Q3 2020 Cummins Inc Earnings Call
[music].
Greetings and welcome to the comments third quarter Twenty-twenty earnings Conference call. At this time, all participants started listen only mode. If anyone should require outbreak or assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. If he liked to be placed into question Q. Please press star one.
At any time on your telephone keypad.
Once again.
This conference is being recorded it's not my pleasure to turn the call over to James Hopkins Executive Director of Investor Relations. Please go ahead.
Thank you good morning, everyone and welcome to our teleconference. Today to discuss comments results for the third quarter of 2020.
Participating with me today are chairman and Chief Executive Officer, Some linebarger, our Chief Financial Officer, Mark Smith, and our President and Chief operating Officer, Tony Shatters wait.
We will all be available for your questions at the end of the teleconference.
Before we start please note that some of the information you will hear or be given today will consist of forward looking statements within the meaning of the Securities Exchange Act of 1934.
Such statements express, our forecasts expectations hopes beliefs and intentions strategies regarding the future.
Our actual future results could differ materially from those projected in such forward looking statements because of a number of risks and uncertainties more information regarding such risks and uncertainties is available on the forward looking disclosure statement in the slide deck and our filings with the Securities and Exchange Commission, particularly the risk factors section of our most recently.
Filed annual report on form 10-K, and any subsequently filed quarterly reports on form 10-Q.
During the course of this call and it'll be discussing certain get financial measures and we refer you to our website for the reconciliation if there's measures to get financial measures are.
A press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website www dot com and start calm under the heading of investors and media would that out of the day, we will begin with our chairman and C O. Tom Linebarger. Thank you James and good morning.
Third quarter continue the period of high demand volatility across our and Margaret.
Three months ago, we experienced the largest sales decline in the company's history.
We've now followed that with the largest sequential increase in sales in the company's history.
Even with a dramatic increase however sales the main below last year's levels.
While we have seen increased demand about most of our end markets over the last three months, we continue to see differences in recovery rate, both by market and by region and we expect these differences to continue.
Our employees who've done a remarkable job of supporting our customers cause it period, while maintaining a sales work environment and.
In the third quarter, our supply chain organization continue to support near record levels of trust production in China, as well as ramping up production to meet significantly increased demand and the north American heavy duty truck and pick up market.
Engineering Group is continue to successfully launched new products. During this great over the last six months, we introduced an entire range abroad stage six products in India and portions of our National standard six portfolio in China.
Also recently announced are full product lineup to meet E. P. A 2021 regulation in North America.
While while nearly everything about the way we have work. We work has changed due to COVID-19 that commitment and capability of our employee has remained intact.
Now I'll move to a summary of our third quarter results and discussion of our major and market.
Mark will then take you through more details about third quarter financial performance and update you on our balance sheet and liquidity.
Revenues for the third quarter of 2020 were $5.1 billion, a decrease of 11% compared to the third quarter of 2019 EBITDA.
EBITDA was $876 million or 17.1% compared to $958 million or 16.6% a year ago.
The impact of lower volumes and higher variable compensation costs.
It was all set by the benefits of restructuring temporary salary reductions reduced warranty costs and higher joint venture income.
The increase in joint venture income was primarily due to continued strong levels of demand in China.
And you're in business revenues declined by 13% in the third quarter compared to a year ago lower production in North American truck markets drove most of the revenue decline.
Dom margin for the quarter was 18.1% compared to 14.1% for the same period in 2019.
Savings related to restructuring activities in salary reductions as well as increased joint venture income, partially offset the impact of lower volumes.
Third quarter results also benefit from a VAT recovery in Brazil.
Sales for our distribution segment declined by 14% year over year with lower revenues and domestic and international markets.
Third quarter, EBITDA was $182 million or 10.6% of sales compared to 9.3% in the third quarter of 2019.
<unk> margins increased as we realize more of the benefit of our transformation work in North America.
Third quarter revenues for the components segment declined seven per cent.
Sales in North America declined, 24% driven by lower truck build rates, while revenues international markets increased by 26% driven by higher truck demand in China.
EBITDA for the third quarter was $261 million or 16.9 per cent compared to 17.3% in the same quarter a year ago.
<unk> per cent and decreased the impact of lower volumes was partially upset by the benefits of restructuring and temporary salary reduction.
Power system sales in the third quarter declined 13% year over year.
Just real sales declined 21% driven by continued weakness and oil and gas and mining markets.
Power generation sales decreased by 7%.
With lower revenues in both North America and international markets.
<unk> and the third quarter was 10.3% or $101 million compared to 14% a year ago, the impact of lower volumes more than offset the benefits of cost reduction actions.
And the new power business sales of $18 million worth double those from a year ago.
EBITDA was a lhasa $40 million in line with our expectations.
Now I will comment on some of our key regions and market starting with North America, and then I'll cover some of our largest international markets.
Our third quarter revenues in North America declined 18% to $3 billion, but increased by 49% sequentially.
Compared to last year, we experienced lower demand and both on and off highway markets as well as within our park and service business.
Industry production and heavy duty trucks declined 35 per cent in the third quarter compared to a year ago, but rose 119% sequentially.
Year to date or market shares 33 per cent driven by the continued strong performance of our products in the field.
Production of medium duty trucks decreased by 33% in the third quarter compared to a year ago, but increased 76% from second quarter levels.
We continued to maintain are clear market share leadership in the medium duty truck market with over 80% of new trucks powered by come in powertrains in 2020.
Total shipments to North American pickup customers increase 4% compared to a year ago and included a catch up in production by her OEM partner after an extended second quarter shut down.
Demand and domestic bus markets remained week in the third quarter with sales down 24% driven by lower demand from both transit and school bus customers.
And domestic off highway market engine sales for construction equipment decreased by 47%.
Driven by lower demand by rental fleets, who went through a significant replenishment cycle and 2018 and 2019.
Revenues for power generation equipment fell by 7% with lower demand and backup power market demand for engines and oil and gas market decline by 80%.
Now I will turn to our international markets International revenues were flat in the third quarter of 2020 compared to a year ago third quarter revenues in China, including joint ventures, with $1.7 billion, an increase of 46% compared to a year ago, driven by continued strong demand in both truck and construction market.
And the third quarter industry demand for medium and heavy duty trucks in China increased by 74% compared to a year ago.
While demand declined sequentially, which is normal in the third quarter for China total industry production with the highest on record for any third quarter.
Demand continues to be driven by improve levels afraid activity and government policies supporting the scrapping of old N S. Three trucks.
Our market share with 17% into the quarter up from 16 in the third quarter of 2019, driven by increased truck market share of our partner photon along with higher utilization of our engine info ton trucks, which now stands at over 80%.
Industry sales of light duty trucks increased by 49% in the third quarter in our market share was 9% up from 7% last year.
Our increased market share was driven by improved truck market share it photon as well as increased use of our engines at J a C.
While new end at six regulations come into effect for all markets in China next July there are certain cities and applications, where these regulations are already in place.
<unk> of our NSX engine models are now in production, including our entire like duty portfolio as well as our leading six seven and 12 litre products.
Have shipped over 50000 in a fixed complaint unit. So far 2020 and are seeing strong acceptance of our new engine. In addition, we are now selling our automated manual transmissions into the Chinese market and are on track to sell over 1000 endurant amt's by the end of the year.
Third quarter demand for excavators in China increased by 57% from a year ago. The central government is encouraging ink increased levels of borrowing by local municipalities to support investment in infrastructure and housing projects.
So far this year over $500 billion in local government loans have been issued targeting infrastructure projects and resulting in increased excavator demand.
Our market share was 16% this quarter compared to 15% a year ago, driven by the strong performance of our domestic OEM customers.
Demand for power generation equipment in China was flat compared to a year ago would increase demand from data center customers offset by weaker demand for standby power.
Third quarter revenues in India, including joint ventures or $295 million.
A reduction of 14% from the third quarter a year ago.
Industry truck sales in India decreased 47% will power generation sales declined by 45%.
Well demand in India remains at very low levels.
We did see industry truck sales more than triple compared to the second quarter levels.
Credit availability remains tight certain segments of the truck market, especially those type of construction are seeing a recovery and demand driven by state government stimulus for infrastructure.
Come into as well positioned to benefit from a recovery in Indian market.
Both because of our leading market position as well as the incremental contact we have an engine sent me B S. Six on highway emission standards, which became effective in April.
Outside of India, and China restart your your year over year revenue declines of 8% in Europe, and 15% in Latin America, primarily due to lower truck production.
Pair to the second quarter sales compared to the second quarter sales increased by 25% in Europe and increased by 102% in Latin America as Oem's resumed truck production in both regions glue.
Global sales of mining engines declined 39% compared to a year ago.
Demand remains stable among copper and iron them for minors, while sales related to coal mining remain low.
I also wanted to discuss our aftermarket revenues during this quarter.
Sales of parts declined by 12% and Orange and business and 14% in our power systems business.
Art sales remain depression or power systems business due to low demand in oil and gas market as well as lower rebuild activity and mining markets and our engine business Park sales were down 12% year over here, but increased 20% sequentially come.
Compared to last year.
You're seeing weaker demand and bust markets and parts for older model trucks.
Parts demand for current on highway truck engine or flat with last year.
While demand increase from second quarter levels across most of our end markets. We remain cautious about future demand increases due to the continued spread of COVID-19, and most countries outside of Asia.
And while we are encouraged by continued strong demand in China in improving fundamentals in North American truck market industry backlogs remain at modest levels.
We currently expect consolidate company revenues in the fourth quarter to be similar to the third quarter levels with higher demand in North American truck market and continued improvement an aftermarket sales, partially offset by lower demand in China.
We continue to expect that the pace of market recovery will differ from region to region and May change based on government actions supposed to control the spread of <unk>, COVID-19 or to stimulate their economies and build business and consumer confidence.
We continue working hard to support end users and build our spilled strong OEM relationships. During this period in August we announce the extension of our medium and heavy duty truck engine partnership with Navistar.
Come into will continue to supply engines for navistar medium and heavy duty trucks as well as for bus applications through the end of 2026.
Extending our 80 year relationship with Navistar.
Through the development and introduction of new products, we continue to reduce the emissions levels of our products, while increasing fuel economy. This includes a lunch of our full product lineup for 2021 E. P. A regulations in North America, and there's six regulations in China N B O six regulations in India.
We are encouraged by the performance and market acceptance of these products that are already in the field.
We also continue to focus on supporting our customers and their transition to carbon neutral technologies are revenues doubled in our new power segment. This quarter and we're excited to share more about how we expect our hydrogen production and fuel cell business to develop I'd come in hydrogen day on November 16th.
Hope you all will be able to attend this virtual that now.
Now, let me turn it over to Mark to discuss our financial performance this quarter, including a record operating cash flow Mark.
Thank you telling him good morning, everyone.
I'd like you to leave this call with two <unk> two key takeaways Smile financial performance in the third quarter number one we delivered salt solid detrimental knowledge ins in the third quarter, which put it on the trunk for full year performance, but will extend a record of raising profitability over successive down too.
This performance is a testament to our operational flexibility ramping down effectively in the second quarter, and then converting additional volume into stronger rulings and record operating cash flow and the third quarter.
Number two as a result of the record operating cash flows on the addition of low cost longterm financing in the third quarter. The company such today with strong liquidity, which will allow us to keep investing in our future in the face of any further volatility Richard any access to capital extra skeptical the share holders in the future.
Now, let me share some of the key details of what's the third quarter.
Quarter revenues with $5.1 billion decrease of 11% from a year ago sales in North America fell, 18% and international revenues were flat.
See movements negatively impacted revenues by 1%, primarily due to a week of Brazilian wheel.
HM.
Earnings before interest in Texas, depreciation amortization I'll read it don't what $876 million or 17.1% of the site sales for the quarter compared to $958 million Oh, 16.6% of sales a year ago, representing a detrimental EBITDA.
13%.
[noise] EBIT Dulles decreased by $82 million over the third quarter last you driven by the negative impact of lowest sales, partially offset by the benefits of prior restructuring actions temporary salary reductions lower warranty and material costs and increased joint venture income in China.
During the quarter recorded a recovery of previously expensive value added taxes in Brazil, which boosted revenues and pretax earnings by $44 million.
I'm not really benefited the engine business.
The variable compensation expense in the third quarter was higher than a year ago, as we increased out accrual, reflecting higher expectations for full your company profitability than we anticipated three months ago for the full use of 2020 variable compensation is projected to be Lola than 2019.
HM.
Gross margin of $1.3 billion or 26.4% of sales increased by 50 basis points from a year ago Lilah based compensation expense due to the benefits of restructuring actions temporary salary cuts material cost reductions and have the the V. A T recovery in Brazil Moulden upset.
Packed of lowest sales and high a variable company station expense.
As a reminder, our gross margin lost you was negatively impacted by $37 million in pretax charges.
As we exited to unprofitable protos lines.
<unk> general and administrative expenses decreased by $67 million or 11% due to the benefits of restructuring temporary salary reductions and reduced discretionary expenditures expenses.
Partially offset by the increase the variable compensation.
Research expenses decreased by $18 million or 7% from a year ago, but increased by $35 million or 19% from the second quarter have expected as we wrapped it will could I will global technical centers and continued progress on engineering programs.
Clothing, some disruption to operations in the second quarter joint.
Joint venture income increased by $30 million, but continued driven by continued strong demand for trucks and China.
Joint venture income in China was a record for the third quarter as we converted those higher volumes and just strong earnings.
Other income of $21 million decreased by $40 million compared to a year ago last year, we recognize the one time $35 million cash gain related to the company's foreign exchange hedging program, which did not repeat this year.
Now the other things for the quarter with $501 million or $3 36 per diluted share compared to $622 million or $3.97 a year ago.
The effective tax rate in the quarter was 26.5% in income tax expense included unfavourable discrete items of $31 million or 21 cents per diluted share.
After I took second quarter operating cashflow rebounded to a record inflow of $1.2 billion in the third quarter, driven by strong profitability and liberal working capital levels, our inventory decreased by $195 million in the quarter, even a sales increased 33% from second quarter levels.
Capital expenditures was hundred $16 million in the quarter down from $153 million a year ago, we expect full year capital expenditures to be in the range of $500 million to $525 million.
Unchanged from our prior guidance and download and 25% from 2019.
We continue to return cash to shareholders in the third quarter with $194 million cash dividends paid up.
In August the company completed an aggregate 2 billion dollar debt offering 510, 30 and maturity take.
Taking advantage of extremely attractive long term interest rates that reflected both favorable market conditions that would own strong credit rating. This long term financing was used can pump to pay down our commercial paper borrowings and reduces our alliance on credit facilities going forward.
Company long term credit ratings remain unchanged eight plus from standard and Poor's and a two for Moody's with stable outlooks.
As a result of I was strong operating cash flow under that offering we boosted that with total liquidity to $6.5 billion at the end of September which puts come in a strong position to navigate any further volatility that may lie ahead.
In October we announced an increased 12 quarterly cash dividend Howard 11th straight you dividend growth.
Looking to the fourth quarter, we expect consolidated revenues to remain similar to third quarter levels strong industry orders are expected to lead to strong demand in north American truck markets and improved after market demand.
India has shown some signs of improvement from very low levels and demand.
Down to the east and some economic activities increasing.
And China, where demand as being at record levels over the last six months, we expect to experience some seasonal declines in the fourth quarter, but demanded to remain relatively strong levels.
Temporary salary reductions went into effect in mid April ended at the end of September as plant. The restoration of solid salaries will add approximately $90 million of pre tax expenditures in the fourth quarter.
Summary would you live with a strong set of results in the third quarter, including record operating cash flow I want to thank our employees around the globe for the dedication and commitment to excellence through the last six very challenging months.
Following unprecedented decline in demand in the second quarter.
<unk>, well and ramping back up in the third quarter supporting our customers maintaining financial discipline throughout.
Well many of our markets have improved the effects of dependent pandemic can still be felt in many regions and may impact the piece of recovery. We will continue to align our business with market conditions deliver strong operational performance invest in the technologies that will fuel profitable growth.
And returned any access to capital to shareholders.
Finally, as Tom previously mentioned will be holding out of a hydrogen day on November 16th where we will highlight telecom dissipation and hydrogen economy additional details and registration can be found on our Investor Relations website. Thank you for joining us today and your interest in Cummins now, let me turn it back to James.
Thank you Mark how does consideration to others on the call I would ask that you limit yourselves to one question and a related follow up and if you have an additional questions. Please rejoined the queue operator, we're not ready for our first question.
Thank you as a reminder, that star one to be placed in the question queue. Our first question today is coming from Steven Goldman from Jeopardy, sure why does not alive.
Okay.
Hello.
And you guys hear me okay.
Okay, sorry, so yeah. My question. Maybe this is a mark question I don't know, but I'm trying to just see if I can disaggregate, you're sort of temporary cost.
Activities from your restructuring benefits and obviously I'm trying to start to think about 2021 and figure out what you get to keep in kind of what you have to give back can you give us some help with that.
And you'll remember that we implemented the temporary salary reductions in the middle of April steep. So when you do the math, it's about $165 million a full you lowered expenses.
In 2020, obviously that will not repeat we restored those salaries in the fourth quarter.
The restructuring I mean, he's embedded in our solid detrimental margins and again, we don't have any further <unk> major restructuring actions.
In place, but we have captured the benefits of that $250 million to $300 million in the current year.
As anticipated.
Okay, I guess, what that's sort of where I'm trying to go Mark is is how shall we think about incremental margins assuming there's some small increment next year.
You know low decrementals kind of maybe employ low incrementals, but maybe not if you're getting a good chunk of restructuring benefits.
Yeah, I think there's just at this point, it's a very fun I understand the question. It's just too early Ethan to assess our market conditions next year, but you will.
No you couldn't see from our results today that we're pushing on all the lepers.
Productivity gains that we can't but it's just too early beyond the obvious items to comment much on next year.
Okay. Thanks worth a try I appreciate it okay well. Thank you thanks, Steve.
That your next question today is coming from Courtney components from Morgan Stanley. Your line is that life.
Hi, Thanks, guys.
You can just comment a little bit more on on the guidance that <unk> revenues would be similar to three cute relative to cancel it would be strength based on the international market.
First is you know the increases that were expecting in North America. If you could just and and help us understand that and then relative to what you were expecting in in parts relative to tension type things.
So the strengths and international marked I'll be eating flattened all down with a China, but it really wasn't any strength.
<unk> elsewhere in terms of year over year growth that was studied recovery in some markets, but any part of our business touched China, whether within the components business, even though a construction business within the engine business.
Data center older power systems was anything that touched China was pretty much hope you had it over a year and so that's really what drove flat international revenues for the quarter. It's typical caught me that we see some seasonal weakening going into the third into the fourth quarter every year and.
China. So we still expect relative to pry, you, you're strong demand, but weaker sequentially, primarily impacting the components business since all of them pretty much all of their revenue was consolidated and to a lesser extent.
The engine business so that.
Primary market wherever expecting some seasonal declines and then yeah production Bill of rights I think are largely set for the fourth quarter and then yes on Pops, what we saw in the second quarter was particularly some weaker demand and bus and the bus market.
Tops.
A newer model heavy duty truck was stable in the in the third quarter and we expect steadily.
Steadily improving pumps demand in subsequent quarters.
The big factors really China, Reesing and get you know.
Expecting rapid.
Further acceleration and fucked him on right now.
Okay.
Thanks for the next question is pain from Jamie Cook from Credit Suisse. Your line is that life.
Hi, Good morning, Nice corner I guess two questions first the margins in the distribution business.
You know improved again in the third quarter. So can you talk about how to think about those margins longer term sort of white stripe Charles based on some of the internals South help you guys have been implementing and then my second question Mark understanding you guys are always conservative, but you are sitting with 3 billion or selling cash so.
How do you think about cash flow for the year, what's what's the right number at what 0.2 or do we start to thinking about putting that cash T. S. Thanks.
Good.
So you're right and I'll I'll start I am distribution, Tony if you wanted to challenge because we have had a very focused effort, particularly in North America.
On driving margin improvement a lot of it's coming out of the cost side of the business. This year's would be pleased with the progress. This year. Jamie I think then you know then we're really looking to see you know is pops in service, which you know have been down.
More more than in prior cycle is due to the severity of the impact of Covid, how that recovers in future years. So I think we've.
We've made a lot of progress in the margin improvement over the last couple of years, we certainly expect to hang on to that and.
Then we'll be yeah.
Looking to build on revenue growth going forward.
To avoid given a specific tub Tony.
Yeah, I would just add Jamie.
Uhm revenue has been a little weaker in this downturn in D. B U that previous downtown so we've been really pleased with the cost performance in the restructuring and focusing going forward is gonna be on how do we see better revenue growth does that bagels comes back and how do we gained some sharon in the parts and service business in particular so.
What we're we're looking for more about how do we get that business back to a higher revenue level than necessarily trying to get margins.
Okay, but is there any reason to believe the margins construction really sort of be now and the double digit range and then he adjusted EBITDA basis.
That has been our goal that's why we said when we launched this transformation program. So that's what we're trying to do is keep them in the double digit level going forward. That's all go yep.
Okay do you market and then on your cash Dark go ahead, yeah. It's Tom I mean, just to make sure I get them you get the math right. So.
Our view is that we are already in double digits wall facing yes, we had some cost temporary cost measures that help but we had way more headwinds with regard did both.
<unk> and then parts and service declines so our view is that that we are on our plan despite pretty heavy headwinds. So we are not only feeling good about where we are but we are more confident than ever that we're gonna be in double digit margins.
From now forward so.
You can imagine some scenarios with with Covid that would make it so you might have a quarter to that weren't but.
Rodney sneaking our view is the restructuring stuff has gone better than I expected. So we as Tony said that with our target and you feel like we're ahead of target. So that's just that.
On the on the cache site I'll, let Marc Ah.
Feeling some more but I mean broadly speaking.
We we definitely acted conservatively from a balance sheet this year to protect ourselves against the worst potential outcomes.
Economic outcomes from the pandemic.
So we've showed up the balance sheet with our debt offering low cost financing or cash flow hasn't dramatically. So we feel we feel good about the positions the companies and expect.
Barring some some significant change in economic conditions to return to our cash flow plans that we've been operating under for many years. So our plan is to go back to returning.
As a normalized level half of our cash flow and dividends and and share buybacks. We still have to take all of that stuff for the board we have to finish our planning work for next year. There's a lot of work to do and of course, there are still a pandemic. So.
So, we'll keep watching and paying attention, but right now as we see it.
That's where we're headed Mark I don't know what you would add yes, I think we've made it clear we're not trying to hoard cash a little being cautious this year I think Tom's make it clear going forward.
Okay I appreciate the caller. Thank you.
Thank you. Our next question today is coming from Adam Omen from Cleveland Research. The line is not alive.
Yeah, Hey, guys. Good morning, I was hoping to get some perspective on heavy truck market I guess, we've we've seen a spike and spot rates and.
Orders have been soaring I guess I'm I'm, just wondering how sustainable you.
You think that is and you know most of your customers that are looking for a pretty aggressive sales growth in the next year I guess, maybe you can frame up.
Your thoughts on on how the cycle plays out from here that'd be helpful.
[noise] tone.
Yeah, [laughter], where I'll wait sorry, we're not together at it. So this is telling me yeah.
Yeah, it's been it's been very pleasing to see the growth, particularly in the last couple of months.
The thing to remember is that the virus is still with us and although we are very encouraged I also think we're very cautious about how the market is gonna play out next year.
I do think that there there is it a view that demand is higher the newer trucks and newer products are definitely working better we get really good feedback from customers.
And we got new products coming out next year that meet the latest greenhouse gas emissions for EPA 2021. So we're excited with the products we have an offer.
R O M customers are feeling pretty bullish but at the same time, there's a lot of uncertainty out there and so we're just we're trying to be prudent we're trying to keep our eye on all the things going on it and make sure that we are ready if things come in stronger and we're prepared if things all of a sudden.
Downtown So the main characteristic of this covid environment is unpredictably and volatility. So we're just trying to be ready for that as best we can.
Just say the other thing we look at is really the parts consumption because in prior cycle. This one may not be the same as prior cycle's been prior cycles without a pretty good run of accelerating pops consumption before the sustainably stepped up so that's something we're watching closely by segment and and market.
That should give you some indication from listen to the participants in the future quarters.
Okay Gotcha and then.
Mark the with with these new products coming out for 21, I guess my company's been benefiting from lower warranty expense and there's some structural actions going on there.
Should we expect a pause and and lower warranty expense next year or do you think we have more legs lower execute on your strategic initiatives. Thanks.
Thanks have a really good question I think.
On the one end of course would always drive into more improvement, but I would say about expenses at 1.81919% of sales, but this year have really run the low expectations and the principal drivers of the warranty performance.
Field performance of existing products.
<unk> campaigns, and then over a longer period of time changing emissions regulations and then the launch of new product launch you're right launch of new products will continue we took the can start those with higher wonky rates and this year.
The number of field campaigns has been below normal. So we would expect even some kick up a in the fourth quarter and yes.
Probably shouldn't be looking in 1.8% for now.
I run right. So yeah, we will provide you with an update on that when we get into next year.
Pick up from here, what should we expect would even expected something this quarter.
But that's that's where we are right now.
Uh-huh.
Thanks.
Thank you for next question today is coming from jolted from BMO capital markets. Your line is not alive.
I have to tell you guys.
Hi, Joel.
I wanted to Tony are are okay can you talk a little bit about any product lines that have been like systematically challenged and I'm thinking you over a couple of years not just because of this and and any areas that you could you know like do product lines simplification and reduce some of that exposure to.
To drive the gross margins higher or or you are always doing that and there's nothing that really stands out.
Hey, Joe I'll go first I think we did some of that last year actually ended.
Ended production of one of our engine platforms in the pick up market in North America, which not only.
We took a.
Charge. This time last year, but that's also improved our operating performance year over year, and similarly, and one of the transmission lines of business. So yeah. We're always looking at things like that but I would say don't see any major changes like that but there's always some opportunity to trim improve and improve.
None of them.
And I Wonder if you can talk about the M&A environment out there and and what you guys are focused on is is that is everything so disrupted that it's it's not the right time to be to be looking or maybe because things are disrupted there are some unique opportunities and what areas would you be thinking about.
Thank thank.
Tom I can step in on that I mean.
For sure in the second quarter, we were on pause a little bit making sure that our balance sheet was short out that with all the potential outcomes. We we took a pause.
But things as I mentioned to Jamie's question, I think things have begun to normalize at least economically to a place where we feel pretty secure in our balance sheet and we're we're looking at.
Restarting our cash flow return and we will of course, we have it continued actively looking at the strategic areas, where acquisitions it'd be interesting to US you probably wrote call from.
Our previous calls or Investor day that we kind of start with strategy first.
Acquisitions second so we think through what are the areas that we'd like to expand in and we've talked about those before but they they all of the areas, where we feel like our competitive advantages the things that we bring in terms of technology global footprint.
Fly chain that sort of thing.
Help us move forward and then of course, our new technology areas, the acquisitions I could deal with hydrogen X.
And the batteries battery companies those were to add new capabilities. So we're continuing to look in those same areas I think maybe the one comment I would make.
I said I expected given the disruption for evaluations to be lower today. So I was kind of like the basis of your question I expected.
May be destruction would cause valuations to drop out a little bit that's actually not happen. So much it doesn't mean that it won't happen, but but.
Maybe because the private equity dollars are so large, but I would say as we look around.
Using.
One method to look at what acquisition could mean for our company.
The acquisition prices relatively lofty.
So we will continue to look and we're continuing to talk to people and and look for the right thing, but we will just will remain disciplined and look for the right things at the right price and we find it will act and if we don't we'll we'll return more caches here just seconds.
Alright, Thank you very much.
Baker next question is coming from Jerry ravaged from Goldman Sachs. Your line is that a lot.
Oh, you sound good morning, a room.
Right.
Yeah.
Tom number the number of your customers so sharpen their pencils at least publicly on their hygiene nangle turn the vehicle strategies.
Are they any closer to allocating lower volume diesel engine product clients to you.
Can you talk about.
If you can which regions are which product lines you see the most potential for you folks.
Add value for customers have had lower volumes in those areas.
Jerry Here's the thing I would say that every customer that we're talking to is doing exactly the pencil sharpening calculations that you talked about it it's a really different environment than it was 10 or 15 years ago.
Where the calculations, where maybe the opposite about had it backward integrate more mostly what I hear is may be back with an a great less but that said.
There's no deal to others a deal alright, so so again.
I can't really pre announce or suggest anyone who's gonna go because they are tough that they are difficult decisions for them.
To figure out what they want to continue and what they don't I feel very optimistic that will play an increasing role with our major customers on.
Selling them more diesel engines, providing them more components technology in the future than the past so I expect market share increasing in the future based on the fact that they will decide that their money's based.
Best spent elsewhere, exactly where and when again I just can't get ahead and my customers on those conversations, but we're talking with everybody about it we're excited about it and you know they.
We have a lot of strategic considerations to make.
As do we so these these conversations are complicated and.
And take time, but anyway, we're in it for sure and we're in.
Confident that we will win increase sure.
Okay I appreciate the color and market is look at the fourth quarter sales outlook flattish sales you know normal seasonality is closer to up 7% sequentially.
You mentioned, China, but obviously North America in other regions are accelerating so I'm just wondering.
Are you expecting a slowdown versus normal humanity or is it the sort of situation, where look where could get hit by the second wave and we don't want to get into a situation, where if it's worse, where we're missing numbers.
Some conservatism and there are other pieces that you are legitimately concerned with.
Yeah, the numbers will be what the numbers will be Jerry I mean, we've been very focused on cost and then Tony in the team on this incredible run back up again, but what I said, let's just use the pickup truck market example, if you'd just stirred Q3 in isolation you would see that that's in the top 10 quarters in history, a pick up truck engine demand.
But if you do look back queue to you would say zero right. So you just can't normalize everything that happened in Q3, and say flat means everything's flat. So I think there's some it'll be some rebalancing in some markets.
But again.
We'll see what it is I will focus is on coston delivery and then deliver in the calendar results that go with whatever evolves.
We're throwing up and Gerry is Tony says we are encouraged by the truck market. I mean, you know as you guys have said to us.
The all of our customers are projecting.
Projecting stronger volume, which is great for us so yes.
Yes, we're always cautious because that's how we live but nonetheless, we are encouraged by their comments and they are very close to the market. They are watching their fleet customers and what they're ordering and we're hearing good things from the fleets too. So yeah. We are very encouraged in China, while we expect seasonal demand, we don't expected a gigantic drop off and you can expect.
Seasonal demand normal.
It's just the thing is flying so high now that that again, we just remained cautious so just don't hear from US discouragement. We are the markets are going well and we're we're surprised and pleased by how strong. They are and were encouraged by those were just trying to make sure that we balance our enthusiasm with the cautious.
Attitude that appropriate for a global pandemic.
Okay. Thank you.
HM.
Thank our next question today is coming from David results from Evercore Iron fire lines not alive.
Hi, Thank you Yeah my questions on and your margins for next year, just thinking about the framework, Tom and giving you a China comments just now.
I'm trying to square up it looks like next year, you have sort of a sweet spot of strong growth, but not yet at those.
Extremely high levels were sometimes there is inefficiency serving the domestic truck market.
So on a consolidated margin basis I'm, just curious how you think about.
The margin structurally versus say 2019, just some sense of while we might not get back to those revenues.
Or the domestic margin set up in a way where they could be can be a little closer to 19, then then otherwise give them a bit of a sweet spot.
Then within the segment you do have the JV income, which is a big contributor and thus maybe if you could share your initial views on 21 for China.
And that.
That business is debatable, if it's up to not next year. So I'm just I'm appreciate your thoughts for for an early framework on 21 engine margins.
Well within China, there are a number of moving parts David <unk>.
Well, we'll add to the complexity expecting our biggest step up in the penetration of internet fixed products, what that will happen to demand take up is all to be figured out.
So yeah, we're not in a position right now to give you 2021.
Q3 margins, where a higher than normal.
For a couple of other factors that we've we've laid out, but which will still going throw a planning cycle. So next year as we speak so now as we speak but after we speak it will be back on that again here. Shortly so it's just it's just too early to say given everything that's going on but I would just say we are very pleased with the performance of the engine business.
On the fact that we're able to deliver strong margins.
And this is very very challenging environment and I think it speaks to the strength of the global franchise and the scale. We've got multiple markets, obviously, North American China primary, but yeah, we're not we're not ready to give guidance and actually I. Appreciate you asking we'll look forward to giving an update with queue for those things.
Would you mind, just so I can clarify they're just given a whole high China's today.
Maybe you don't want to predict the industry I'm curious and you've given some numbers in the past, but now we're a little bit closer the incremental content. Some of the opportunities are idiosyncratic to the company.
If there is a thought that you know China's bombs are so high this year, they're down next year, but maybe have some self help offsets can can you give us some framework as we discussed in the past, but now closer to it.
What kind of people potentially framework revenue impact you should see that is from better NSX content or increased penetration with photon and so forth can can you help us a little bit just frame it yeah.
Yeah, I'll I'll just make a couple of comments and then James can give you some numbers, but I think it's kind of a couple of dynamics. One so there's the potential of the expectation of higher content for the components business on a consolidated revenue basis as the emissions regulations, a rolled out that's kind of a given given that we saw.
We specify I think after treatment systems are an integral part of our agent system design changes will give you the numbers in a moment. We hope then as we move into these more advanced machines regulations that we can continue to pick up shall we say like I went on a six products that they will receive an hour penetration of photons already been really accelerating.
Over the last couple of years, we're ready to 80%.
Encourage you to see photons, we can picking up some shelves as well. So yes, we are optimistic about if we set aside the market, which of course markets to drive earnings as well, but our position and our ability to watch at self help then and James you cannot be quantified the revenues yeah.
And David from arisen.
The impact of that we've talked broadly before both between the emissions content in China and in India.
That'll be roughly $600 million of incremental revenue and that primarily hits are components segment. In addition to that Tom mentioned in his remarks.
Excitement about the endurant transmission that were selling a thousand units off in the second half of this year will see continued growth of that product in China next year, which will provide customers was even improve fuel economy, hopefully to more market share games. So I think that was also some self help us into 2021.
David.
David This is John as you kind of think through the model.
The the numbers for this year are so high on the truck market.
This is what mark saying that right now, it's just hard for us to do that the weighing of one or the other because we know what the content is we know with one to share with we even have forecast for.
How we think it converts over to.
Six and what what growth, we see and transmissions. The challenges just what's the overall market going to be and we were wrong. This year I mean, just to say it straight out we had pretty pretty.
Balanced assumptions about how well this year would be and we've been wrong every single quarter on the low side, it's been better than every single corner. So.
That's why we're just a little gun shy about doing the overall balance for you we will do it of course.
When we get done with fourth quarter earnings, but I just would say that we are hopeful that we can offset a.
Downturn with a lot of these other content pieces, but it just depends on how big the the slope down it.
Yeah, I mean, that's what's interesting done I mean, historically your order book could be accelerating and every time on the call you Wanna say, well, Chinese whom slowdown it and a lot of times it it doesn't and I Miss your environment, you know I'm Gonna say, we're at such a high level and you've seen Volvo and so forth you know I'm ready forecast, China down next year betting man with a satellite well known Tom says truth, when he moved to China just trying.
Be cautious with it and we'll be hearing today baseline Oh, it's definitely down it seems like and what you are saying enough internally when your own opportunities.
It's still an open question, which item, it's a little more positive them and I would've thought so yeah, you are right about again so.
David He is an open question and I appreciate your comments and I do acknowledge that I have been calling it down more than it has been.
Just take that one another cost estimate.
I can set that.
Does that hasn't been right and so anyway I think it's a good it's a good point you're right.
I appreciate it thank you.
Take our next question today is coming from and Diamond from J P. Morgan you ladies that live.
Yeah, Hi, I'd like to go back to Q4, I mean, you have guided to revenue slapdash quarter over quarter, you call that then 90 million in a higher compensation expenses.
Mentioned, and perhaps warranty costs coming back up could you talk about some of the positives and negatives that we ought to consider beyond those are quantified maybe the warranty impact.
As we head into the queue for just so we don't assume that EBITDA is flat also minus the 90 million what else should be taken into consideration.
Yeah, I mean, there's really there's.
Really three main things.
You've got the 90 million, it's likely that some increase in the warranty expense in the fourth quarter and then as I said in my prepared remarks.
<unk> Trudeau pillow variable compensation in the third quarter.
To catch up for a higher expectation. So I think it's unlikely now that will be showing up again in the fourth quarter.
Are you the you can come.
Despite all the comments just past.
Yeah direction, I would expect that still be a little bit later in.
I noticed based on seasonality is still very strongest typically a year over here, but just just weaker into the fourth quarter. So those are those are really the big moving parts and other than the vulgar human we've converted that well when we have received this year, yeah, and we hope the volume being higher in the in North America truck market is is.
Net positive towards.
Incremental margins too it's a good.
It's a good market for us we're operating at a recently efficient level, especially given all of the challenges is covid. We're operating at a good level on North American truck market. So we're hopeful that that how also helps.
Okay, and I think you mentioned alcohol distribution.
It's aftermarket weren't to continue to accelerate that should be a positive for mix also is that a fair statement.
It is a first statement and it.
Who would benefit you know number of businesses, but particularly distributions yeah.
Okay. Thank you I leave it there I've lost my other questions are answered I appreciate it.
Then.
Thank you for the next question is coming from Ross Gilardi from Bank of America. Your line is that life.
Hi, good morning, guys.
Hi, how are you.
Great. Thank you look clearly or your overall results are very strong and very impressive I realized it engines for mining and energy or not.
Big parts of your company any more so sorry to focus there I missed the strong quarter, but but wanted to get your perspective on those two and markets and I think you said <unk>.
Meaning engine shipments were down 39% was that actually worse in the second quarter you mentioned cole.
And are you starting to view mining or energy has more structurally challenged and markets for comments or is this just a cyclical downturn like prior downturns and you're just beyond that is there any real hope for a real pick up and either mining or energy and 2021 or did these businesses potentially get worse or just kind of flatline.
Low level before they get better.
But James will do the numbers for you just to confirm first of all of them are also on the mining engine sales side. As you mentioned third quarter revenues were very similar to second quarter and mining overall and as you mentioned, we continue to see relatively stable demand and miners that are going to be focused more.
More on iron or copper and continued weak demand Milan, Nicole side of things, but we were flat sequentially on the mining revenues.
And oil and gas was the minimum yes oil and gas very to minimize so sales in North America at this point on the oil and gas side for new engines, almost nothing and we've also continue to see very weak demand in oil and gas markets in relation to rebuilds.
Really kind of highlighting the fact that there are risks that are not currently being utilized in the market.
And Ross, maybe just stepping back I would just say that from a mining point of view I don't think we see it as a structurally challenge market.
Well, it's challenged in the following him there tends to be overshot and undershot a lot in the market you know that well and you know a lot of mining companies overshot by a lot in the last cycle and really got knocked back hard and so needless to say, they're all being careful not overshooting now which has nine.
That that equipment buying has been more muted even in good markets than it was in the previous cycle. So our expectation of of the cycle was that it wasn't going to be as good as the last one and sure enough. It hasn't been at all and of course just general.
Economic demand being dampened.
Confidence in future demand being dampened by the pandemic has meant that mining is indeed slow and I think it really won't get a lot stronger until there's confidence built in global economic growth, which means the end of the pandemic.
I, just don't see a way that it changes energy as a whole another.
<unk>, an energy has a lot more structural challenge to it but I'm not the right one to answer it as you say, we have a participation they're not a huge one.
And so I think it's better for someone else to comment on that but but it looks more structurally challenged to meet and then some of the other markets.
Okay. Thank you.
Okay, great. Thank you I think with with that.
Sorry.
We have a lot of the floor back over to you for any further or closing comments.
Great. Thank you for that.
So again I just wanted to say thanks to everyone for taking the time to call in today I appreciate that there's always and for your continued interest in comments that'll be available for any follow up questions. Here. This afternoon, and let me add my thanks to James I really appreciate your attention.
I'm, sorry that I did not invite my dog to this quarterly cause I've tried to include her on future calls, but it was it was nice to have a noise free call. Thank you very much for your attention.
Thank you. Thanks, everyone finds that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.