Q4 2021 Cummins Inc Earnings Call

Speaker 1: Greetings and welcome to Cummings' fourth quarter 2021 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation.

Okay.

Greetings and welcome to come in fourth quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference call is being recorded.

I would now like to turn the conference over to your host Jack Kinsler Executive Director of Investor Relations. Thank you you may begin.

Speaker 2: Thank you. Good morning everyone and welcome to our teleconference today to discuss Cummins results for the fourth quarter and full year of 2021.

Thank you good morning, everyone and welcome to our teleconference today to discuss Cummins results for the fourth quarter and full year of 2021.

Speaker 2: Participating with me today are our Chairman and Chief Executive Officer Tom Leinbarger, our President and Chief Operating Officer Jennifer Rumsey, our Chief Financial Officer Mark Smith, and our Corporate Controller Chris Colullo. Mark is dealing with a bit of a cough today, so Chris is going to read his remarks this morning. We will all be available for your questions.

Participating with me today are our chairman and Chief Executive Officer, Tom Linebarger, Our President and Chief Operating Officer, Jennifer Ramsey, Our Chief Financial Officer, Mark Smith, and our corporate controller, Chris cooler.

Mark is the only with a bit of a cost today. So Chris is going to read his remarks. This morning.

We will all be available for your questions at the end of the teleconference.

Speaker 2: 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 meeting of the Securities Exchange Act of 1934.

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 Exchange Act of $19 34.

Speaker 2: Such statements express our forecasts, expectations, hopes, beliefs, and intentions on strategies regarding the future. Our 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 statement in the slide deck and our filings with the Securities and Exchange Commission.

Such statements express our forecasts expectations hopes beliefs and intentions on strategies regarding the future our 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 statement in the slide deck and our filings with the Securities and Exchange Commission.

Speaker 2: 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 .

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 .

Speaker 2: During the course of this call, we will be discussing certain non-GAAP financial measures and we refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website at www.commons.com under the heading of Investors in Media.

During the course of this call we will be discussing certain non-GAAP financial measures and we refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website at www Dot Cummins dot com under the heading of investors and media.

Speaker 3: Without out of the way we will begin with our chairman and CEO . Tom. Thank you Jack and good morning everybody. Before I jump into our results though I do want to welcome Chris Kulotu, our investor relations function. So yes he is our corporate controller but he is replacing Jack as the head of the investor relations function soon. And so Chris has been with the company for 18 years. He's gained valuable leadership experience and roles across the finance organization.

With that out of the way, we will begin with our chairman and CEO Tom.

Thank you Jack and good morning, everybody before I jump into our results, though I do want to welcome Chris <unk> to our Investor Relations function. So yes. He is our corporate controller.

He is replacing Jack is ahead of the Investor relations function soon and so Chris has been with the company for 18 years. He has gained valuable leadership ship experience in roles across the finance organization.

Speaker 3: During his career journey, Chris has served as the controller of the engine and components businesses while also playing a key role in development and strategy.

During his career journey, Chris has served as the controller of the engine and components businesses. While also playing a key role in development and strategy.

Speaker 3: Chris has served as the corporate controller for the last five years and has a deep understanding of our business and our financial performance.

Chris has served as the corporate controller for the last five years and has a deep understanding of our business and our financial performance. He will be a terrific addition to the Investor Relations team and we will continue jacks efforts to improve communications with investors to make sure that you have the insights and understanding you need of our business and our financial condition.

Speaker 3: He'll be a terrific addition to the investor relations team and will continue Jack's efforts to improve communications with investors, to make sure that you have the insights and understanding you need of our business and our financial condition, and to work with our managers across the company to ensure that they understand what investors expect of us.

And to work with our managers across the company to ensure that they understand what investors expect of us.

Speaker 3: I'm grateful to Jack for his contributions to investor relations and excited for him about his new opportunity serving as the finance leader for our filtration business. Thank you Jack and welcome Chris.

Grateful to Jack for his contributions to Investor relations and excited for him about his new opportunity serving as the finance leader for our filtration business. Thank you Jack and welcome Chris.

Speaker 3: Now I'll start with a summary of our fourth quarter and full year results and our market trends by region and finish with a discussion of our outlook for 2022. Chris will then take you through more details of our fourth quarter and full year financial performance as well as our forecast for this year.

Now I'll start with a summary of our fourth quarter and full year results and our market trends by region and finish with a discussion of our outlook for 2020 to Chris.

Chris will then take you through more details of our fourth quarter and full year financial performance as well as our forecast for this year.

Speaker 3: Strong economic recovery, combined with high demand for our products, resulted in record full-year revenues in 2021. On the other hand, our industry continues to experience significant supply chain constraints, driving elevated manufacturing, logistics, and material costs, and resulting in margins below our expectations, particularly in the fourth quarter.

Strong economic recovery combined with high demand for our products resulted in record full year revenues in 2021 on the other hand, our industry continues to experience significant supply chain constraints, driving elevated manufacturing logistics and material cost and resulting in margins below our expectations.

Particularly in the fourth quarter.

Speaker 3: We've taken a number of actions to significantly improve our margins in 2022 and expect to generate strong incrementals through increased pricing.

We've taken a number of actions to significantly improve our margins in 2022 and expect to generate strong incrementals through increased pricing.

Speaker 3: as well as surcharges, combined with cost reduction initiatives in our supply chain and operation.

As well as surcharges combined with cost reduction initiatives in our supply chain and operations.

Speaker 3: Having effectively managed through a challenging 2021, we expect improved performance in 2022 and our well-positioned to invest in future growth while continuing to return cash to shareholders.

Having effectively managed through a challenging 2021, we expect improved performance in 2022 and are well positioned to invest in future growth, while continuing to return cash to shareholders.

Speaker 3: The decarbonization of our economy is critical to our way of life and our industry.

The decarbonization of our economy is critical to our way of life in our industry and excuse me and and all of us and it will in our industry will play a key role in the effort to Decarbonize our economy.

Speaker 3: and all of us, and our industry will play a key role in the effort to decarbonize our economy.

Speaker 3: Fortunately, decarbonization is also a growth opportunity for comments.

Fortunately de Carbonization is also a growth opportunity for Cummins, we are confident in our ability to play a leading role in bringing lower carbon technologies to the commercial and industrial markets globally and to generate strong returns due to the unique capabilities that come into us built over many years specifically.

Speaker 3: We are confident in our ability to play a leading role in bringing lower carbon technologies to the commercial and industrial markets globally and to generate strong returns to the unique capabilities that come into this built over many years.

Speaker 3: We're a leader in key technologies for zero tailpipe emissions in commercial and industrial applications, and are investing further to strengthen our position. We're also a leader in the transition technologies that will be needed in our industry for many, many years. Technologies that lower carbon emissions while still offering customers economic solutions and hard to abate applications.

We're a leader in key technologies for zero zero, tailpipe emissions and commercial and industrial applications and are investing further to strengthen our position.

We're also a leader in the transition technologies that will be needed in our industry for many many years technologies at lower carbon emissions, while still offering customers economic solutions and hard to abate applications.

Speaker 3: We also have existing relationships with leading OEMs and customers around the globe, and are continually forming new partnerships with market leaders in a variety of industries.

We also have existing relationships with leading Oems and customers around the globe and are continually forming new partnerships with market leaders in a variety of industries. These relationships bring us visibility to opportunities and product plans.

Speaker 3: These relationships bring us visibility to opportunities in product plans.

Speaker 3: They drive economies of scale and production and service, and they provide the trust of those making key purchase decisions. We have a deep knowledge of our end markets and applications, each of which has unique technical and performance service and service demands. We know how to adapt existing and new technologies into our products, into products, excuse me, that customers can actually use and operate economics.

They drive economies of scale in production and service.

And they provide the trust of those making key purchase decisions.

We have a deep knowledge of our end markets and applications each of which has unique technical and performance service to end service demands.

We know how to adapt existing and new technologies into our products into products excuse me that customers can actually use and operate economically.

Speaker 3: We are building a combination of businesses that have both the capability to serve the industry and the agility necessary to quickly pivot our product offerings depending on changes in regulations or infrastructure, advancements in technology, and end-user preference.

We are building a combination of businesses that have both the capability to serve the industry and the agility necessary to quickly pivot our product offerings, depending on changes in regulations or infrastructure advancements in technology and user preference.

Speaker 3: We have invested significantly to attract and build the best talent and to create an environment for innovation and long-term success that will increase shareholder value.

We have invested significantly to attract and build the best talent and to create an environment for innovation and long term success that will increase shareholder value.

Speaker 3: As a result of the successful execution of our strategy over many years, we are also in a very strong financial position, which allows us to make the sustained investments required to transition our industry to a zero-carbon future, while navigating economic cycles and returning excess cash to shareholders.

As a result of the successful execution of our strategy over many years. We are also in a very strong financial position, which allows us to make the sustained investments required to transition our industry to a zero carbon future, while navigating economic cycles, and returning excess cash to shareholders.

Speaker 3: We're excited to tell you more about our long-term strategy during our analyst day later this month.

We're excited to tell you more about our long term strategy during our analyst day later this month.

Speaker 3: Revenues for the fourth quarter of 2021 were $5.9 billion, which is flat compared to the fourth quarter of 2020, as increased demand in many over international markets was offset by decline in North American sales, as our customers worked to clear their production backlog.

Revenues for the fourth quarter of 2021 were $5 9 billion.

Which is flat compared to the fourth quarter of 2020 as increased demand in many of our international markets was offset by a decline in north American sales as our customers work to clear their production backlog.

Speaker 3: EBITDA was $705 million or 12.1% compared to $837 million or 14.4% a year ago.

EBITDA was $705 million or 12, 1% compared to $837 million or 14, 4% a year ago.

Speaker 3: EBITDA decreased as a percentage of sales due to the elevated material and supply chain costs we continue to experience. These impacts were partially offset by lower product coverage costs.

EBITDA decreased as a percentage of sales due to the elevated material and supply chain costs. We continue to experience. These impacts were partially offset by lower product coverage costs.

Speaker 3: For the full year, common sales were $24 billion. Up 21% year over year, and a record for our company. Our EBITDA margins were $3.5 billion, or 14.7% of sales compared to $3.1 billion, or 15.7% of sales in 2020.

For the full year <unk> sales were 24 billion.

Up 21% year over year, and a record for our company. Our EBITDA margins were $3 5 billion or 14, 7% of sales compared to $3 1 billion or 15, 7% of sales in 2020.

Speaker 3: higher supply chain and material expenses, as well as higher compensation expenses, more than offset the benefits of higher volume, higher joint venture income, and lower product coverage expense compared to 2020.

Higher supply chain and material expenses as well as higher compensation expenses more than offset the benefits of higher volume higher joint venture income.

And lower product coverage expense compared to 2020.

Speaker 3: Now cover the full-year trends across our key markets, beginning with North America, before moving to our international region.

Now I'll cover the full year trends across our key markets, beginning with North America before moving to our international regions.

Speaker 3: A revenues in North America increased 17% in 2021, primarily due to higher demand across on highway market.

Our revenues in North America increased 17% in 2021, primarily due to higher demand across on highway markets industry.

Speaker 3: industry production of heavy duty trucks increased 228,000 units, up 26% from 2020 levels, while our heavy duty unit sales were 85,000, an increase of 37% from 2020.

Industry production of heavy duty trucks increased 228000 units up 26% from 2020 levels, while our heavy duty unit sales were 85000, an increase of 37% from 2020.

Speaker 3: The market size for medium duty trucks was 115,000 units in 2021, an increase of 12% from 2020 levels, while our unit sales were 94,000, an increase of 21% from 2020.

The market size for medium duty trucks was 155 to 115000 units in 2021, an increase of 12% from 2020 levels. While our unit sales were 94000 increase of 21% from 2020.

Speaker 3: We shipped 159,000 engines to Chrysler for use in their Ram pickups in 2021, an increase of 27% from the previous year.

We shipped 159000 engines to Chrysler for using their Ram pickups in 2021, an increase of 27% from the previous year.

Speaker 3: Engine sales to construction, customers in North America increased by 50% as non-residential construction spending increased and rental companies increased capital spending.

Engine sales to construction customers in North America increased by 50% as nonresidential construction spending increased and rental companies increased capital spending.

Speaker 3: Engine shipments to high horsepower markets in North America increased by 13% from last year with higher demand from agriculture, rail and mining segments partially offset by decreased shipments to defense and marine customers. Power generation revenues increased 6% year over year driven by higher demand for standby applications again resulting from higher non-residential constructions.

Engine shipments to high horsepower markets in North America increased by 13% from last year with higher demand from agriculture rail and mining segments, partially offset by decreased shipments to defense and marine customers power generation revenues increased 6% year over year, driven by higher demand for standby applications.

Again, resulting from higher nonresidential construction spending.

Speaker 3: Our international revenues increase 27% in 2021 with higher demand in all markets.

Our international revenues increased 27% in 2021 with higher demand in all markets full year revenues in China, including joint ventures were $7 5 billion up 8% compared to 2020. The increased revenue was driven by record demand in the truck construction and data center market.

Speaker 3: Full year revenues in China, including joint ventures, were $7.5 billion, up 8% compared to 2020. The increased revenue was driven by record demand in the truck, construction, and data center markets, particularly in the first half of the year.

Particularly in the first half of the year.

Speaker 3: Industry demand for medium and heavy duty trucks in China was 1.6 million units, a decrease of 11 percent driven by decline in production in the second half of the year following a significant pre-by period ahead of broad and a six implementation in July

Industry demand for medium and heavy duty trucks in China was one 6 million units a decrease of 11% driven by a decline in production in the second half of the year. Following a significant pre buy period ahead abroad, and our six implementation in July .

Speaker 3: Our units sold, including joint ventures, were 249,000 units, a decline of 13%.

Our unit sold including joint Ventures were 249000 units a decline of 13%.

Speaker 3: The light duty market in China decreased 4% from 2020 levels to 2.1 million units, while our units sold, including joint ventures, were 150,000 units, a decrease of 21% as new regulations drove demand for smaller displacement engines.

The light duty market in China decreased 4% from 2020 levels to $2 1 million units, while our unit sold including joint Ventures were 150000 units a decrease of 21% as new regulations drove demand for smaller displacement engines.

Speaker 3: Industry demand for excavators set another record of 342,000 units in 2021 and increase of 4% from 2020 levels. Our units sold were 56,000 units and increase of 5%.

Industry demand for excavators set another record of 342000 units in 2021, and an increase of 4% from 2020 levels. Our units sold were 56000 units an increase of 5%.

Speaker 3: In our power systems markets, power generation sales in China increased 48 percent compared to 2020, driven by growth in key markets such as infrastructure, healthcare, and mobile power applications driven by the power shortage in the country. Industrial engine sales increased 18 percent from 2020 primarily driven by

In our power systems markets power generation sales in China increased 48% compared to 2020, driven by growth in key markets, such as infrastructure health care and mobile power applications driven by the power shortage in the country industrial engine sales increased 18% from 2020.

Primarily driven by strong mining demand.

Speaker 3: Folio revenues in India, including joint ventures, were $2 billion up 68%. Industry truck production increased by 76% in 2021, demand for construction and equipment increased by 55%, and power generation revenues increased 38% as the broader economy in India recovered off a very low base in 2020.

Full year revenues in India, including joint ventures were $2 billion up 68%.

Industry truck production increased by 76% in 2021 demand for construction equipment increased by 55% and power generation revenues increased 38% as the broader economy in India recover off a very low base in 2020.

Speaker 3: In Brazil, our revenues increase 46% driven by higher demand in most end markets.

In Brazil, our revenues increased 46% driven by higher demand in most end markets.

Speaker 3: Now let me provide our overall outlook for 2022 and then comment on individual regions and then March.

Now let me provide our overall outlook for 2022, and then comment on individual regions and end markets.

Speaker 3: We are forecasting total company revenues for 2022 to increase 6% compared to 2021. Driven by an increase in heavy duty and medium-duty truck production in North America, Europe and India, offset by China will we expect demand to moderate after a strong year in 2021.

We are forecasting total company revenues for 2022 to increased 6% compared to 2021.

Driven by an increase in heavy duty and medium duty truck production in North America, Europe , and India, offset by China, where we expect demand to moderate after a strong year in 2021, we.

Speaker 3: We expect demand for construction equipment to increase in North America and Europe and decline in China from record levels experienced in 2021.

We expect demand for construction equipment to increase in North America, and Europe and decline in China from record levels experienced in 2021.

Speaker 3: We are forecasting higher demand in global mining, oil and gas and power generation markets, and expect aftermarket revenues to increase by 10 percent compared to 2021.

We are forecasting higher demand in global mining oil and gas and power generation markets and expect aftermarket revenues to increase by 10% compared to 2021.

Speaker 3: Industry production for heavy-duty trucks in North America is projected to be 250,000 to 260,000 units in 2022, a 10 to 15 percent increase year over year.

Industry production for heavy duty trucks in North America is projected to be 250 to 260000 units in 2022, a 10% 15% increase year over year.

Speaker 3: In the medium duty truck market, we expect the market size to be 120,000 units.

In the medium duty truck market, we expect the market size to be 120000 units.

Speaker 3: or between 120 and 130,000 units, a 5 to 10 percent increase from 2021.

Or between 120 to 130000 units of 5% to 10% increase from 2021.

Speaker 3: We expect our deliveries in North America to continue to outpace the market as the end-bent engine partnerships we announced last year continue to phase in.

We expect our deliveries in North America to continue to outpace the market as the <unk> engine partnerships, we announced last year continue to phase in.

Speaker 3: Our shipment for pickup trucks in North America are expected to be down 5% compared to last year.

Our shipments for pickup trucks in North America are expected to be down 5% compared to last year.

Speaker 3: In China, we project total revenue, including joint ventures, to decrease 10% in 2021. We project a 30% reduction in heavy and medium-ditrupt demand, and a 5% reduction in demand in the light-duty truck market.

In China, We project total revenue, including joint ventures to decreased 10% in 2021.

We project, a 30% reduction in heavy and medium duty truck demand and a 5% reduction in demand in the light duty truck market. Indeed.

Speaker 3: Industry sales of excavators in China are expected to climb 30% from last year's record level.

Industry sales of excavators in China are expected to decline, 30% from last year's record levels.

Speaker 3: Despite the projected decline in China, we remain well positioned for continued outgrowth across our end markets in the region.

Despite the projected decline in China, we remain well positioned for continued outgrowth across our end markets in the region.

Speaker 3: Industry volumes of NS6 product will increase in 2022, as the new regulations are implemented more broadly.

Industry volumes of NSX product will increase in 2022 as the new regulations are implemented more broadly.

Speaker 3: We first launched engines to meet standard similar to NS6 in the United States 10 years ago. We have leveraged our knowledge in power-trained technologies along with China local customer and market requirements to develop a range of products for the Chinese markets that we expect to be highly competitive and well accepted by end-use.

We first launched engines to meet standard similar to NSX in the United States 10 years ago, and we've leveraged our knowledge in powertrain technologies, along with China, local customer and market requirements develop a range of products for the Chinese markets that we expect to be highly competitive and well accepted by end users.

Speaker 3: We continue to ramp production, expand our presence in automated manual transmissions, and have launched new natural gas platform, which will play an increasingly important role as a region moves towards a lower emissions future.

We continue to ramp production expand our presence in automated manual transmissions and have launched new natural gas platform, which will play an increasingly important role as the region moves towards a lower lower emissions future finally, we.

Speaker 3: Finally, we continue to build momentum in the new power space, adding partnerships and in-country capabilities to establish a leadership's position as the market develops.

Continue to build momentum in the new power space, adding partnerships and in country capabilities to establish a leadership position as the market develops.

Speaker 3: In India, we project total revenue, including joint ventures, to increase 10% in 2021. We expect industry demand for trucks to increase 20% this year.

In India, We project total revenue, including joint ventures to increase 10% in 2021.

We expect industry demand for trucks to increased 20% this year.

Speaker 3: We project our major global high horsepower markets will improve in 2022. Sales of mining engines are expected to increase by 10% in 2022 with greater demand, following continued strength and commodity prices.

We project our major global high horsepower markets improved in 2022 sales of mining engines are expected to increase by 10% in 2022 with greater demand. Following continued strength in commodity prices demand for new oil and gas engines is expected to increase by 25% this year.

Speaker 3: Demand for new oil and gas engines is expected to increase by 25% this year, albeit up a very low base, primarily driven by increased demand in North America.

Albeit off a very low base, primarily driven by increased demand in North America.

Speaker 3: Revenue in global power generation markets are expected to increase 5%. Driven by increases in non-residential construction spending.

Revenues in global power generation markets are expected to increase 5% driven by increases in nonresidential construction spending.

Speaker 3: In New Power, we expect full year sales to be approximately $200 million.

And new power, we expect full year sales to be approximately $200 million.

Speaker 3: We have a growing pipeline of electrolyzers, which we expect to convert to backlog, and be delivered over the course of the next 12-18 months. We will continue to deliver fuel cell systems for use in the European rail market and other adjacent markets as adoption gains momentum. We also expect to continue to provide fuel cells for truck applications this year, as more end users try out the new technology.

We have a growing pipeline of Electrolyzed offers which we expect to convert to backlog and be delivered over the course of the next 12 months to 18 months, we will continue to deliver fuel cell systems for use in the European rail market and other adjacent markets as adoption gains momentum.

We also expect to continue to provide fuel cells for truck applications. This year as more end users try out the new technology.

Speaker 3: We are continually innovating across our broad portfolio of power solutions, from diesel and natural gas, to hydrogen and other low carbon fuels, to fuel cells and battery electric options.

We are continually innovating across our broad portfolio of power solutions from diesel and natural gas to hydrogen and other low carbon fuels to fuel cells and battery electric options. We plan to provide our customers with the right technical solution for their application at the right time and to continue to be the leader in power for commercial.

Speaker 3: We plan to provide our customers with the right technical solution for their application at the right time and to continue to be the leader in power for commercial and industrial equipment.

On industrial equipment.

Speaker 3: We expect supply chain constraints to continue to impact our industry during the first half of 2022, driving inflation and elevated costs.

We expect supply chain constraints to continue to impact our industry. During the first half of 2022 driving inflation in elevated costs.

Speaker 3: We will continue to place a strong focus on managing costs and cash flow in our well-position to generate attractive incremental margins as constraints ease across our markets.

We will continue to place a strong focus on managing costs and cash flow and are well positioned to generate attractive incremental margins as constraints ease across our markets.

Speaker 3: In summary, we expect full year sales growth of 6% and EBITDA to be approximately 15.5% of sales.

In summary.

We expect full year sales growth of 6% and EBITDA to be approximately 15, 5% of sales we.

Speaker 3: We are projecting EBITDA as a percentage sales to increase versus 2021, primarily due to strong truck production in North America, increase pricing and surcharges, and the easing of supply chain can cost.

We are projecting EBITDA as a percent of sales to increase versus 2021, primarily due to strong truck production in North America.

Increased pricing and surcharges and the easing of supply chain costs.

Speaker 3: We anticipate profitability will be at the low end of our guidance range in the first half of 2022 as the industry continues to manage through supply constraints that are limiting production and adding incremental costs.

We anticipate profitability will be at the low end of our guidance range in the first half of 2022 as the industry continues to manage through supply constraints that are limiting production and adding incremental costs. We.

Speaker 4: We anticipate these costs will ease throughout the year driving stronger performance in the second half of the year. Now, let me turn it over to Chris, who will discuss our financial results in more detail. Thank you, Tom, and good morning, everyone. There are four key takeaways from my comments today.

We anticipate these costs will ease throughout the year driving driving stronger performance in the second half of the year.

Now, let me turn it over to Chris who will discuss our financial results in more detail.

Thank you Tom and good morning, everyone.

There are four key takeaways from my comments today.

Speaker 4: Global supply constraints continue to limit growth for our industry in the fourth quarter. Resulted in elevated freight and logistics, the logistic costs, and drove inefficiencies in our operations, negatively impacting markets.

Global supply constraints continue to limit growth for our industry in the fourth quarter resulted in elevated freight and logistics related logistic costs and drove inefficiencies in our operations negatively impacting margins.

Speaker 4: We've been experiencing supply-side challenges all year and saw further escalation in global freight rates in the fourth quarter.

We have been experiencing supply side challenges all year and saw further escalation in global freight rates in the fourth quarter.

Speaker 4: On a more positive note, underlying demand in many of our core markets remains strong, points to another record revenue year in 2022.

On a more positive note underlying demand in many of our core markets remained strong points to another record revenue year in 2022.

Speaker 4: Fourth quarter margins were below our expectations, and we have taken actions to improve in 2022, including pricing, surcharges, and a strong focus on cost reduction, which are reflected in guidance for this year.

Fourth quarter margins were below our expectations and we have taken actions to improve in 2022, including pricing surcharges and a strong focus on cost reduction which are reflected in guidance for this year.

Speaker 4: And lastly, we returned $2.2 billion to shareholders in 2021 in the form of dividends and sharey purchase.

And lastly, we returned $2 2 billion to shareholders in 2021 in the form of dividends and share repurchases.

Speaker 4: Now let me go into more details on the fourth quarter and fully your performance.

Now let me go into more details on the fourth quarter and full year performance.

Speaker 4: Fourth quarter revenues were $5.9 billion flat with a year ago.

Quarter revenues were $5 9 billion flat with a year ago.

Speaker 4: Sales in North America were down 4 percent, inhibited by supply constraints. In international revenues increased 6 percent.

Sales in North America were down 4% inhibited by supply constraints and international revenues increased 6%.

Speaker 4: Currently movements in aggregate did not have a significant impact on revenue.

Currency movements in aggregate did not have a significant impact on revenue.

Speaker 4: Furnings before interest in tax depreciation and amortization were $705 million, or 12.1% of sales for the quarter, compared to $837 million, or 14.4% of sales a year ago.

Earnings before interest and tax depreciation and amortization were $705 million or 12, 1% of sales for the quarter compared to $837 million or 14, 4% of sales a year ago.

Speaker 4: EBITDA decreased by 132 million versus the fourth quarter last year as higher freight, labor and material costs more than offset lower product coverage costs and the benefits of pricing.

EBITDA decreased by $132 million versus the fourth quarter last year as higher freight labor and material costs more than offset lower product coverage costs and the benefits of pricing actions.

Speaker 4: Gross margin of 1.3 billion or 22.5% of sales decreased by 44 million or 80 basis points.

Gross margin of $1 3 billion or 22, 5% of sales decreased by $44 million or 80 basis points.

Speaker 4: Lower product coverage expense in the benefits of higher pricing were more than offset by higher material and logistics costs.

Lower product coverage expense and the benefits of higher pricing were more than offset by higher material and logistics costs.

Selling administrative and research expenses increased by $86 million or 10% due to higher compensation costs, including higher variable compensation related to stronger full year 2021 earnings and program costs associated with future growth.

Speaker 4: To join venture income declined by $1 million, due to lower demand for trucks and construction equipment in China versus a year ago. Partially offset by strength in China power generation.

Joint venture income declined by $1 million due to lower demand for trucks and construction equipment in China versus a year ago, partially offset by strength in China power generation markets.

Speaker 4: Other income of 31 million increased by 7 million from a year ago.

Other income of $31 million increased by $7 million from a year ago.

Speaker 4: Net earnings for the quarter were $394 million, or $2.73 per diluted share, compared to $501 million, or $3.36 from a year ago. The effective tax rate in the quarter was 22.2%.

Net earnings for the quarter were $394 million or $2 73 per diluted share compared to $501 million or $3 36 from a year ago.

The effective tax rate in the quarter was 22, 2%.

Speaker 4: Operating cash flow in the quarter was an inflow of $732 million, $410 million lower than the fourth quarter last year.

Yes.

Operating cash flow in the quarter was an inflow of $732 million $410 million lower than the fourth quarter last year.

Speaker 4: Lower earnings and higher working capital contributed to the decline in cash generation.

Lower earnings and higher working capital contributed to the decline in cash generation.

Speaker 4: For the full year 2021, revenues were a record $24 billion, an increase of 21% or 4.2 billion from a year.

For the full year 2021 revenues were a record $24 billion, an increase of 21% or $4 2 billion from a year ago sale.

Speaker 4: Sales in North America increased 17% and international revenues increased 27%. Currency movements positively impact-

Sales in North America increased 17% and international revenues increased 27%.

Currency movements positively impacted revenues by 2%.

Speaker 4: Earnings before interest in tax depreciation and amortization were $3.5 billion, or 14.7% of sales for 2021, compared to $3.1 billion, or 15.7% of sales a year ago.

Earnings before interest and tax depreciation and amortization were $3 5 billion or.

There were 14, 7% of sales for 2021 compared to $3 1 billion or 15, 7% of sales a year ago.

Speaker 4: EBITDA declined as a percent of sales primarily due to elevated supply chain and material costs and higher compensation expense.

EBITDA declined as a percent of sales, primarily due to elevated supply chain and material costs and higher compensation expenses.

Speaker 4: which more than offset the benefits of higher volumes, higher joint venture income, and lower product coverage expense.

It's more than offset the benefits of higher volumes higher joint venture income and lower product coverage expense.

Speaker 4: Net earnings were $2.1 billion or $14.61 per diluted shares. This compared to $1.8 billion or $12.1 per diluted share a year ago.

Net earnings were $2 1 billion or $14 61 per diluted shares this compared to $1 8 billion.

$12 <unk> per diluted share a year ago.

Speaker 4: Full year cash from operations was $2.3 billion, down from $2.7 billion a year ago. Higher working capital was the primary driver of the lower cash generation.

Full year cash from operations was $2 3 billion down from $2 7 billion a year ago higher working capital was the primary driver of the lower cash generation.

Speaker 4: Capital expenditures in 2021 were $734 million, up 206 million from 2020, when we re-prioritized and reduced our plans in the face of extreme uncertainty.

Capital expenditures in 2021 were $734 million.

Up $206 million from 2020, when we re prioritized and reduced our plans in the face of extreme uncertainty.

Speaker 4: We return to $2.2 billion of cash to shareholders or 98% of operating cash flow in the form of share purchases in dividends in 2021.

We returned $2 2 billion of cash to shareholders or 98% of operating cash flow in the form of share repurchases and dividends in 2021.

Speaker 4: In the fourth quarter, our board of directors authorized the repurchase with up to $2 billion in shares of common stock upon completion of the company's 2019 $2 billion share repurchase program, reinforcing the company's commitment to deliver strong returns to shareholders and confidence in long-term performance.

In the fourth quarter, our board of directors authorized the repurchase of up to $2 billion in shares of common stock upon completion of the company's 2019 $2 billion share repurchase program.

Reinforcing the company's commitment to deliver strong returns to shareholders and confidence in long term performance.

Speaker 4: Moving on to the operating segments, I will summarize their 2021 results and provide our forecast for 2022.

Moving on to the operating segments I will summarize our 2021 results and provide our forecast for 2022.

Speaker 4: For the engine segment, 2021 revenues increase 24% from a year ago, while earnings before interest taxes depreciation and amortization.

For the engine segment 2021 revenues increased 24% from a year ago, while earnings before interest taxes depreciation and amortization.

Speaker 4: decreased from 15.4% to 14.2% of sales. As the impact of supply side costs, more than offset the benefits of higher volume.

Decreased from 15, 4% to 14, 2% of sales as.

As the impacts of supply side costs more than offset the benefits of higher volumes.

Speaker 4: In 2022, we expect revenues to be up 7%. The increase in sales is primarily driven by an increase in heavy duty and medium duty truck production in North America and higher aftermarket revenues in North America.

In 2022, we expect revenues to be up 7%. The increase in sales is primarily primarily driven by an increase in heavy duty and medium duty truck production in North America, and higher aftermarket revenues in North America.

Speaker 4: 2022 EBITDA is projected to be approximately 15.5% compared to 14.2% of sales in 2021.

2022, EBITDA is projected to be approximately 15, 5% compared to 14, 2% of sales in 2021.

Speaker 4: The benefit of higher volumes, increased pricing and lower logistics costs are expected to more than offset lower joint venturing.

The benefit of higher volumes increased pricing and lower logistics costs are expected to more than offset lower joint venture income.

Speaker 4: In the distribution segment, revenues increased 9% from a year ago to $7.8 billion. Earnings before interest, taxes, depreciation, and amortization increased as a percent of sales to 9.4% compared to 9.3% of sales a year ago.

In the distribution segment revenues increased 9% from a year ago to $7 8 billion earned.

Earnings before interest taxes, depreciation and amortization increased as a percent of sales to nine 4% compared to nine 3% of sales a year ago.

Speaker 4: We expect 2022 distribution revenues to be up 11% compared to 2021. The increase in revenues primarily driven by stronger aftermarket demand.

We expect 2022 distribution revenues to be up 11% compared to 2021, the increase in revenues, primarily primarily driven by stronger aftermarket demand.

Speaker 4: EBITDA margins are expected to be approximately 10% compared to 9.4% of sales in 2021, primarily due to higher volumes and increased prices.

EBITDA margins are expected to be approximately 10% compared to nine 4% of sales in 2021, primarily due to higher volumes and increased pricing.

Speaker 4: Component segment revenues increase 27% in 2021. While earnings before interest taxes depreciation and amortization decrease from 16% of sales to 15.4%. Its higher material, logistics, and compensation it expenses more than offset the benefits of stronger volume.

Component segment revenues increased 27% in 2021, while earnings before interest taxes, depreciation and amortization decreased from 16% of sales to 15, 4%.

Higher material logistics and compensation expenses more than offset the benefits of stronger volumes.

Speaker 4: This year we expect revenues to increase 4%, primarily due to higher industry truck production in North America, offsetting weaker demand in China.

This year, we expect revenues to increase 4%, primarily due to higher industry truck production in North America.

Offsetting weaker demand in China.

Speaker 4: EBITDA margins is projected to be approximately 16% compared to 15.4% of sales in 2021. Primarily do the stronger muff volumes, increase pricing, and some efficiency gain.

EBITDA margins is projected to be approximately 16% compared to 15, 4% of sales in 2021, primarily due to stronger volumes increased pricing and some efficiency gains.

Speaker 4: In the power system segment, revenues increased 22% in 2021, and EBITDA increased from 9.4% to 11.2% of sales as the benefits of stronger volumes and better mix more than offset higher compensation expenses and elevated freight costs.

In the power systems segment revenues increased 22% in 2021.

And EBITDA increased from nine 4% to 11, 2% of sales as the benefits of stronger volumes and better mix more than offset higher compensation expenses and elevated freight costs.

Speaker 4: In 2022, we expect revenues to be up 5%, primarily due to higher demand for mining engines and power generation equipment globally.

In 2022, we expect revenues to be up 5%, primarily due to higher demand for mining engines and power generation equipment globally.

Speaker 4: EBITDA is projected to be approximately 11% compared to 11.2% of sales in 2021.

EBITDA is projected to be approximately 11% compared to 11, 2% of sales in 2021.

Speaker 4: In the new power segment, revenues increased 61% to $116 million in 2021, primarily driven by stronger sales of battery electric vehicles.

In the new power segment revenues increased 61% to $116 million in 2021, primarily driven by stronger sales of battery electric systems are.

Speaker 4: Our EBITDA loss was $223 million in 2021. As we continue to invest in the products, infrastructure and capabilities to support strong future growth.

Our EBITDA loss was $223 million in 2021, as we continue to invest in the products infrastructure and capabilities to support strong future growth.

Speaker 4: In 2022, we anticipate revenues to be approximately $200 million, up 72%.

In 2022, we anticipate revenues to be approximately $200 million up 72%.

Speaker 4: Net expense is projected to be approximately $290 million as we continue to make targeted investments in this space.

Net expense is projected to be approximately $290 million as we continued to make targeted investments in this space.

Speaker 4: As Tom mentioned, we are projecting 2022 company revenues to be up 6%. Company Eda Da margins are projected to be approximately 15.5%.

As Tom mentioned, we are projecting 2022 company revenues to be up 6% company EBITDA margins are projected to be approximately 15, 5%.

Speaker 4: EBITDA is projected to increase as a percent of sales versus 2021, primarily due to stronger truck production volumes in North America. Increased pricing and easing of supply chain challenge.

EBITDA is projected to increase as a percent of sales versus 2021, primarily due to stronger truck production volumes in North America.

The increased pricing and easing of supply chain challenges.

Speaker 4: We anticipate profitability will be lower in the first half of 2022 than the second half with some of the challenges we saw in 2021 continuing into the first quarter of 2022.

We anticipate profitability will be lower in the first half of 2022 in the second half with some of the challenges we saw in 2021 continuing into the first quarter of 2022.

Speaker 4: We expect earnings from joint ventures to decline 15 to 20% in 2022, primarily due to a decline in demand and China truck and construction mark.

We expect earnings from joint ventures to decline, 15% to 20% in 2022, primarily due to a decline in demand in China truck and construction markets.

Speaker 4: and the transition of our natural gas and joint venture in North America to fully consolidated in 2022.

And the transition of our natural gas engine joint venture in North America to fully consolidated in 2022.

Speaker 4: We are projecting our effective tax rate to be approximately 21.5% in 2022, excluding any discrete items.

We are projecting our effective tax rate to be approximately 21, 5% in 2022, excluding any discrete items.

Speaker 4: We expect that our 2022 capital investments will be in the range of $850 to $900 million.

We expect that our 2022 capital investments will be in the range of $850 to $900 million.

Speaker 4: As we have discussed in prior years, our base case is to return 50% of operating cash flow to shareholders over time.

As we have discussed in prior years, our base case is to return 50% of operating cash flow to shareholders over time.

Speaker 4: We accelerated cash returns to shareholders in recent years above that 50% base case, given the excess cash generated above our core business needs.

We accelerated cash returns to shareholders in recent years above that 50% base case, given the excess cash generator generated above our core business needs. We will continue to evaluate the best ways to deploy capital for profitable growth and deliver strong returns to shareholders.

Speaker 4: We will continue to evaluate the best ways to deploy capital for profitable growth and deliver strong returns to shareholder.

Speaker 4: To summarize, demand recovered in nearly all our markets in 2021, and we delivered record sales and higher full year earnings despite facing significant supply constraints.

To summarize demand recovered in nearly all of our markets in 2021, and we delivered record sales and higher full year earnings despite facing significant supply constraints.

Speaker 4: Fourth quarter margins were below our expectations, and we have some actions, including price increases, that should see improvements starting in the first quarter of 2022.

Fourth quarter margins were below our expectations and we have some actions, including price increases that should see improvements starting in the first quarter of 2022.

Speaker 4: As we enter 2022, end-customer demand remains in many of our core markets, and we are well positioned to deliver a strong year. Our focus remains on investing in the products and technologies that position us to grow profitably for the long run, improve performance cycle over cycle and return excess capital to shareholders. Thank you for your interest today. Now let's...

As we enter 2022 and customer demand remains in many of our core markets and we are well positioned to deliver a strong year.

Our focus remains on investing in the products and technologies that position us to grow profitably for the long run improved performance cycle over cycle and return excess capital to shareholders.

Thank you for your interest today and now let me turn it back over to Jack.

Speaker 1: Thank you, Chris. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. And if you have an additional question, please rejoin the queue. Operator, we are now ready for our first question. Thank you. Our first question is from Jerry Rebitch.

Thank you Chris out of consideration to others on the call I would ask that you limit yourself to one question and a related follow up and if you have an additional question. Please rejoin the queue.

Operator, we are now ready for our first question.

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

Hi, Jerry are you there.

Can you hear me.

Speaker 5: Yeah, I can now, I can now, Jake. Good morning. Good morning, sorry about that. Must be the choice of Bluetooth. Thanks. Tom, the Cyanopec agreement really congratulations to the team on getting that done. Can you talk about how the pipeline for electrolyzer opportunities?

Yes, I can I can now Jay good morning.

Good morning.

Sorry about that must be the joys of Bluetooth.

Thanks.

Tom.

I don't think agreement really congratulations team on getting that done can you talk about how the pipeline for Electrolyze our opportunities looks for you folks in China from here relative to maybe what you laid out at the edge.

Speaker 5: Looks for you folks in China from here, you know, relative to maybe what you laid out at the analyst days seems like we might be progressing ahead of plan, but maybe you can expand on that.

Analyst day, it seems like we might be progressing ahead of plan, but maybe you can expand on that.

Speaker 3: Yeah, and Jerry, we will provide updated figures across the globe at the analyst day. So let me just make a couple brief remarks about that and just I'll hold the details for then. There is significant pen-up demand in China. Our sign-up pack venture is just getting started. We've got a lot of work left to do. We do have a project with them, but there is significant pen-up demand. We do believe as soon as we get the operations rolling, we will be able to significantly increase

Yes, Jerry we will provide updated figures across the globe at the analyst day. So let me just make a couple of brief remarks about that and just but I'll hold the details for then.

There is significant pent up demand in China are our sinopec venture is just getting started we have got a lot of work left to do we do have a project with them, but there is significant pent up demand. We do believe as soon as we get the operations role and we will be able to significantly increase our backlog in China.

Speaker 3: our back log in china uh... we do have a project is a mention working with them but but i think there's a lot more to come with with with that started uh... but i'll let me let any davis uh... update you more fully at the analyst they she's got a lot lot more to say about that

We do have a project as I mentioned working with them, but but I think theres a lot more to come.

That started but I'll, let me, let Amy Davis update you more fully at the analyst day. She has got a lot more to say about that.

Speaker 5: Okay, terrific. Look forward to it. And then in terms of the margin cadence, Mark, sorry to ask you to jump in. I know you're not feeling well, but it can you just talk about normally your margins are flat, sequentially first quarter versus fourth quarter. And I'm wondering what the price increases that you folks spoke about in the prepare remarks. Are we gonna see a better first versus fourth quarter than that normal seasonality? In other words, you know, how back end loaded is, is the margin guide. Thanks.

Okay terrific look forward to it and then in terms of the margin cadence.

Mark sorry to ask you to jump in and I know, you're not feeling well, but can you just talk about <unk>.

Normally your margins are flattish sequentially first quarter versus fourth quarter and I'm wondering with the price increases that you folks spoke about in our prepared remarks are we going to see a better first versus the fourth quarter than that normal seasonality. So in other words, how backend loaded as is the margin guide. Thanks.

Speaker 6: Thanks, Jerry. I'm doing better than I sound. I certainly start the year, you're right. We will explain.

Thanks Jerry.

Im doing better than a sound.

So let me start the year you are right we will.

Speaker 6: We will expect, because Q4 was tough and we've taken these pricing actions, we will expect Q1 margins to improve from Q4. But let me start with the year's bridge, just to kind of give context to the full year guidance. I'll come back to some of the puts and take some Q1.

We will expect because Q4 was tough and we've taken these pricing actions. We will expect Q1 margins to improve from Q4, but let me start with the US bridge just to kind of give context to the full year guidance I'll come back to some of the puts and takes from Q1.

Speaker 6: So we've got 80 basis points of margin, EBITDA margin improvement year over year for the full year.

So we've got 80 basis points of margin EBITDA margin improvement year over year for the full year.

Speaker 6: That's 1.9% coming from pricing and surcharges for the 1% from volume.

That's one 9% coming from pricing and surcharges.

A 1% from volume.

Speaker 6: about 30 basis points from positive cost reduction initiatives that we've got.

30 basis points from positive cost reduction initiatives that we've got.

Speaker 6: On the downside, we've got material cost increases, base increases of about 50 basis points.

On the downside, we've got material cost increases base increases of about 50 basis points.

Speaker 6: We've got lower joint venture income, 50 basis points, which comes from two areas. One, weaker.

Lower joint venture income of 50 basis points, which comes from two areas one.

Speaker 6: Full year look in China, we feel like the markets are bottoming right now, so not a change in trajectory from where we were in Q4, but certainly down year over year. And then the balance is really the incremental investment in new power, where we're projecting strong growth again in 2022, and you'll hear more about subsequent years here shortly, and then some additional investment in our core engineering. So that's a full year bridge. So going back to Q4 to Q1, most of that pricing starts to take effect.

Weaker full year look in China, we feel like the market's a bottoming right now so not a change in trajectory from where we were in Q4, but certainly down year over year and then the balance is really the incremental investment in new power.

Projected strong growth again in 2022, and Youll hear more about subsequent use here shortly and then some additional investment in our core engineering. So that's the full year bridge, so going back to Q4 to Q1 most of that pricing starts to take effect in the first quarter.

Speaker 6: in the first quarter. So that's obviously going to be positive.

So thats, obviously going to be positive JV amendment, theres not going to be much momentum on the JV income line.

Speaker 6: JV moment there's not going to be much momentum on the JV income line and we expect the benefits of our cost reduction work and some of the easing of supply chain really to kick in

We expect the benefits of our cost reduction work and some of the easing of supply chain really to kick in.

Speaker 6: and the later quarter. So we won't get all the way to our average margin guidance in the first quarter jury, but we are expecting a clear improvement from that. What was it disappointing for us both?

Q2, when the later quarter, so we won't get all the way to our average margin guidance in the first quarter jewelry, but we are expecting yes clear improvement from a what was a disappointing for this fourth quarter.

Speaker 3: And there's no question, Jerry, that, you know, we think supply chain constraints are still terrible. I mean, just did call it like it is.

And there is no question Gerry.

We think supply chain cost our supply chain constraints are still terrible I mean, just to call like it is I mean.

Speaker 3: it jennybin talking about this that there's labor shortages suppliers are struggling freight is struggling i mean everything it it's not better in jenny where it was in the summer it's bad

John and I have been talking about this that there's labor shortages suppliers are struggling freight is struggling I mean, everything if not better in January than it was in December it's bad.

Speaker 3: And you know we are getting our plants are getting better at operating in those environments That doesn't mean it's great. It's still really terrible But that so that's one thing and also we do expect things to just ease across the year Not not to get overwhelmingly better in the first months or or to be fixed We we are taking a pretty conservative review about that but what they will start to ease So as as Mark said

And.

We are getting our plants are getting better at operating in those environments that doesn't mean, it's great.

It really durable, but that's so that's one thing and also we do expect things to just ease across the year not to get overwhelmingly better in the first months or or to be fixed we are taking a pretty conservative view about that but what they will start to ease.

As Mark said.

Speaker 3: you know, RQ-1 will have a lot of the benefits and then the costs won't ease as quickly. And then RQ-4 in 2022, we expect more of those costs to ease and still to have those benefits. So that's just the simple trajectory was built like that.

Our Q1, we'll have a lot of the benefits and then the costs won't eases quickly and then our Q4 and.

2022, we expect more of those costs to ease and still to have those benefits. So that's just the simple trajectory was built like that and then just one small thing Jerry just we won't get a lot more volume in Q1, and Q4 certainly year over year, we're expecting that driven heavily by North America.

Speaker 6: And then this one small thing about cherry just, we won't get a lot more volume in Q1 than Q4. Certainly year over year we're expecting that driven, heavily by North America, true.

Yeah.

Terrific. Thanks.

Our next question is from Jamie Cook with Credit Suisse. Please proceed with your question.

Speaker 7: Hi, good morning everyone. I guess my question specifically is around the revenue guide for engines and components. I would have thought the guide would have been better, in particular with the pricing actions you're assuming. So can you just help me understand the revenue guide?

Hi, Good morning, everyone. I guess my question specifically is around the revenue guide for engines and components.

Would have thought the guide would have been better.

In particular with like the pricing actions, you're assuming can you just help me understand the revenue guide.

Speaker 7: relative to it sounds like you'll be below the industry. We have positive pricing. I'm not sure how much of it is red tags that impacts your top line and with the pricing. So the puts and takes around the revenue guide on engine and components, just it's much lower than I would have thought. Thanks

Relative to it sounds like you'll be below the industry, we have positive pricing I'm not sure how much of it is red tag that impacts your top line and with the pricing the puts and takes around that revenue guide on engine and components.

It's much lower than I would have thought thanks.

Speaker 6: So I think our guidance for North America production, that's in line with kind of industry averages and some of the independent research firms that publish...

So I think our guidance for North America production, that's in line with kind of industry averages and some of the independent research firms published.

Speaker 6: So I think we're in line there. James certainly is a potential to go higher, but it's really the supply chain constraints that are limiting us. And then I think the big negative year over year for those two businesses, particularly the components businesses China, where most of our businesses...

So I think we're in line there Jamie certainly there's a potential to go higher but it's really the supply chain constraints that are limiting us and then I think the big negative year over year for those two businesses, particularly the components business is China, where most of our business is fully consolidated again, we sold a significant.

Speaker 6: fully consolidated. Again, we saw a significant drop off in the second half.

Drop off in the second half.

Speaker 6: on a full year basis that's lower. And then we had yet we had very strong growth in on highway market.

So on a full year basis, that's lower and then we had yes, we had very strong growth in on highway markets.

Speaker 6: You heard Tom talk about the record demand in China for construction equipment. That's a contributor to the engine business in particular. We expect that. So those are the puts and takes. Most momentum in North America. Potential to go higher if the industry can build more trucks.

Tom talk about the record demand in China for construction equipment.

<unk>.

The engine business in particular, we expect that.

So those are the puts and takes most momentum in North America potential to go higher if the industry can build more trucks.

Speaker 3: and get weaker in China as the main offset. But Jamie, you know the math. The math is simple. We're taking the market. We expect to be...

And weaker in China as the maintenance.

Jamie you know the math the math is simple.

Taking.

The market, we expect to be.

Speaker 3: Stronger, stronger than the market, as you said, we'll have the price in there. And then we just, so North America truck.

Strong or stronger than the market as you said, we will have the price in there.

And then we just so North America truck and components revenue will fall that exactly so theres no change in any of that Matt. So you are right to say that as strong.

Speaker 3: And components revenue will follow that exactly. So there's no change in any of that math. So you are right to say that's a strong that's a, that's the. Stronger part of the growth guide, and then some of the other markets are less. So, but, but again, we can go through those details with you after the call. But but the math works that we aren't expecting any.

The stronger part of the growth guide and then some of the other markets are less so but but.

Again, we can go through those details with you after the call, but but the math works that we arent expecting any negatives there as Mark said, our view is we picked a spot.

Speaker 3: negatives there as Mark said our view is you know we picked a spot in the

Speaker 8: in the forecast for North America where there's no question the range could be higher if supply constraints weren't there especially in the first half but I think it's still a strong market. Yeah there's no doubt you know the underlying demand is still very strong you know I've been out talking to customers I mean they cannot buy as many trucks as they would like and use trucks pricing is really high which is also benefiting our aftermarket revenue so it really is a question on the supply base.

In the forecast.

North America, where there is no question the range could be higher if supply constraints weren't there, especially in the first half, but I think it's still a strong market. Yes. There is no doubt the underlying demand is still very strong.

I've been out talking to customers I mean, they cannot buy as many trucks as they would like in used truck pricing is really high which is also benefiting our aftermarket revenue. So it really is a question on the supply base.

Okay.

Speaker 8: Is there any impact from, you know, the OE's in North America, you know, getting the red tags out the door? I know that would, you know, a lot of the OE's made progress in Q4. I'm wondering if that goes into Q1 or Q2, and is that impacting the revenue value specifically? You're right, Jamie, that there is a factor in the red tag trucks and on our revenue, because in most cases, those red tag trucks have engines and components on them already. We've been able to deliver.

Is there any impact from the OE in North America, getting the Red tagged out the door I know that.

Yeah, a lot of that always made progress in Q4, I'm wondering if that goes into Q1 or Q2 and is that impacting the revenue that you said correctly.

Youre right Jamie that there is a factor in the Red tag trucks.

On our revenue because in.

In most cases, those red trucks have engines and components on them already we have been able to deliver to our OEM customer needs and sell when they are directing parts to finish up <unk>.

Speaker 8: to our OEM customer needs. And so when they are directing parts to finish out red tag trucks, they're reducing the order on us. And so we're seeing some.

Our things Tom.

Speaker 8: some benefit of that as we go into the start of the year, as they really did focus in Q4 on clearing the red tag truck.

Im benefit.

That as we go into the start of the year as Dave really did help us in Q4 on clearing the Red Tag Chucks.

Speaker 3: Yeah, it's okay. Jamie, I don't know if you were asking if that's continuing into 2022. Yeah. Most bad is cleared in Q4. I mean, there's still some around, but most is gone in Q4. So that's not impacting our revenue guide for 2022. It did impact our revenue in Q4.

Yes, Jamie I don't know if youre.

Asking if that's continuing into 2022, yes, most of that is cleared in Q4.

Theres still some around but most is gone in Q4, so that's not impacting our revenue guide for 2022, it did impact our revenue in Q4, though.

Speaker 9: Okay. All right. Thank you. I appreciate it and look forward to the end of the day. Thank you, Jamie. Yeah. Good to talk to you. Thanks, Jamie.

Alright. Thank you I appreciate it and look forward to the analyst day.

Yes.

Thanks, David.

Our next question is from Steven Fisher with UBS. Please proceed with your question.

Speaker 10: Thanks. Good morning. I'm wondering if you could talk a little bit more about the natural gas engine development. I noticed the announcement you had. It sounds like you're delivering some pilot trucks in 2022. I think last quarter you talked about bringing that in in 2024. So, should we take that to mean you're accelerating that program? And can you remind us how the margin mix would look as that product ramps up?

Thanks.

Good morning wondering if you could talk a little bit more about.

The natural gas engine development.

I noticed.

And you had it sounds like Youre delivering some.

Pilot trucks in 2022, I think last quarter, you talked about bringing added in 2024. So should we take that to mean, you're accelerating that program and can you remind us how the margin mix would look as that product ramps up.

Speaker 8: Yeah, let me just talk a little bit about what we're doing with the natural gas products. You know, we of course have had natural gas products.

Yes, let me just talk a little bit about what we're doing with the natural gas products.

We of course have had natural gas products on the market here in North America.

Speaker 8: on the market here in North America through our joint venture, which we continue to sell now as a Cummins Consolidative Product in 2022. And we see growing demand from customers as they look at ways to decarbonize and neither dark decarbonization goals in a most cost effective way. So we have introduced a new heavy duty natural gas.

Through our joint venture, which we continue to sell now has comments consolidated product in 2022, and we see growing demand from customers as they look at ways to Decarbonize.

And.

Neither Dr de carbonization, Golden and most cost effective way and so we have introduced a new heavy duty natural gas product in China, where they're also is.

Speaker 8: product in China where there also is a demand in the market today for natural gas products and we plan to bring that product to North America.

Demand in the market today for natural gas products, and we plan to bring that product to North America.

Speaker 8: in the 24 time frame and as we develop.

And the 24 timeframe.

As we develop new engine platforms for the future one of our approaches to develop a moorefield flexible platform architecture.

Speaker 8: New engine platforms for the future, one of our approaches is to develop a more fuel flexible platform architecture.

Speaker 8: that will allow us and our customers to be able to evolve from diesel to natural gas to hydrogen as it makes sense as we move to increasing decarbonization.

That will allow us and our customers to be able to evolve from diesel to natural gas to hydrogen as it makes sense as we move.

Two increased A&P capitalization.

Speaker 3: And you asked about Margin Mechland and our view across the RR.

And you asked about margin mix in our view across our engine range is that there is unlikely to be sustained differences in margin mix based on fuel in the past margin mix was positive for natural gas, but they were relatively low volume and higher priced.

Speaker 3: engine range is that there there's unlikely to be sustained differences in margin mix based on fuel. In the past, margin mix was positive for natural gas.

Speaker 3: but they were relatively low volume and higher priced. As we increase the volume of those and are able to drive down costs, I think we'll be able to drive competitive pricing and drive up market position with them. And my expectation is margins will level out across different fuel types. But in the past, it has been, you know, margin, the margin of natural gas has been higher than diesel. And I think it's more because of its niche product, if it was a niche product to a large degree.

As we increase the volume of those and are able to drive down costs, I think we'll be able to drive competitive pricing and drive up market position with them and my expectation is margins will level out across different fuel types, but in the past. It has been margin the margin of natural gas has been higher than diesel and I think it's more because of its niche.

<unk> product if it was a niche product for large to a large degree.

Speaker 8: We are looking at some components expansions with the natural gas product. So we've now done a joint venture in natural gas fueling systems as well as tanks until that's another outgrowth opportunity for us.

We are looking at some components expansions with the natural gas products. So we've now done joint.

Venture and natural gas fueling systems as well as tanks and so that's another.

Okay.

Speaker 10: Okay, and then I just asked about China, your forecast for 2021 was pretty spot on.

Okay and then let me just ask about China. Your forecast for 2021 was pretty spot on with the <unk>.

Speaker 10: the first half versus the second half. I'm wondering how you feel about the potential range of outcomes for 2022. Do you think it's kind of similarly banded confidence and maybe how we should think about 2023? Do you think we could exit at all at any point with year for year growth or is it sort of just kind of maybe stabilizing on easier comps on the back half of this year?

First half versus the second half I'm wondering how you feel about that.

The potential range of outcomes for 2022.

Do you think it's kind of similarly banded confidence and maybe how we should think about 2023.

Think we could exit at all at any point with year over year growth or is it sort of just kind of maybe stabilizing on easier comps in the back half of this year.

Speaker 8: Yeah, as you said, I mean, I think we we saw really strong first half and as we predicted, there we saw inventory build up happen as the emissions change over occurred. And that's been slowly.

Yes, as you said I mean, I think we felt very strong first half and as we predicted.

We saw inventory buildup happened emissions changeover occurred.

And that's been slowly.

Speaker 8: The inventory has been fully consumed, so our expectations coming out of the Chinese New Year's, we will start to see more demand for the NS6.

Inventory has been solely consumed so our expectation coming out of the China Chinese new year. So we will start to see more demand for that NSX.

Speaker 11: product, we feel really well positioned with that product and, you know, additional components content. So we will outgrow what the market does, but we don't expect the market to return to the levels we saw in late 2020 and 21. We expect it'll be more more moderated. And you asked about 2023.

Product, we feel really well positioned with that product.

Additional components content. So we will outgrow what the market does but we don't expect the market to return to the levels. We saw in late 2020 and 21, we expect it will be more moderate.

And you asked about 2023, and we don't we.

Speaker 3: We really haven't taken a good look at when we think we'll return. As Jen said, the market was overproducing. No question about it.

We really haven't taken a good look at when we think we will return.

As Jen said the market was was over producing no question about it in.

Speaker 3: 1st, half of 21 and so there's both the fact that the economy's a little weaker plus absorbing all this extra inventory to do whether that takes 12 months to do or 18 months to do. We're just not sure. But we will continue to report on that and see what we think. There's not the underlying fundamentals are good.

First half of 'twenty, one and so there is both.

Fact that the economy's, a little weaker plus absorbing all of this extra inventory to do whether that takes 12 months to do our 18 months to do we're just not sure but we will we will continue to report on that and see what we think there is the underlying fundamentals are good.

Speaker 3: As Jen said, our market position is good. We're getting more content. All that seems fine. Just we're just trying to understand the market dynamics about when.

As Jen said our market positions. Good we're getting more content all that seems fine just we're just trying to understand the market dynamics about when when economic growth starts to pick up and absorbs the trucks that they put into inventory ahead of NSX.

Speaker 3: When economic growth starts to pick up and absorbs the trucks that they put in the inventory head of NS6.

Speaker 6: You know, history says, Steve, that in most years the second half isn't, there's more buying in the first half than the second half. So if we...

History says Steve that in most years, the second half as Theres more volume in the first half in the second half swiftly.

Speaker 9: Most likely I would say if we're seeing momentum, momentum build it will be brought towards the back end of the year. Thank you very much. Thank you.

Most likely I would say if we're seeing momentum momentum build it will be towards the backend of the year.

Perfect. Thanks, very much Hugh.

Hugh.

Our next question comes from David Raso with Evercore. Please proceed with your question Hi, Good morning.

Speaker 3: Hi, good morning. I think it's fair to summarize the guide is maybe revenues a little lighter than people thought, the margins. Definitely stronger than people would have.

It's fair to summarize the guidance, maybe revenues a little lighter than people thought the margins.

Definitely stronger than people would've thought, especially on the Incrementals.

Speaker 4: So I'm just trying to add or not the credibility to the 22 margin guide. And then just sort of think of that as a launch pad for if those are the margins in 22, how do we think about 23 in a nearly look?

So I'm, just trying to add or not credibility to the 22 margin guide and then just sort of think of that as a launch pad for if those are the margins in 'twenty two.

How do we think about 'twenty three and an early look.

So I guess on 22 margins.

Speaker 4: What is in the backlog today that already has a higher price on it, the surcharge, and what percent of your costs have you already sort of locked in, be it maybe you extend it a little further?

What is in the backlog today that already has.

Higher price on it the surcharge and what percent of your costs have you already sort of locked in be it maybe.

Extended will further your purchasing your hedging.

The level set on the on the 15, 5% EBITDA margin for 'twenty two.

Speaker 4: then I'll bring you a quick follow up on how to think about that 155 and 22 if that's possible.

And then if I can do a quick follow up on how to think about that 15, 5% in 'twenty two if that's possible.

In 'twenty three.

Speaker 12: You know, again, assuming if China's a little better, that helps JV income but also consolidate its sales within the engine business.

Again, assuming of China's a little better that helps JV income, but also consolidated sales within the engine business.

<unk> chain loosens in North America on truck volumes.

Speaker 12: get an acceleration there. So you would think the margin profile for 23 all of a sudden got maybe a little higher than people thought. But the real question about that is, are there other costs in 23 or something else we should be thinking about in 23 that would have

Might get an acceleration there. So you would think the margin profile for 'twenty through all of the southern got maybe a little higher than people thought but the real question about that is are there other cost in 'twenty, three or something else, we should be thinking about in 'twenty three that would've retired those margins a little bit surcharges rolling offer or whatever may be so im sorry for the long question.

Speaker 12: charges rolling off or whatever may be. So I started for the long question, but just wanted a credibility on 22 and had a thing with the launching pad.

But just wanted to credibility on 22, and how to think about the launching pad for 'twenty three.

Speaker 6: Thanks David, think I've got the handle on that. So first of all, I'd say we've clear our full potential margins are above 15.5% for the business. Obviously we're dealing with...

Yes, Thanks, David think of handle on that.

So first of all so we are clear our full potential margins are about 15, 5%, Florida business, obviously, we're dealing with.

Speaker 6: extreme inflation in a number of key categories in our cost. So, if we think about that bridge year over year that I gave...

Yes.

<unk> extreme inflation in a number of key categories and our costs. So if we think about that bridge year over year that I gave.

Speaker 6: To start with 1.9% improvement in pricing, that's pretty much locked and loaded.

To start with one 9% improvement in pricing, that's pretty much locked and loaded.

Speaker 6: parts will move in which quarter, maybe some modest variation, but that's pretty much done, that's committed. And again, we'll need to continue to evaluate...

Parts will move in which quarter, maybe some modest variation, but that's pretty much that's committed and again, we will need to continue to evaluate.

Speaker 6: how costs move through the year. We cannot yet be certain about the pace and rate of improvement in some of these supply changes.

How costs move through the year, we cannot yet be certain about the pace and rate of improvement in some of the supply chain efficiency is our expectation that things were working on that are discrete and unique tools, but obviously, we've got the overall market conditions, which were not in full control of when it may be if we face more cost.

Speaker 6: So we'll expectation, there's things we're working on that are discrete and unique to us, but obviously they've got the overall market conditions which we're not in full control of, and it may be if we face more cost-escalation, then we may need to revisit that pricing and push it up beyond the 1.9% in the base case, but certainly we feel confident about the 1.9%. We said we'd get 1% from volume.

Escalation than we may need to revisit that pricing and push it beyond the one 9% in the base case, but certainly we feel confident about the one 9% we said we'd get 1% from volume.

Speaker 6: The market demand is there to support the volume, because he is operating in a more efficient way as we scale up, but the demand is there to get that volume. So I think it's the JV income down 50 basis points. That's where we're operating at.

Market demand is there to support the volume of <unk>.

And in a more efficient way as we look what the demand is there to get that volume. So I think it's the JV income down 50 basis points, that's where we're operating at its kind of a run rate from the fourth quarter. So no material changes there. So what feels to me like the biggest swing factor is the rate and pace of improvement.

Speaker 6: kind of a run rate from the fourth quarter, so no material changes there. So what feels to me like the biggest swing factor is the rate and pace of improvement on efficiency gains.

One.

On efficiency gains.

Speaker 6: and you know, easing of that supply chain in the second half of the year, but many, you know, certainly you can hear a confidence about the pricing and some of the other assumptions. And definitely, we think the long-term potentials above the 15 and a half.

And easing of that supply chain in the second half.

Certainly you can have confidence about the pricing and some of the other assumptions and definitely we think the long term potentials of both the <unk> and.

Speaker 3: David, the only other thing I'd point you to is remember at the same time that we're driving these margins, we're also investing more in our new power and other engineering categories in primarily in new power. So we are building a brand new business.

David the only other thing I'd point you to is remember at the same time that we're driving are these margins were also investing more in our new power and other engineering.

Categories, primarily in new power. So we are building a brand new business and I think the opportunity for the company is huge as you heard me talk about but we had if you just look at our core business margins. They are even stronger than you might think just by looking at the overall number so again, our confidence level is high and our ability.

Speaker 3: And I think the opportunity for the company is huge as you heard me talk about. But if you just look at our core business margins, they're even stronger than you might think, just by looking at the overall number. So again, our confidence level is high in our ability to drive margins higher in 2023. You know, assuming we can continue to

To drive margins higher in 2023.

Assuming we can continue to <unk>.

Speaker 3: benefit from the kind of demand we have now. And as Mark said, the reason we have confidence in the 2022 margins is because

Benefit from the kind of demand, we have now and as Mark said.

The reason we have confidence in the 2022 margins is because.

Speaker 12: We don't know exactly how supply chain costs are going to go. We built a reasonably conservative scenario. And if it's worth, we will raise prices again. Just that simple. If I can ask a quick question about that, that the investment cost, if you didn't have those this year, which is improved, obviously investing a lot of new technologies, I mean, that would be a 16 point.

We don't know exactly how supply chain costs are going to go we built a reasonably conservative scenario and if it works we will raise prices again just that simple.

If I can ask a quick question about that that the investment costs. If you didn't have those this year, which is imprudent, obviously, you're investing a lot of new technologies I mean that.

That would be a 16, 9% EBITDA margin you'd be guiding to but when I think of the investments for 'twenty three 'twenty four and some will address this in the next few weeks at the meeting but to those investments ramp up like that 140 bps drag. This year should we expect that drag to get greater as we go into the out years or similar or less.

Speaker 3: We will talk about that in some depth at the analyst day and we will show what we think the trajectory is where investment.

He will talk about that in some depth at the analyst day, and we will show kind of what we think the trajectory is where investments sort of peak in returns start to come the other way because of course eventually we'd like to see them.

Speaker 3: sort of peak and return start to come the other way because of course eventually we'd like to see them that you know the break even and margins start to come the other way a new power and we do expect that to happen. So let us go through that trajectory but again there's no question that for the next couple of years our investments will be increasing and the question is when it turns back the other way. So let us take you through that and I think you know my own view is that you and other investors will recognize that we are creating a significant opportunity.

The breakeven and margins start to come the other way and new power and we do expect that to happen. So let us go through that trajectory, but again. There is no question that for the next couple of years, our investments will be increasing and the question is when it turns back the other way so let us let us take you through that and I think.

My own view is that you and other investors will recognize that we are creating a significant opportunity.

Speaker 12: at a reasonably affordable investment level relative to our competition. Thank you very much. I appreciate it.

At a reasonably affordable investment level relative to our competition.

Thank you very much I appreciate it David appreciate the questions yes.

Our next question is from Tim <unk> with Citigroup. Please proceed with your question.

Speaker 9: Oh, thanks. Good morning. Maybe one on distribution. That's obviously one where Tracy and team have been working hard on all the improvements in North America for the past couple of years. Can you maybe update us there? I mean, it's long been talked about getting to a double digit margin. Maybe this is the year you get there. But what's underneath the surface? What?

Thanks.

Maybe you want to.

Distribution.

That's obviously one when we're chasing.

Tracy and team have been working hard on.

All of the improvements in North America.

Past couple of years can you maybe update us there.

Long been talked about getting to a double digit margin. Maybe this is the year, you'll get there but.

What kind of underneath the surface, what's what's driving.

Speaker 13: What's driving, or obviously there's more than one thing, but how much of this is kind of some of that, the benefits being realized from that, from the restructuring versus, pretty good top line growth and just the associated, kind of volume leverage that comes with that. So.

Living obviously, there is one thing, but how much of this is kind of some of that.

The the benefits being realized from that from the <unk>.

Restructuring versus.

Good topline growth and just the associated volume leverage that comes with that.

Speaker 13: A longer question, but maybe just kind of an update us as to distribution and kind of where you are relative to the some of the goals you've got.

Longer question that maybe just kind of an update us as to distribution and kind of where you are relative to the some of the goals we've outlined.

Speaker 8: Yeah, so if you if I look at the distribution business, you know, the positive there are we're seeing strong demand for parts and service. And we are seeing the benefits of the work we've done in our North American distribution business to really drive commonality and efficiency and revenue growth into the business. And those are offset currently by the fact that we cannot get enough parts to support all the demand. And we've also experienced labor challenges. And so we've been really focused on increasing parts flow and

Yes, so if you if I look at the distribution business. The positive there are we're seeing strong demand for parts and service and we are seeing the benefits of the work we've done in our North America distribution business to really drive commonality and efficiency.

And revenue growth into the business and those are offset currently by the fact that we cannot get enough parts to support all the demand and we have also experienced labor challenges and so we've been really focused on increasing parts flowing.

Speaker 8: hiring technicians in that business and then those logistics costs that we talked about that impact our distribution business as well and so that was unfavorable for that business in the fourth quarter.

Our hiring technicians in that business and then the logistics costs that we talked about that impact our distribution business as well and so that was.

Unfavorable for that business in the fourth quarter.

Speaker 3: If I just step back to him, obviously it's not the perfect time to travel, but it would be worth it later when you have a chance to visit some of the distributors. So Tracy and her North American leader, Jenny Bush, have done an amazing job transforming that business. Just whatever number of years ago was all independence.

If I just step back to him.

Obviously, it's not the perfect time to travel, but it would be worth it in later when you have a chance to visit some of the distributors. So Tracey and her North American leader Ginnie Bush have done an amazing job transforming that business just whatever number of years ago was all independent.

We.

Speaker 3: Created joint ventures. We bought all the distributors, but they were still independent. Each one was a separate company. It's own pricing. It's own. It's now a national distribution organization.

Created joint ventures, we bought all the distributors, but they were still independent each one was a separate company its own pricing its own. It's now in national distribution organization with business level, So powergen as one organization across.

Speaker 3: with business level. So PowerGen is one organization across.

Speaker 3: across North America with sales, service, and support linked to customers across the entire North American region. It's a remarkable transformation. Cost levels and inventories are levels lower. As Jen said, the struggle they've had this year to deliver their double-digit margin is we can't give many parts.

Across North America, with sales service and support linked to.

Two customers across the entire North American region.

A remarkable transformation cost levels and inventories are levels or lower as Jen said the struggle they've had this year to deliver their double digit margin as we can't give many parts.

Speaker 3: They can sell as many parts as we can give them. We just can't give them enough. And to say that they are disappointed with that would be an understatement. They are screaming about that pretty regularly. And we are one of the things we're trying to do in part of our 2022 work is to reduce backlog in the parts organization, which of course helps.

They can sell as many parts as we can give them, we just can't give them enough and to say that they are disappointed with that would be an understatement.

They are screen.

Screaming about that pretty regularly and we are one of the things. We're trying to do in part of our 2022 work is to is to reduce backlog and the parts organization, which of course helps helps our customers through service.

Speaker 3: helps our customers through service as well, but it also will help our margins. So, but the transformation has just been remarkable. And I think if you get a chance to just see it and see the operational changes, it is a great piece of work. So we are excited about what we're gonna do in terms of the margins once we get the parts flowing through the distribution business.

As well, but it also will help our margin so that.

But the transformation is just been remarkable and I think if you get a chance to just see it.

To see the operational changes. It is it is a great great piece of work. So we are excited about what we're going to see in terms of margins once we get the parts flowing through the distribution business.

Speaker 13: You got it. Thanks. And Tom, just your earlier comment about, you know, these supply chain issues are not, you know, potentially not getting better, maybe getting worse in places. The messaging from from your peers is kind of it all over the board. And I'm curious as to, again, I'm sure that's impossible to isolate this to a single factor. But do you think that?

Got it thanks, and Tom just to your earlier comment about the supply chain issue here.

Potentially not getting better or maybe even getting worse and in places where the.

Messaging from from your peers kind of been all over the board.

Curious as to.

And again I'm sure it's impossible to isolate this to a single factor, but do you think that's it.

Speaker 13: Is it just Omicron related that's disrupted the workforce? Is there something more deep-rooted than that? Just what are you seeing on that front that led to that comment?

Yes.

On the con related that's disrupted.

Workforce is there something more deep rooted in that.

What are you seeing.

On that front that led to that comment.

Speaker 8: Yeah, I think Omicron is definitely a factor that's impacting the workforce over the last month and a half and contributing to that. And we could just continue to be in a very supply constrained market so you're building everything you can get parts for, any minor disruption.

Yes, I think.

<unk> is definitely a factor that's impacting the workforce.

The last month, and a half and contributing to that and if we could just continue to be in a very supply constrained markets that you are building everything you can get parts for any minor disruption.

Speaker 8: can create an issue. So that's really what's driving a lot of the uncertainty. And just labor challenges generally, right? So while Omicron is worsening that, getting workforce and really moving parts through the logistics channel.

Can create initiatives. So that's really what's driving a lot of the uncertainty and just labor challenges generally right.

Worsening that getting getting workforce that really.

Moving through those logistics channel.

Speaker 3: effectively is a broad challenge that continues to play us. And Tim, I think the reason you hear different things from different people is because each of us has dealt with our challenges last year differently.

Secondly is that broad challenge that continues to plague us.

And Tim I think the reason you hear different things from different people is because each of US has dealt with our challenges last year differently.

Speaker 12: You heard Jamie's question about red tag trucks. So if if you're a truck maker and you had a bunch of trucks sitting there You now have lower production rates and you are studying your production more so your revenue forecast is a little lower But you are able to stabilize and maybe that feels actually better to you in terms of You know how your production rates go not to mention not holding all this extra inventory

You heard Jamie's question about Red tagged trucks. So if you are a truckmaker and you had a bunch of trucks sitting there you now have lowered production rates and you are steadying. Your production more so your revenue forecast is a little lower but you are able to stabilize and maybe that fuel is actually better to you in terms of.

How your production rates go not to mention not holding all this extra inventory and in our case. We of course did not do that we were able to ship and keep them running so to us.

Speaker 12: And in our case, we of course did not do that. We were able to ship and keep them running.

Speaker 12: So to us, the basic production challenges look the same in January . They looked in December and they did in November . I do agree with what Jen said. She's shown me the data about absenteeism and things. And there's no question over the grant has driven up our own absenteeism as well as our suppliers.

<unk> production challenges look the same in January as they looked in December than they did in November I do agree with what John said. She has shown me the data about absenteeism and things and there is no question <unk> has driven up our own absenteeism as well as that of our suppliers.

Speaker 12: But you know if I step back though chip supply is still a disaster. I mean it just moves around

But if I step back, though chip supply is still a disaster I mean, it just moves around lately my biggest thing I'm hearing about as antilock brakes, which as you know don't affect us, but essentially every one of our customers and car companies. They are all suffering from antilock brake chip shortages. So there just arent enough chips and so.

Speaker 12: Lately, the biggest thing I'm hearing about is anti-lock brakes, which as you know, don't affect us. But essentially, every one of our customers and car companies are all suffering from anti-lock brake chip shortages. So there just aren't enough chips.

Speaker 12: That's why I predict continued challenges. Even if we have a little bit of reprieve from, and there isn't a replacement derivative for a micron in the next several months, that will steady out labor supply, but make no mistake, chips will be right behind it. I just think we'll just continue to work.

That's why I predict continued challenges, even if we have a little bit of reprieve from and there isn't a replacement.

A derivative for <unk> in the next several months that will steady out labor supply, but make no mistake chips will be right behind it. So I just think we will just continue to work through these challenges and that all of US our customers are ourselves our suppliers are all getting a little bit better at dealing with the variability in steadying.

Speaker 12: through these challenges and that all of us, our customers, ourselves, our suppliers are all getting a little bit better at dealing with the variability and and studying out our production. That's helping us. Meanwhile, we're dealing with inflation on freight and other other costs. So that's what we tried to show in that balancing of costs and benefits for our margin next year.

Our production, that's helping us. Meanwhile, we're dealing with inflation on freight and other other cost. So that's what we tried to show in that balancing of costs and benefits for our margin next year.

Speaker 12: Thanks for the color. Thank you Tim.

Got it thanks for the color. Thank.

Thank you Tim.

Our next question is from coordinated Novartis with Morgan Stanley . Please proceed with your question.

Speaker 14: Hi, thanks guys for the question. If we could just talk about power systems, I think that was one of the end markets where you're not seeing that incremental flow through next year and margin guidance is roughly the same on higher sales. So can you just walk us through maybe why that division's being impacted differently than some of your others?

Hi, Thanks for the question, if we could just talk about power.

Our systems I think that was one of the end markets, where youre not seeing that incremental flow through next year and margin guidance is roughly the same on higher sales can so can you just walk us through maybe why that division is being impacted differently than some of your others.

Speaker 6: I think one of the biggest challenges seen is the power systems business really started to see the supply chain challenges.

Yes, I think one of the biggest challenge is seen as the power systems business really starting to see the supply chain challenges.

Speaker 6: later in the year than we saw. There were less impacted by some of the chip challenges, but there'd be more recently impacted by, yeah, more labor constraints.

Later in the year than we saw with or less impacted by some of the challenges.

More recently.

Impacted by more labor constraints.

Speaker 6: and more supplier challenges. It's a very international business. So these...

And more supplier challenges is a very international business solely.

Speaker 12: And you guys just remember for a context that most of the engines used by that division are large, larger engines above 19 liters. So the production

The global logistics is an important part of how we get our products to market. So that has that did certainly inhibitor with margins in the fourth quarter I think demand again remains strong it's really principally of supply concentrate on the top line and you guys. Just just remember for context.

That most of the engines used by that division, our large larger engines above 19 leaders. So the production <unk>.

Speaker 12: The supply chain is different than it is for the 15 liter in below. That's what Mark's talking about. So yes, there are still chips required. There are different set of chips. And so they just had fewer constraints on the volumes or lower. But if you look at the freight content of those engines and gen sets is much higher, they're bigger, heavier, more. And so as containers got short,

Supply chain is different than it is for the 15 liter and below that's what Mark is talking about so yes. There are still chips required they're a different set of chips and so they just had fewer constraints on envelope volumes are lower but if you look at the.

The freight content of those engines and gen sets as much higher they are bigger heavier more and so as containers got short shipping rates went up the impact on that division is much larger than it is on the others as a percentage of costs and of course labor shortages affect everybody, but they.

Speaker 12: shipping rates went up the impact on that division is much larger than it is on the others as a percentage of costs and of course labor shortages affect everybody but they you know for the heavy duty and mid-range engines

The heavy duty and midrange engines.

Speaker 12: that was just another in the pile after kipped and everything else for high horsepower. It's just really hitting now. So we do see them improving by the way. It's just that everything is pushed back a couple of quarters relative to what we're seeing in our larger volume heavy duty and medium duty. That's all. And we've raised prices there as well. Same. Yeah. Same price, same pricing strategy, just a little bit slower on the cost improving.

That was just another in the pile after chips and everything else for high horsepower. It's just really hitting now so we do see them improving by the way. It's just that everything is pushed back a couple of quarters relative to what we're seeing in our larger volume heavy duty medium duty Thats, all and we've raised prices there as well. It's the same same price same pricing strategy, just a little bit slower on.

Cost improvement.

Speaker 14: Okay, that's helpful. And then I think you had been quantifying, you know, the total impact of freight logistics and inefficiency costs and we're expecting another 90 million in the fourth quarter. Can you just true up how that ended up relative to your expectations? And if you can just bucket it for us, I think there was a, had been a shift between the waiting of some of the freight and logistics.

Okay. That's helpful. And then I think you had been quantifying.

The total impact of freight logistics and inefficiency costs and we're expecting another $90 million in the fourth quarter can you just true up.

That.

Ended up relative to your expectations and if you can just bucket it for US I think there was this.

<unk> had been a shift between the weighting of some of the freight and logistics versus the inefficiencies versus material cost. If you can just.

Speaker 6: versus the inefficiencies versus material cost. You can just help us pair that up for how it ended for the year. And you're talking for Q4 versus Q4, that call me?

Help us tie that up for how it ended for the year.

Are you talking for Q4 versus Q4 the company.

Speaker 6: So I think you had been got I think it was 295 million year to date as of the third quarter and then you were expecting 90 million year over year in the fourth quarter. Yeah and that in fact because of partly well in large chunk because of the increasing global shipping rates you're right we were running about a hundred million a quarter through the first three quarters 300 million number between freight

So I think you had been Guy I think it was $295 million year to date as of the third quarter and then you were expecting about $90 million year over year in the fourth quarter.

And that in fact because of launch because of the increase in global shipping rates, you're right. We were running at about $100 million a quarter through the first three quarters, let's say $300 million number between freight.

Speaker 6: a mexist labor costs some inefficiencies, that number bumped up to $150 million in the ECH Internationaliscus a

Some excess labor cost some inefficiencies that number.

<unk> hundred $50 million in the fourth quarter, so it wasn't effect.

Speaker 8: worse than we'd anticipated. We don't expect all of that 150 to be in the run rate going forward, but yes, 20 question, those are the numbers. Then Mark said about while there was a little fun improvement in premium freight, it was really that standard freight rate that really grew in the public corner.

Worse than we'd anticipated, we don't expect all of that 150 to be in the run rate going forward, but yes to answer. Your question. Those are the numbers and Mark said that while there was a little improvement in premium freight.

Really that's standard freight rate that really gorilla.

Okay. Thank you.

Q.

Speaker 2: All right, well, that concludes our teleconference today. As always, thank you to everybody for your continued interest and comments. Chris and I will be available for questions after the call. I hope you have a great day. Thank you.

Alright, well that concludes our teleconference. Today as always thank you to everybody for your continued interest in Cummins.

And I will be available for questions. After the call I Hope you have a great day. Thank.

Thank you.

Speaker 1: This includes today's conference. You may disconnect your lines at this time.

This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.