Q4 2022 Cummins Inc Earnings Call
Speaker 1: The.
Speaker 2: Greetings and welcome to the Cummins Inc. 4th quarter, 2022 Earnings Conference. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. If you would like the opportunity to ask a question, please press star one on your telephone keypad. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Cluelo, Vice President of Investor Relations. Thank you, please go ahead.
Speaker 3: Thank you very much. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the fourth quarter of 2022, as well as the full year performance. Participating with me today are Jennifer Rumsey, our President and Chief Executive Officer, and Mark Smith, our Chief Financial Officer.
Speaker 4: We will all be available to answer questions at the end of the teleconference. Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities and Exchange Act of 1934.
Speaker 5: Such statements express our forecasts, expectations, hopes, beliefs, and intentions on strategies regarding the future.
Speaker 6: Our actual future results could differ materially from those projected in such forward-looking statements because of a number of risks and uncertainties.
Speaker 7: More information regarding such risks and uncertainties is available in the forward-looking disclosure statement in the slide deck and our filings with the Security and Exchange Commission.
Speaker 8: Particularly, the risk factor section of our most recently filed annual report on Form 10-Q .
Speaker 9: During the course of this call, we will be discussing certain non-GAAP financial measures, and we will refer you to our website for the reconciliation of those measures to GAAP financial measures.
Speaker 10: Our press release with a copy of the financial statements and a copy of today's webcast presentations are available on our website within the investor relations section at commons.com.
Speaker 11: With that out of the way, I'll turn you over to our president and CEO , Jennifer Ramsey, to get this off.
Speaker 12: Thank you, Chris. Good morning. I'll start with a summary of 2022, discuss our fourth quarter and full-year results, and finish with a discussion of our outlook for 2023. Mark will then take you through more details of our fourth quarter and full-year financial performance and our forecast for this year.
Speaker 13: Last year was an incredibly exciting one for Cummins and our stakeholders. We made significant strides in our inorganic growth strategy, most notably through the acquisitions of Jacobs vehicle systems, Miratore, and the Siemens commercial vehicles business.
Speaker 14: We also navigated complex global supply chain challenges, advanced our preparation for the separation of our filtration business, and transition from Tom to me as the CEO .
Speaker 15: We accomplished all of this and delivered record revenues, EBITDA, and earnings per share in 2022.
Speaker 16: We did tell with the focus on the exciting opportunity in front of us to lead the industry to a broader clean economy and do so in a way that is best for our stakeholders and the planet.
Speaker 17: Decarbonization is a growth opportunity for Cummins, uniting our business and climate goals. In 2022, we launched our long-term decarbonization growth strategy, Destination Zero, which includes making meaningful reductions in carbon emissions through advanced internal combustion technologies, widely accepted by the market today.
Speaker 18: you to see momentum in our electrolyzer technology and green hydrogen production opportunities.
Speaker 19: Demand for our products remains strong across all of our key markets and regions, with the notable exception of China, resulting in strong revenues in the fourth quarter.
Speaker 20: Fourth quarter revenues totaled $7.8 billion. Excluding the Maritor business, revenues for the fourth quarter of 2022 were $6.6 billion, an increase of 13% from the fourth quarter of 2021, primarily driven by increased demand and many of our North American markets.
Speaker 21: To provide clarity on the fourth quarter and 2022 full year operational performance of our business, and allow comparison to our prior guidance, I am excluding the Meritor operating results and associated acquisition and integration costs.
Speaker 22: The cost related to the separation of the filtration business and the cost associated with the indefinite suspension of our operations in Russia.
Speaker 23: Mark will provide more detail on the reported results in his comments.
Speaker 24: With these exclusions considered, EBITDA was $1.1 billion or 16.1% of sales in Q4, above our guidance of 15.5%, and stronger than the $705 million or 12.1% reported a year ago.
Speaker 25: EBITDA and EBITDA percentage improve due to an increase in gross margins with positive pricing, higher volumes, lower product coverage cost.
Speaker 26: and some improvement in logistics costs, all of which offset increases in material costs.
Speaker 27: Gross margin improvement is key to meeting our long-term goals of increasing the returns in our core business while transitioning our new power business to break even EBITDA by 2027. It is time for the first panel, and it is our next session.
Speaker 28: In the fourth quarter, Meritor operating performance and financial results showed improvement, and we continue to accelerate value capture opportunities across the business.
Speaker 29: Our employees have done an excellent job in integrating the Meritor operations and people with income and continue to make strides in identifying cost reduction opportunities. We remain confident in our ability to achieve the $130 million in pre-tax energies we referenced upon completion of the acquisition.
Speaker 30: And in addition, we expect to deliver incremental tax energies as we integrate the business.
Speaker 31: Excluding Meritor, 2022 revenues were a record $26.2 billion, 9% higher than 2021.
Speaker 32: Also, excluding meritor, the costs related to the plan separation of the filtration business and the impact of the indefinite suspension of our Russia operations.
Full year EBITDA was $4 billion or 15.1% of sales compared to $3.5 billion or 14.7% of sales in 2021.
Improve volumes, better price realization, and an improved supply chain environment more than offset higher compensation expenses, increased material cost, and lower joint venture income for the year.
EBITDA percent improved year over year in engine, power systems, distribution, and component segments.
Leading the way was the component segment, which delivered 150 basis points of EBITDA margin expansion.
The power systems business finished 2022 with another solid quarter and delivered full year EBITDA of 12.2%, up from 11.2% last year.
The improvement and performance in this segment over the past six months is encouraging, and you will see from our guidance that we expect further margin gains this year.
EBITDA margins in the distribution business increased by 110 basis points.
Our reported full year 2022 results include five months of operational performance for a marathon or $1.9 billion of revenue.
and $26 million of EBITDA, including $115 million of acquisition, integration, and purchase accounting related costs.
Yeah.
Now, let me provide our overall outlook for 2023 and then comment on individual regions and end markets. Outgoing Info
Our 2023 guidance includes our expected results of the Mirator business.
and excludes the costs or benefits associated with the separation of the filtration business.
We are forecasting total company revenues for 2023 to increase 12 to 17 percent, compared to 2022, and EBITDA to be 14.5 to 15.2 percent of sales.
Driven by the inclusion of a full year of sales from Maritor, continued strength in the North American truck market, improved demand and power generation markets, overall pricing improvement, and slow improvement in the China on highway markets.
Industry production for heavy-duty trucks in North America is projected to be 260,000 to 280,000 units in 2023.
A range of a 5% decline to 2% improvement year over year.
In medium duty, TROC, we expect the market size to be 125,000 to 140,000 units.
Flat to up 10% from 2022. We expect our deliveries in North America to continue to outpace the market. As the Indian partnerships we announced in 2021 continue to phase in.
Our engine shipments for pickup trucks in North America are expected to be 140 to 150,000 units in 2023. Volume level is consistent with 2022.
In China, we project total revenue, including joint ventures, to increase 7% in 2023. We project a 15 to 25% improvement in heavy and medium duty truck demand and 10 to 20% improvement in demand in the light duty truck market, coming off the low market levels in 2022. Today, with concrete design and
Industry sales of excavators in China are expected to decline, 25 to 35% in 2023, as the market adjusts to new emissions regulations and digest the inventory on hand.
We are watching the situation in China closely with ensuring the safety and well-being of our people as our first priority. The change in the country's COVID lockdown policy could positively impact our operations in the coming months.
The current events make it difficult to gauge.
The markets within China are at a low point as we close out 2022 and our guidance assumes a slow recovery in 2023.
In India, we project total revenue, including joint ventures, to be up 1% in 2023. We expect the industry demand for trucks to be flat to up 5% for the year.
We project our major global high horsepower markets to remain strong in 2023. Sales of mining engines are expected to be down 5% to up 5%, dependent upon the trajectory of commodity prices and supply chain improvement.
The man for new oil and gas engines is expected to increase by 15 to 25% in 2023.
primarily driven by increased demand in North America.
Revenues in global power generation markets are expected to increase 10 to 15 percent, driven by increases in non-residential construction and improvements in the data center market.
In new power, we expect full year sales to be $350 to $400 million, more than doubling our 2022 revenues.
We have a growing pipeline of electrolyzer orders, which we expect to convert to backlog and to be delivered over the course of the next 12 to 18 months.
At the end of the first quarter of 2022, we shared that we had reached the milestone of $100 million in electrolyzer backlog. This tripled to $300 million at the end of 2022, demonstrating the strong momentum in this market. With demand continuing to rise, we are focused on adding capacity for electrolyzer production.
deliver battery electric and fuel cell systems, along with electric powertrain technologies as adoption continues in the transportation markets.
As mentioned, Meritor results are included in our overall guidance for 2023. We are continuing to drive improvement in our margins post-acquisition and expect Meritor to be accretive to earnings per share in 2023.
We will continue to provide updates on the progress of our Value Capture Initiatives, which will be focused on the portion of the business within our component segment.
Within components, we expect Meritor to add $4.5 to $4.7 billion in revenue in 2023, with EBITDA margins in the range of 10.3 to 11 percent, an improvement from the comparable 2022 EBITDA margin of 7.2 percent.
The electric powertrain portion of the Meritor business has been integrated within the new power portfolio with projected 2023 EBITDA losses of $55 million included in the overall guidance for that segment.
In 2023, we anticipate that demand will remain strong in most of our key regions and markets, especially in the first half of the year. While some macroeconomic indicators have weakened in recent months, we have not seen a significant change in customer orders at this time.
In summary, we expect full year sales growth of 12 to 17 percent and even thought to be 14.5 to 15.2 percent of sales.
We have taken a number of actions to improve our EBITDA in 2023 and expect to generate very strong incremental margins within our core business and improve the margins of the Mirator business while continuing to invest in our new power business.
Having effectively managed through the challenges of the past couple years, we expect improved performance in 2023 and are well positioned to invest in future growth while continuing to return cash to shareholders.
Now let me turn it over to Mark, who will discuss our financial results in more detail.
Thank you, Jen. Good morning, everyone. There are four key takeaways from my comments today. First, we delivered strong results in the fourth quarter of 2022, exceeding our own projections for revenue in EBITDA from three months ago. And we delivered stronger margins in engines, components, distribution and power systems.
compared to a year ago. Second, we continue to make good progress on the integration of Meritor, and we remain on track to deliver $130 million of pre-tax synergies by the end of year three. We return $1.2 billion to shareholders in 2022 in the form of dividends and share repurchases.
Finally, demand for our products remain strong, supporting increased revenues in our core business, and new power and growth in EBITDA, and earnings for share in 2023.
Now let me go into more details on the fourth quarter.
Fourth quarter reported revenues were $7.8 billion and EBITDA of $1.1 billion or 14.2%.
For the full year, revenues were $28.1 billion and EBITD are $3.8 billion or 13.5% of sales.
Also in the full quarter of Meritor generated $1.2 billion of revenue, $60 million of EBITDA.
after incurring $27 million of acquisition and integration related costs.
Our fourth quarter results also included $19 million of costs related to the planned separation of the filtration business.
Full year 2022 results included five months of operational performance for Meritor, yielding $1.9 billion of revenue, $26 million of EBITDA, reflecting $115 million of acquisition, integration and purchase accounting related.
costs, we'll all look forward to a cleaner set of numbers in 2023. Our four-year 2022 results also included $81 million of costs related to the planned separation of the filtration business and $111 million of costs related to the indefinite suspension of our operations in Russia.
To provide clarity on the fourth quarter and 2022 full year operational performance of our business and allow comparison to our prior guidance, I am excluding the Meritor results.
and the separation of filtration and the indefinite suspension of Russia in my following comments. But hopefully you're clear after my earlier remarks about the magnitude of each of those items.
Fourth quarter revenues were $6.6 billion, an increase of 13% from a year ago. Sales in North America were 25% driven by continued strong demand in truck markets.
International revenues decreased 1% with strong demand for power generation and mining equipment in most markets offset by declines in China and of course the impact of our suspension of our operations in Russia.
currency movements negatively impacted sales by 4% due to a stronger US dollar.
EBITDA is 1.1 billion or 16.1% compared to 705 or 12.1% a year ago.
He bit our increased by $359 million, due mainly to improved pricing, higher volumes, lower product coverage expenses, all of which contributed to stronger gross margin performance and more than offset higher material costs.
Now let's go into our income statement a little more detailed by line item. Gross margin of $1.7 billion or 26.3% of sales increased by $420 million or 380 basis points from a year ago.
Selling admin and research expenses increased by $52 million or 6% due to higher compensation and research costs as we continue to invest in new products and capabilities to support future profitable growth, particularly in the engine and new power segments.
Joint venture income, D3's $28 million due to lower demand for trucks and construction equipment in China.
Other income was $44 million, an increase of $30 million from a year ago, primarily due to higher pension income.
interest in expense increased 58 million dollars largely driven by the financing costs associated with the acquisition of Meritor.
The all-in effective tax rate in the fourth quarter was 17.2%, including $52 million or 36 cents per diluted share.
favorable discrete items.
All in net earnings for the quarter was $631 million or $4.43 per diluted share up from $394 million or $2.73 a year ago.
Operating cash flow in the quarter was an inflow of $817 million, including Meritor, and $85 million higher than the fourth quarter last year, driven primarily by higher earnings.
For the full year, 22 revenues were a record $26.2 billion or up 9% from a year ago, with sales in North America up 18% and international revenues down 2%.
currency movements negatively impacted revenues for the full year by 2%.
EBITDA was $4 billion, or 15.1% for 2022, compared to $3.5 billion, or 14.7% of sales a year ago. Improvements in components, distribution, power systems, and engine margins.
were partially offset by increased investment in new power and more than $100 million of mark-to-market losses on investments that underpin some of our non-qualified benefit plans. All of that run through our operating EBITDA.
All in net earnings were $2.2 billion or $15.12 per dialogature compared to $2.1 billion or $14.61 per dialogature a year ago.
full year cash from operations with $2 billion down from $2.3 billion primarily due to higher inventory levels.
Capital expenditures in 2022 were $916 million, an increase of $182 million from 2021 as we continue to invest in new products.
and capacity expansion critical for future growth.
We return $1.2 billion of cash to Sherholds or 63% of operating cash flow in the form of Sherry Purchases and Dividends last year.
Now, moving on to our guidance for 2023, which includes merit all and thankfully reduces the number of exclusions. We'll have to explain each quarter and I appreciate your patience as we work through that in 2022.
We are excluding any separation costs associated with filtration and for now we're assuming that the operating results of filtration are in our guidance for the full year 2020.
Three, as the timing of that separation is not yet determined.
We expect Meritor to add $4.5 to $4.7 billion of revenue in 2023.
We currently project 2023 company revenues, including Meritor, to be up 12 to 17%, and company-wide EBITDA margins expected to be in the range 14.5 to 15.2%.
In 23, we expect revenues for the engine business will be flat to up 5%, driven by continued strength in North American truck market.
and a modest recovery in China.
2023 EBITDA is projected to be in the range of 13.8 to 14.5% compared to 14.4% in 2022.
We expect distribution revenues this year to be up to 7%, and EBITDA margins to be in the range of 10.3 to 11% compared to 10.5% in 2022.
Including Meritor, we expect 2023 components revenues to increase 28 to 33% and EBITDA margins in the range of 14.1 to 14.8 compared to 15.5.
0% in 2022.
In 23, we also expect power systems revenues to be up 5 to 10 percent due to higher demand for oil and gas engines and power generation equipment globally.
EBITDA is projected to be between 13 and 13.7% up from 12.2% of sales last year.
And also this year we expect new power revenues to increase to the range of 350 to 400 million dollars.
We expect new power net losses to be in the range of $370 to $390 million as we continue to make targeted investments in capacity technology to support growing customer demand.
Our goal remains to achieve break even EBITDA in 2027.
Our effective tax rate this year is expected to be approximately 22%, excluding any discrete items.
Capital investments will be in the range of $1.2 to $1.3 billion this year.
We remain committed to our long-term goal of returning 50% of operating cash flow to shareholders over time and have accelerated cash returns to shareholders in recent years above that 50% goal when we have generated more cash than required to support our strategy.
In 2023 we will prioritize cash towards dividends and debt reduction following the acquisition of Meritor while continuing to invest.
to deliver future profitable growth. Having a strong balance sheet is an important asset.
as we navigate through economic cycles and sustain our investments in new products for existing and new markets.
To summarize, we delivered record sales, strong full-year earnings in 2022, while managing through supply chain challenges and a very weak demand environment in China.
As we move through 2023, demand for our products remains strong in most of our core markets, with good visibility into the first half of the year. We'll continue to focus on raising margins in our core business, driving improvements in the performance of Meritor, generating strong cash flow.
and investing in the products and technologies that position us to lead in the adoption of new technologies and penetrate new markets through our new power business.
Thank you for your interest today. Now let me turn it over to Chris.
Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have an additional question, please rejoin the queue. Operator, you're ready for our first question. Thank you. The floor is now open for questions. If you would like to ask a question as a reminder, it is star one on your telephone keypad.
If you would like to remove your question from the queue, please press star 2.
As just mentioned, please limit yourself to one question and one related follow-up at a time to allow everyone the opportunity to ask questions. The first question today is coming from Jerry Riebich of Goldman Sachs. Please go ahead.
Hi, good morning everyone.
I know it's early post the acquisition of the Siemens propulsion systems and the Maritore but I wonder if you just comment on what the acceptance has been of the products in the marketplace post-common ownership what's the pipeline for the developments look like how's that cross-sowing.
and new power and having a number of conversations with our customers on how we bring that together to deliver.
both electric power trains and components to meet their needs. So it brings some some strong products, employees, as well as customer relationships and we're seeing growing opportunities as we have.
Relationships at a senior more strategic level with these customers to to grow our business going forward. It's really early days at this point. So we'll continue to talk about that as we bring those businesses together.
Sounds good, Jennifer. Thanks. And Mark, can I ask in terms of the pricing that you're expecting in 23 within now? Look, and if you could just touch on the logistics costs embedded in the guide as well. You folks have been running pretty hot to hit deliveries in 22, I'm wondering what extent does that?
a tailwind within the guidance. Yep, we've got about 2% of price cost benefit embedded in the guidance, Jerry. That's the biggest single driver of margin improvement.
Great, thanks.
Thank you. The next question is coming from Jamie Cook of Credit Suisse. Please go ahead.
Hi, good morning. I guess two questions just given, you know, the concern on the macro out there. Can you guys be cute by business line? Where do you see the most visibility or where demand trends you see sort of weakening and then I guess on the engine margin guidance. I guess I would have thought margins.
would have been a little better in the implied guide, just given maybe price costs going away, China improving. So if you can just help me bridge 2023 to 2022 engine margins, what's implied. Thank you. Great, thanks, Jamie. Let me speak first to what we're seeing in the markets. And we, of course, are paying attention to some of these macroeconomic trends. If you take.
And it's important to note, it's just not been a typical cycle for us because for the last two years, we've been undersupplying to the market demand. They've been using that equipment. We're seeing that reflected in very high after market demand, which...
Continues and these new trucks provide efficiency benefits to the fleet. So we continue to expect strong North America truck market.
In the power systems business, again, we have a healthy backlog of products and strong demand across many of our markets. Many were forecasting to remain around flat, but growth and power generation.
Growth in the oil and gas business and so we're feeling pretty confident about that as well. The biggest uncertainty is really around China. And as I said, in my comments, we do. Project some slow recovery throughout 2023 with the lift of the.
stringent lockdowns that they had in the last couple years in December . We expect that that may result in economic strengthening and certainly less operational disruption, but we're still monitoring what happens with the COVID-19 pandemic.
Waves there is there any government stimulus into the into the economy?
We feel really well positioned there. We've launched our NS6 products, which we think will enable comments to grow our position in the market. We've launched the automated manual transmission there. We've got a new natural gas platform, so we're really well positioned as China continues to strengthen and just uncertainty on exactly what the shape of that will look like.
I'll let Mark talk about the margin question. Yeah, I think the main...
The thing on the engine business margins is that we haven't got built in a very strong recovery in China and then the other piece that you didn't mention Jamie is that we've got fairly sustained investments ahead of us over the next couple of years because we're updating several of our platforms. We've won a lot of external business.
and we've got to meet future emissions regulations. So that's the only other element that's running through the engine business that may not be obvious from the outside. But otherwise, yet we'll expect them to do well.
if markets continue to be strong.
to be strong. Okay, thank you Jennifer.
Thank you.
Thank you. The next question is coming from Steven Volkman of Jefferies. Please go ahead.
Hi, good morning everybody. Maybe just following on the engine margin question mark, given what you just described around increased spending, R and D, et cetera. Should we think about sort of flattish incremental margins over the next few years or can it still be better than that if we have some volume?
I think it can definitely be better than that. We're still.
Battling some inefficiencies here and there, Steve. We're still expecting to have aftermarket growth over time. So no, we're not locked into these margins. I was just trying to be clear on what the underlying factor is. I've seen a few comments around engine business margins, but no, I think they can go higher.
You know, getting China up, it is the world's biggest truck market. I know the earnings come through JV. We are the lowest market in a decade.
and we think we still got more share to gain there, we've got more content in the components business.
If I sit here today and say what could be the one thing that could move that could
Change our guides most clearly. I would agree with Janet would be China right now. We don't have visibility people
more enthusiastic, but the activity hasn't yet materially picked up. So that would be one important factor.
Great, understood. And then my follow on maybe a bigger, broader question, but as we start very early days, but we start to think about the 2027 emissions regulations. Do you guys feel like you have line of sight to what you need to do technically to get there? You know, we're starting to hear that this is going to be sort of the biggest emission.
hurdle ever and that some people may have trouble getting there or it may have some massive costs associated with it which has some implications for pre-buys and maybe whether...
people do it themselves or outsource it to you. Just your big picture thinking on 2027 and how that kind of plays through.
Yeah, we're focused on continuing to meet more stringent regulatory requirements and do so with products that will provide benefits to the environment and exceed our customer needs. We now have clarity on the EPA 2027 NOCS regulations that happened late last year.
And they finalized that standard at a .035 gram NOx and we're our intention is to offer a full product lineup with our new fuel agnostic engine platforms.
to meet that regulation and we're finalizing our product plans right now with our customers on those but we we really feel well positioned to invest in really as a part of our destination zero strategy reduce CO2 And NOx impact to the environment and offer products market leading products to our customers with that regulation
All right, thank you, guys.
All right, thank you guys.
Thank you. The next question is coming from David Rassow of Evercore ISI. Please go ahead. Hi, thank you. The China guy, the up 7%, I assume that includes...
consolidated NJV revenue so that how you usually speak to it? Can you update us on the mix of your Ed markets it feels like the consolidated....
you know off highway the construction exposure you have that shows up in the P&L more so than JV and the JV is more the on highway
I'm surprised that with the mix, that construction business at this stage must be pretty small after the after the declines we've seen.
So to have truck up double digit for China for heavy and light Even though the excavator is down a lot the mix would suggest you'd be up more than seven
if truck is up double-digit and that now relatively small construction business is down.
Are there other businesses keeping it only at seven? Is there a share comment there? Just trying to understand why only up seven with that China and market guide.
I don't think there's anything significant in there, David. I mean, obviously, whether it's consolidated or unconsolidated, trucks probably 70% plus when you hide up all of our markets. So if truck does better, we'll be up more than 7%. If it doesn't, we won't, I think, for components.
That's all consolidated revenue. That's almost entirely on highway. It's really the engine business.
that has the off-highway business of any size. And then, yeah, I think power systems has been pretty strong. Last year in China, it's probably been the exception to what we've seen in every other market. But there's no big change in dynamics.
Just on your share, we expect to continue to grow our share in the China market with the launch of the NS6 product. So, that's assumed in our guidance.
Just on your share, we expect to continue to grow our share in the China market with the launch of the NS6 product. So that's assumed in our guidance.
Transmissions as well. So I'm just trying to sound like photons struggling more than I would have thought It's still you know, barely making money now for two quarters in a row. Is there something about that dynamic? We should be more sensitive to on the margin recovery in China in the JV because a photon
No, we did get some sizable tech fees and other things from the early part of last year, which kind of helped proper it.
What's the wrong word? We were entitled to those based on product launches, but now I don't think there's anything
significant though. And I'll hop off just one kind of modeling question. If you take the interest expense in the fourth quarter and annualize it, it's $348. You mentioned there's debt reduction.
But your God's 380.
So what are we assuming for interest rates from the fourth quarter on to have up interest expense, but you're targeting debt reduction?
bystartking.
I think the answer to that is
We'll need to keep working that down. I think we've got some floating rate exposure. It's not all fixed
and probably the debt reduction will come in the second half of the year, but let me come back to you on that.
All right, thank you very much. I appreciate it
Thank you. The next question is coming from Rob Werthimer of Milius Research. Please go ahead.
Hi, I know it's still early days, but you're starting to see some ramp and electrolyzers and I guess there's obviously a lot of uncertainty as to what the ultimate margin structure is going to be. I wonder if you have any thoughts on when you see clarity, any thoughts on where gross margins might trend?
aspirations that we shared for 2030. And so we expect during that timeframe to scale up the product.
the supply chain and manufacturing and continue to see a growing backlog.
and conversion of orders to revenue. So through that time period, you'll see.
margins go on positive and improving the exact margin structure of that business is still unclear. There's not a lot of
go on positive and improving the exact margin structure that business is still unclear. There's not a lot of...
suppliers in the market and we expect demand to be quite strong through that time period so I'm optimistic on what margin structure for the business will look like but obviously we'll share more as we get towards that break even point and go margin positive.
Yeah, Rob, one thing I'll add is for the gross margin on a project basis, we're at gross margin positive last year, which is a good early indicator. We have other costs that are going into for capacity expansion and other things that obviously offsets that, but it's a good indicator that we're on the right path for profitability.
as we before with more volume. Okay, that's helpful. Thank you. Obviously, there's just still a lot of build out in manufacturing and supply chain. So, do you have a sense as to how you stack up competitively on either design cost or, or I guess you have a lot of advantages in manufacturing as you build out and I'll stop there. Thank you.
One of the advantages we have here is we're able to leverage our existing footprint and capability that we have as a part of the broader comment. So you saw us announce recently we plan to use
Our frizzy manufacturing facility for electrolyzer production in North America. So want, you know.
We are tapping into that strength we have in our footprint and supply chain capability to help build out a profitable both product as well as supply chain. And that's an advantage that I think comments has here.
Thank you. Thank you. The next question is coming from Nicole de Blasio of Deutsche Bank. Please go ahead.
Yeah, thanks. Good morning guys.
Maybe just on the distribution margins, looks like you guys aren't expecting margin expansion there, even though sales are up two to seven. I guess, what is the reason for that?
I think there's a little bit of improvement baked into the guidance, but we've got a pretty strong track record of improving. There's no structural impediments to growing margins over time. That's arranged under the different revenue scenarios.
There's some variation Nicole, but over the time we expect the margins to keep going up.
Okay, understood. Thanks. And then I guess power systems stood out to me on the other side. It's just the margins look really impressive year on year in 2023. Is price cost the biggest driver of that or is there any other big drivers of the margin expansion that you guys are expecting?
I think certainly that's been a big factor and then we've got pretty healthy demand locked in now. So there's been a lot of focus on that business. We've been pleased.
with a solid results in the sticky line the second half of this year, and we've got a very very strong focus over continuing a drive.
For that business, it's important to keep in mind, you see a very long, we have a very long lead time on order. So as costs accelerated, it took a while for us to pass on some of the price increases to offset that. And that is in part what drove the
the strong margin improvement from 21 to 22.
Thank you. I'll pass it on. Okay. All right. I think we have a few more questions. Okay. All right. Thank you. Okay.
Thanks Nicole.
Thank you. The next question is coming from Matt Elcott of Cowan. Please go ahead.
Good morning, thank you. If you can give us a sense of how much of a growth moderation can we expect in the second half, I'm assuming that will be the case directionally because you'll have the Meritor comms and also it sounds like you guys are more cautious on the second half. So
How much of a growth moderation are we expecting? You can roughly split our revenues 52-53% in the first half versus the second half.
That's very helpful. And then just one follow-up on the new power front. It's been about a year since you guys announced the Fuelagnostic Engine. So any update on that and the receptiveness from customers and your conversations. And also I think back in August .
Packard announced that they're using your new natural gas engine. So is there anything new on that front as well?
Yeah, so the fuel agnostic platform just to clarify that's being developed as a part of our engine business and as I mentioned earlier, we'll launch a full lineup in North America of that product as a part of the 27 EPA regulation. As you've seen, PACR is integrating and plants to introduce the natural gas version and we have cost of fuel.
a lot of interest in those platforms both as a way to improve efficiency of diesel engines and then create flexibility.
to move to other fuels such as natural gas or hydrogen with the platform and really minimizing the integration.
pair up that's required for customers as they move between those platforms. So we'll begin to launch those with the natural gas version here.
in North America in late 23 early 24 and then accelerate introduction in the coming years after that.
Thank you very much.
Thank you. The next question is coming from Noah Kay of Oppenheimer. Please go ahead.
Good morning, thanks for taking the questions. Can you characterize the current mix of investment spending and new power? Just going to give us a sense of the key buckets where you're spending. Maybe you can even give us some guidelines on how much of the capex for this year would be attributed to new power.
And then I think the higher question here is, are you ready to call 2023, kind of the peak of net investment spending for the segment?
At a high level, the different categories of investment and new power, of course, there's big investment happening in an electrolyzer, and we talked about the growth.
And capacity investments that we're making there the other buckets include investments in batteries
Other electrified components and the electric power train and then and fuel cell. So we're investing in both the primary for as well as some of the key components to position ourselves as. Our current markets start to move to electrified power trains to be both the power train.
provider as well as provide key components. Similar to the model we have today with engine business and components. We want to talk about allocation of the investments. Yes, yes, or Capix. Probably in 100 to 125 million dollar range. So just under 10% of the total for the company in the new power segment.
Most more of that's weighted towards electrolyzers where of course we're ramping up production albeit using
existing common sites where possible and appropriate. And then yes, I'd love to call the peak in new power losses. They're going to have to peak soon because we're aiming towards...
Break even in 2027 at the E bit dial level.
The only caveat is if there's a significant change, should we invest in some new capabilities that aren't part of our current portfolio? That's not part of our plan today, Noah, but that would be the only.
The only caveat is if there's a significant change, should we invest in some new capabilities that aren't part of our current portfolio? That's not part of our plan today, Noah, but that would be the only variation.
That's helpful. And then just to give us some expectations around the cadence of earnings this year, obviously you're guiding to EBITDA and not EPS, but thinking about China JV modestly improving, getting better synergies captured on Meritor throughout the year, but then —
Maybe some offset from potential deterioration and end market So just any guide post you would give us on first half versus second half or even EPS.
I mean by and large it'll go along with the revenue. Unfortunately we had a tough Q3 in 2022 so that probably gives us the easiest comp just kind of going through by quarter and then you know we started the year much stronger. So XJV I think we'll...
of a good first half of the year. The GV will be the biggest single swing factor when you look at our P&L I would think.
In the first half of the year, maybe that helps. In the second, Q3 gross margins were disappointing. We've rebounded well in here in Q4. So yeah, I've modestly expect.
first half to be stronger all in unless
Revenues in the second half.
change direction significantly from what we've guided.
Very helpful. Thank you.
Thank you. The next question is coming from Tammy Zakaria of JPMorgan. Please go ahead.
Hi, good morning. Thanks for taking my question. So my first question is are you expecting any synergy savings from the merit to requisition this year? I believe you were expecting $130 million in total by year three. So anything this year? Absolutely. Yeah, we're working very hard on that.
me personally, along with many members of the Meritor comments team. So yes, and we'll talk about those as we go along.
But yes, we're feeling confident about that progress towards that 130.
And some of that is embedded in guidance and assuming or would that be incremental?
We'll try and get as much as we can. That both helps the long term interests of that business and improves the cost structure. So, yet we expect the results clearly to improve, especially in the components segment. We're assuming that's all in for now. If we get more than.
We will get more than 130 of you want to be clear that for year 3 number we are making good progress.
Got it. And so I'm sorry if I missed it, but can you give some color on the embedded merit or margin expansion cadence for the year? Should it be in the guided 10 to 11 or does it ramp towards the back? geolocation.us
Yeah, so let me just reiterate the guidance that we had within the components.
Business, we have 4.5 to 4.7 billion in revenue and EBITDA margins for the Maritor, um, Maritor business 10.3 to 11 percent compared to in 2022 that was 7.2 percent and some of that is progress on price cost and that business operating efficiency as well as center
Thank you. The next question is coming from Avi Urosovic of UBS. Please go ahead.
Hey, guys. Thanks for taking our questions. On to Steve Fisher. Just in terms of the power generation market, can you talk a little bit more about what's driving that market to be so robust this year? We might have expected data centers weakening a little bit. Sounds like you're expecting that to be.
up still again this year, but if you could just talk about some of the drivers in that market. Yeah, the power generation market, really non-residential construction as well as data centers. And despite some of the announcements that you've seen from our data center customers regarding staffing levels, they continue to show interest in investing in power.
data centers and have demand and drive backup power.
Demand on our products in that market. So we are still quite bullish about the opportunities there for 2023. I think it's fair to say it's pretty broad based across multiple markets.
broad parts of the economy. Yes, the data centers gets a lot of attention. It is a significant individual segment. But we're seeing robust underlying demand for power generation across multiple segments.
Okay, appreciate that. Thank you. And then just in terms of the new power business, have you seen an acceleration in recent months following the IRA in terms of customer interest there? And –
Does that possible acceleration in the market change your view on when we could see break even in that business?
How I would describe it is the Inflation Reduction Act and the investments around that are really going to be key to enable the adoption rate that we anticipate it is going to drive an acceleration in hydrogen investment. The details around that investment are being clarified right now. So it's going to take
As those incentives come into place to both put the hydrogen production in place as well as drive adoption of some of these technologies, which today, frankly, just cost more. So you need those incentives in order to start to drive customer adoption. And bring down the cost system more viable in the market.
I mean in the short run we're investing more because we're building up capacity as are others in the industry. So the faster we go in the short run could consume more cash. But obviously we want the market to move. We expect to deliver good gross margins once we get up this kind of investment phase. So it could go faster.
It's quite a long incubation period so very different from say our on highway engine business where we take an order.
So very different from say, we're on highway, engine, business, where we take an order and then...
Typically we're shipping in a few weeks, it's not been that typical in the last 12 months, versus sometimes more than a year between headline announcements to actually putting equipment into place, sometimes even more than a year. But we are encouraged, strong adoption for our technology.
business doing well on the business development side in Newport.
yeah business doing well on the business development side in U-PAL. Understood appreciate the time. Thank you.
Thanks. Thank you. We're showing time for one final question today. The final question is coming from Michael Fenneker of Bank of America. Please go ahead.
Thanks everyone for squeezing me in. When we look at China Revenue, the Consolidated Plus GB in 2022, it's basically the lowest that's been in over three, four years. I think slightly below 2019, I'm just curious in those three years how profitability looks, maybe post some restructuring optimization. If you need to try to recover.
So the amount of revenue that we're selling
as going up for a vehicle quite significantly over time. And certainly cycle over, cycle is...
It's billions of dollars of extra revenue growth a year. We're just at the lowest market in a decade. So we agree that that growth rate is modest.
We don't have any signs of yet of a rapid adoption. We'll be looking at the same data you're looking at and obviously taking on board the feedback from our customers. But we are profitable in our operations. We don't disclose profitability by region, but for sure when China volumes improve our profits will go up.
Thank you. And we've seen quite a few emerging suppliers in the EV, in mobility space really struggle last 12 months with delivery deliveries or profitability. Do you see some of the dynamics driving OEM conversations back to you and traditional suppliers as we start looking at the future?
going to take a long time for our industry. And that positions in comments like comments well because you need to invest for the long term. Regardless of what our customers are adopting, we've got the solution in our portfolio. And so for sure, you see the benefit of a company like us that has a.
Portfolio of options to meet their needs is going to be around for the long term and continuing to invest in some of these new technologies and be able to do that and support the product as an advantage and it's playing out to be more of an advantage as time goes on compared to some of the the new entrants.
We continue to pay attention to those new entrance though and how they advance the technology and work to enter the market. So, wouldn't discount them, but certainly this...
long investment period makes it more challenging for them to stay in and be successful. I think also our footprint, our reputation for dependability, wherever our customers operate.
is leading us to be approached in new segments by global large industrial players. So it's not just in the market that we operate in today.
You know, we've been approached to expand them into different market applications. That's particularly exciting.
Thank you.
Thank you. Thanks, Mike.
Thank you. At this time, I'd like to turn the floor back over to Mr. Clule for closing comments.
Thank you all for your participation today. That concludes our teleconference. I really appreciate the interest and as always the Investor Relations team will be available for questions after the call this afternoon. Take care.
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