Cummins well for the future. So in particular, now through the 2026, 2027 timeframe when we launch these new fuel-agnostic engine platforms, we're making major R&D and capital investments, and those are bringing new customer business to us and also will position us to have leading products through the energy transition. We've also been increasing our investment in the Accelera business as we ramp up product investments for our electrolyzers and see growing demand for electrolyzer volume, as well as in the electrified components. So that's really what you're seeing come through in the R&D line. And then we're continuing to really focus on improving underlying performance and efficiency in other areas so that we can continue to make the necessary R&D investments.

Yes. That's why we've placed a strong emphasis on SG&A and will continue to do so. Regarding gross margin, we aim to increase margins, boost investments, enhance the bottom line, and consistently improve cash flow. This is the straightforward strategy we're pursuing. We hope to see cash flow rise. Engineering expenses will remain elevated for a while, and the new engine business platforms are contributing to higher CapEx in dollar terms, though it's still within our expected range as a percentage of sales. Over the next couple of years, we are renewing major platforms, which is crucial for our future.

Thank you. Our next question is from Tim Thein with Citi. Please proceed with your question.

Thanks. Good morning. The first question is about Power Systems. I’m interested in your visibility for 2024. While backlog isn't something we typically discuss at Cummins, given the long lead times for large engines and your insight from a rebuild perspective, could you share where you expect to finish the year in terms of revenue visibility for that business?

Yes, Tim, you are correct that there is increased visibility, but we also have long lead times and underlying demand to consider. I believe we have strong visibility through the first half of the year. However, we anticipate facing additional pressure on the on-highway sector, as market participants generally expect a slight decrease in heavy-duty truck orders heading into next year. Consequently, we expect to face more revenue challenges in the engines and components area. The distribution segment, which is largely driven by the aftermarket, should remain stable unless there is a significant downturn in the economy. In Power Systems, we also have strong visibility through the first half of the year and some visibility extending into the second half. We have not observed any significant change in our trajectory at this time.

Yes. I mean we're continuing to, as Mark said, to watch the Power Systems markets and in the industrial markets, we have seen a little bit of softening in oil and gas, which is a relatively small market for us that's kind of its inverse. And so that has softened a little bit. And then in Power Gen, you see a lot of growth this year. And I expect continued strong demand in the data center market for our business, and we're well positioned there.

And it's encouraging that both Power Systems and distribution now are on multi-period margin expansion trends that serve us well going forward.

Yes. There's been a lot of discussion regarding the on-highway parts business. I know it's not a straightforward comparison, but considering the comments from your largest customer and their outlook for their parts business, I'm curious about the differences. You've mentioned an 18% decline since the start of the year, while they seem to be down about 2% or 3%. What do you think is causing the difference in performance between your business and some of the OEMs? I understand that the businesses don't completely align, but they likely face similar market dynamics. I'm interested in your thoughts on this.

Generally, I believe it's about destocking. We know that return levels and similar factors from all parts of our channel have increased as customers have been more cautious.

Yes. I think it's really important to note that through this cycle, there are two very different dynamics because of the supply constraints than what you would previously see. So the aftermarket demand was really strong. And with the supply constraints, it was challenging for some of our customers to get parts. And so there was a lot of focus on building up inventory to try to buffer against those constraints and a focus, frankly, on addressing the gaps that resulted in an overbuild of inventory. So now that some of those supply challenges have eased, getting inventory back to appropriate levels has been a focus, and that's driven a drop-off beyond just the actual aftermarket demand in service. And then the same is true and happening on the first-fit build that we've had supply constraints that have limited our ability to meet industry demand, and you see that resulting in the markets holding up longer than you would typically see and continue to see solid demand for first-fit trucks.

And then if I just step back from the noise in this kind of correction period, Tim, clearly, our market share in North America on-highway markets has gone up noticeably so that should all go well for the parts that will inevitably be purchased through Cummins. I just think just in this correction period. I was just trying to provide that extra color this time to explain what I think is a short-term margin influence but not long-term market trends.

Thank you. Our final question will be from Steven Fisher with UBS. Please proceed with your question.

Thanks. Good morning. Just curious about how much visibility you have to on-highway engine pricing going forward at this point into 2024. I guess to what extent is your pricing going to be dependent on the pricing of your OEM customers or how independent can that be?

Yes, we were price-cost favorable this year, as we've shared previously, and we are continuing to focus on pricing with new product launches and where we've seen inflationary costs coming through. So we're working to continue to maintain that positive price/cost ratio. And we're seeing some slowing of course, in pricing in the market, but we'll expect to continue to have some of that.

Right. And again, when we give out next year, then we'll, I'm sure you'll ask us about price/cost. We'll be happy to share the dynamic.

Yeah. Thanks. You indicated some favorable testing around the X15 and coming to market next year. So just would love to get a little bit more color on your expectations for demand there, the extent to which this could be a driver of share gains and where you're hearing the strongest indicators of demand for that product?

Yeah. So we'll launch the X15 here in North America next, as you heard me say, it's performing well in China. We'll have a U.S. version of that, of course, meeting the regulatory requirements here next year, and we'll have availability now through two of our OEMs. And we are seeing end customers testing and interested in that product. We'll have the only heavy-duty natural gas product offered here in North America. So of course, that creates some opportunity for us as customers where they've got infrastructure, environmental goals or even operating cost benefits associated with natural gas will start to adopt that solution more. So there's some opportunity there for sure.

Okay. And then I think we'd love to get a catch-up on the electrolyzer backlog and quoting activity. Any change in the trajectory there? Anything you noticed during the quarter? And can you update us on where you're at in terms of building out capacity?

Yeah. Really, on the same trajectory we've talked about previously with building up manufacturing capacity here in the U.S. and Europe, continuing to have backlog growing. We are in the process of commissioning a 25-megawatt electrolyzer with Florida Power and Light over the course of this year. So another big project that we're delivering this year, and we continue to ramp up that business as we described previously.

Thank you very much for your interest today. And as always, the Investor Relations team will be available for calls and to answer any further questions that you may have. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.