Cummins Inc. (CMI) Earnings Call Transcript & Summary

Thanks, everyone. We're happy to have once again, the team from Cummins, who have been great and loyal supporters to this conference over the years. So thank you, guys, as always, for being here. Chris Clulow from IR to the far right; and Jeff Wiltrout, who is VP of the Strategy Group in Cummins, probably there's -- keeps you quite busy.

Not been boring the last couple of years.

Definitely. Well, we'll just get right into Q&A. And if anyone has any questions along the way, just don't be bashful and just make sure I see you.

So Chris, maybe let you start or whoever, Jeff. Looking ahead, I guess, in a couple of months, we'll have Investor Days typically every 2 years. Last one, a lot of focus. The topic, azure around the whole new power and battery electric solutions, hydrogen along those lines. Some of the regulatory environment -- interest rate environment is quite a bit different than what it was back then. But just maybe a sneak peek into what investors should be expecting in terms of just high-level themes at the upcoming Investor Day.

Jeff, why don't you start?

Yes, I'll start and then you can add. So obviously, what we'll intend to do and excited to do is talk a little bit about our perspective around the technology transition as we look a little longer term out what that means for us. I think we've tried to be pretty consistent in saying that the things that need to come together to drive towards some of these advanced solutions are the combination of infrastructure and economic and operational viability in those pieces. And I think we've also been pretty consistent in saying is in our end-use markets, which are generally a little bit more hard to abate in several instances, it's going to be a long -- in some cases, not linear road. And I think the last couple of years are proving that out. So we'll, of course, talk a little bit, may around the very practical implications for us as it relates to our business in Accelera, what it means in terms of some of the top line targets. But fundamentally, we remain happy with our strategic positioning to be investing at the right time to win across the various phases of this transition, near term, medium term and long term and be able to prove both strong strategic positioning as well as strong financial performance along every single one of those phases. And so we think the last couple of years have largely proven that the first chapter of that has gone pretty well for us. And so we're excited to talk a little bit more about the positioning of the long-term adoption. Then, of course, obviously, we'll update a little bit more on some of the near-term financial picture as well. So I don't know if you have anything, Chris.

Yes. I think that as we talked in 2022, we talked about where it looked in 2030. We were answering the question where everybody thought transition was happening essentially immediately. And like it was -- we got the melting ice cube analogy for Cummins. So like it was like by 2030, it's our terminal value, which was clearly not the case. So I think the answer to that question when we went through and now we want to kind of also fill it in and what does that mean financially. What's our view and how our margins progress over the next few years? And I think that's the key message we want to get out to people. Yes, we're managing through the transition, and this is how we win essentially.

Yes. I mean from my perspective, as I communicated, I think anything that can help to kind of distill the message and the thesis around Cummins? So it isn't a 12-part discussion around, I guess, market needs to do that and et cetera. So what...

Yes, we've -- over the course of our career side, the complexity of our companies just skyrocketed so we just need to distill that into what's the thesis.

Yes. Just from a hydrogen perspective for that industry to scale, it needs a favorable policy as well as financing backdrop. And you can argue in both cases, that is less the case today. And as you look at least what the public market valuations for some of these fuel cell operators and hydrogen companies suggest that these challenges seem to be quite significant. I mean how does that impact your decision? I mean, one could argue you could take a few days of free cash flow from Cummins and acquire some of these assets. Or do you -- does that say, hey, maybe we need to scale back our rate of -- or pace of investment because the market is telling us that the outlook is a little bit more challenged?

Yes. So I mean I think hydrogen is an example across this whole set of technology solutions headed towards decarbonization, like I said, which is it does need the regulatory drivers to make the economics work. It needs scale positions to start driving the unit economics to a viable place. And we are in the very early stages of that coming together. So what that means for us is a lot of where we spend our strategic energy is to make sure we're -- we now have the technology foundations in place. We do a lot of our inorganic activity over the last several years. Now it's about pacing those investments to make sure we've got the right technology at the right time across the cross-section of markets we serve, specifically as it relates to hydrogen. I think we view that still as very much a strong long-term structural place we want to be in. We want to be a global market leader and we intend to invest to support that but that's very much a 10-, 15-, 20-year view. So year in, year out, exactly how we sequence and pace those investments, we, of course, monitor very closely. But we want to be in it for the long term, we intend to win. It's a really attractive growth space for us because it does open up new markets, new customers that haven't been in our traditional set of applications. And then we do, of course, we evaluate when we do come across some of these companies that are -- need cash flow, need capital, we pretty consistently have been evaluating those. But fundamentally, it has to be materially and meaningfully additive to our technology portfolio for that to make economic sense because we do now feel like we've got a lot of those foundational elements in place. So we can be a bit more selective around adding to that portfolio when the time is right.

Got it. And from a battery electric standpoint, where is Cummins along the path of having options available for the truck OEMs as we look ahead to emission standards in '27 and then '30? Again, it's a long ways out. How are you progressing along those time line?

Yes, we feel comfortable around that. So we're in batteries today. We sell to the Bluebird and other customers with our current offering. We've got a next-generation set of battery packs coming out in the next year or 2 to continue to solidify that nearer-term position as we're getting some of the early adoption of these battery solutions and bus applications and some of the medium-duty truck applications. For us, of course, one of the big steps we've taken and announced is our pursuit of the joint venture with Daimler and PACCAR EVE to open a battery cell plant. We do believe for our commercial and industrial applications that being on the front foot in there with some of our long-term strategic partners to move and be prepared to have the right chemistry for those commercial and industrial applications as we get into higher adoption levels in the back end of this decade is going to be pretty important. And that's why we go into that. So we feel like we're -- again, our working to sequence this effectively. We are in the business, the battery business right now. We'll have our next-generation packs coming in the next couple of years, and we think the medium-term bet around the cell chemistry is going to be a really critical piece for us to deepen that positioning and set us up for where we're going to see the most meaningful kind of scale adoption, which is when we head into 2030 and beyond. That's really what we're making sure we're teed up to be well positioned for.

For the Accelera business, the losses look to remain at pretty elevated levels in '24. I mean at one point, there was the notion that maybe you can get to EBITDA breakeven by '27. Is it just -- maybe that's too tough a road at this point? Or is that still...

That's still a target. No, that's still the focus. I think it's really important for that business. And we're making the progress in terms of driving better gross margin. I think gross margin is a key piece of our -- how we're looking at it, both in electrolyzers and then the e-mobility, which is battery electric space, primarily now. And then we're going to make choices. As an example, Jeff alluded to it, is like if the market is not there now, what you might back off on investment to get it. But I think it's really important for us to make strides in that direction. And even in '24, the numbers are -- we're starting to cut the losses. We kind of have a little bit of a headwind because with the new JV that comes in with some losses of about $25 million. So we're making headway down there. We still have targeted '27 breakeven.

Got it. Okay. Maybe we can dig into some of the segments, starting with Engine and one of the -- certainly one of the areas of focus for investors. I mean you look at that business, and there's, obviously, we understand the investments that are ongoing as we're talking about. But relative to some of the peers and certainly some of your larger OEM customers, I mean, the margin differential is starting to wind out. Maybe talk us through how much of that is more maybe structural in nature versus like the parts go against you? Or there were some factors that maybe get alleviated with some help from the macro, maybe you just talk...

Sure. Yes, we get this question a lot because the Engine business is kind of obviously core to the historic nature of the company. But we are making progress in that space. We are in a heavy investment period. And that's the biggest driver. So R&D, we're getting ready to launch our fuel-agnostic engines. Well, actually beginning later this year with a natural gas 15 liter, but really for EPA27. And that's 3 entire platform developments. These we only do every 15, 20, 25 years, and we're doing 3 at once. And so that does take a lot of dollars up. That's been a headwind for us, but it's just setting us up so well for the future. So it's worth the investment there. But that's one of the things we're going to be paint the picture more. And as we come back in May and Analyst Day is really talking about as we get through this investment bubble, I would kind of call it. This year, in 2024, we'll have similar R&D investment as last year, and then it starts to taper off and it gets you more normalized levels. At the same time, we -- as we've talked before, as we take pricing more of a long-term nature, we'll take just small bites, all the way, over time. I don't give it back. It just kind of continues to rise up. And so we're looking to make that expansion in the Engine business margin for the last couple of years. That's really been the case. It's been -- we got to buckle down and invest, get ready for the future.

So the pricing will be kind of preemptive in terms of in advance of these offerings? Or how does that work?

Yes. So we tend to continue to -- even in 2024, we're working our pricing upward a little bit beyond what the -- some of the long-term agreements. We've done that because of inflationary pressures we've done for the last 3 years. And then we take maybe a little bit more pricing actions and try to broaden the margins with the value we bring with the new emissions. And that's -- whether it's in the diesel product awards in like natural gas and others. It's an opportunity for us as we're adding content to also add to margin. So I think that's the view is every time we get through an emission cycle, we're adding a lot of value for the OEMs and so the price work.

And then the -- thinking ahead to the upcoming -- I mean, the jury is out in terms of how meaningful it could be, but I think most would expect fairly sizable prebuy just as the -- on a percentage basis is the biggest, looks to be the largest percentage increase or even bigger than '06, there's a notion that maybe carrier profitability has improved by then. So the stars could be aligning such that the willingness and the ability from the fleets to buy ahead of that emission cycle. So as the largest supplier from an engine perspective into that market, are you starting to feel conversations with customers in terms of like, look, we want to make sure those slots are available? Or is it -- I'm sure each customer is probably different in terms of how they're thinking about it.

Yes. I think I would say in my 20 years in Cummins, this is the earliest we've been talking about a pre-buy. It's like 3 years in advance of the engines coming out or some will launch in 2026. But I do think there is enough pressure there. We think '25 will drive some and some in '26 where you have some months but I don't also -- the key thing is, historically speaking, the industry would just go through these big waves and ramp way up the year before in emission cycle. The supply chain is just not there for it. I mean I think we feel confident in our ability to meet whatever level of demand, but I don't see the whole industry going up to 400,000 units in heavy-duty trucking, as an example, just to meet that certain because suppliers don't want to make an investment for year. So I think it's going to -- that's kind of the viewpoint we get from our customers is that we need to make sure we're buying along so that we can get the product in because they don't expect the industry to ramp. Just take a 1-year ramp-up to meet that.

So maybe Jamestown has the ability within its 4 walls to do that. But how -- but maybe your supply base is more of a question.

Yes. I think we feel pretty confident in our supply base. But I think when I'm talking about the whole overall industry. Supply base has still got some constraints around it, but adding a lot of capacity there doesn't seem as likely just for a 1-year bump because I think one, I guess, benefit that we've seen through going through this prolonged cycle is steadier build with a lower cycle, it's best for everybody in the industry. So I think that's what people are trying to stick to as much as possible and control where they can.

Yes. I mean that seems to be what your customers progressing along in terms of when the market was tighter than those per day build rates didn't really maybe in the supply chain, it was the excuse or what, but they haven't taking the advantage of maybe they would have in the past.

Yes. Exactly. There's no one stepping out with try to grab a bunch of share by doing this because it just hurts in the long run.

More kind of near term, I guess, what -- the -- going back to one of the headwinds on profitability for that engine or for the Engine segment last year was the -- just how the parts business fell off. What are you seeing there in terms of from presumably the destocking effect that pitch in the back half of the year, are we kind of through that? Or what's the outlook for '24 in terms of...

Yes. We think by the end of last year, we were basically through the -- on the on-highway side through the destock of the -- on the aftermarket side, it is still -- there's a little bit of a hangover in Power Systems, but that's largely through as well. So we go more to market levels because everybody now -- now that we can supply within a couple of days versus longer lead times, people could take out all their safety stocks, and that drove the destock and but that's largely complete, and we should be reverting back to norm this year. And it's going to -- we expect it to be much steadier across the quarters this year, whereas last year, it was very high first half and destock second half, it will probably just even out.

Typically, when you think of that business, though being when trucker profitability is under pressure, then they pull back. Maybe the miles are down, maybe they start extending, they're just overhaul cycles, et cetera, but it doesn't sound like that's a meaningful...

Not so much. I mean there is some impact on economics, but the cumulative population more than offsets that usually because we just have so many engines out in the field and they last quite a long time. So just that effect tends to keep you continued growing like a low digit pace.

Got it. Maybe switching gears to a very important driver for the engine business from a traffic perspective is China, obviously, because of how it flows through largely from a JV income, so it can flatter the incrementals or decrementals. What's the latest in terms of what you're hearing from on and off-highway customers, start in China specifically?

Yes, it's pretty slow and steady, I think is the way to say it, right, which is we haven't seen any significant impacts from any limited stimulus that's been done or any strong signal if there will be more. So we do think there will be some growth, right, but it will be pretty modest. It's come across -- come off of and above where we got to, which is some pretty low levels and in 2022, but it's much more incremental, right? And so kind of big swings in growth we're not seeing. Obviously, on the construction side, the property segment remains slow, not seeing much activity there to speak of. And so it -- we're quite frankly, waiting for what may be the next set of activities that really drive some meaningful change in the trajectory in China. And so far, we haven't seen much. So we're looking for signals that would suggest we're heading in a different direction. But right now, it's more incremental.

Yes. I think the one positive we're taking from lower cycle that we've gone through, we've been able to gain share, both on-highway and off-highway has been kind of picking up shares just a couple of points at a time, and we're feeling better and better because it's just more and more difficult for some of the local companies to compete when you have these more stringent emissions and so I think that's helped us.

And on the on-highway side is natural gas takes more of the share, presumably that plays in the Cummins hands, I'm guessing or...

It does. It does to some degree. I think we're -- we went -- launched the product really in late 2021 and up to about 20% share of the market now. This is really strong growth. Biggest competitor there is Weichai. So we're -- it does help us make some inroads with some -- both our joint venture partners in Foton and Dongfeng, but others -- some other customers as well, where we're picking up share with them. So that's an area we're focused on. Well, the market seems relatively steady. We'll focus on our capacity to build natural gas. Because the spread in the commodity -- the fuel cost is looks like it's going to be there for quite a while.

Got it. Maybe let's -- we can focus on the components business. To your point earlier, I mean, you're seeing the spread used to be engines was here and components and distribution. We're here. I mean they're starting to narrow the gap quite a bit from a profit dollars perspective, which is nice. But what -- just on -- maybe update us on the Meritor integration, just in terms of how you're progressing on integrating that synergy capture and then we'd start with that.

Yes. Yes, we've been really happy with the progress with our acquisition of Meritor, both strategically in terms of how it's set up to continue to diversify our earnings stream and also to add more to that set of technology foundations I alluded to on the EX side in particular. But then also financially, right, a big part of that was as we think about disciplined growth, finding companies that have a growth opportunity, have real synergy, value capture opportunities and generate cash flow, right? That's a good combination that we like. So we feel comfortable. On the synergy value capture side, we left the year at a little over 60% of kind of hitting our 3-year target in terms of run rate synergy. So we feel quite comfortable around that and have our next set of plans that we'll deliver in 2024. So we feel very much like we're ahead of schedule in terms of getting to where we need to be on the value capture to make sure that the financial story matches the strategic story on our acquisition of Meritor.

Can that business over time get to like components average margin? Or is that...

We're certainly going to do everything we can to try. There are obviously some different competitive dynamics in otherwise. But we have now, I think the -- even the profitability performance last year was in Meritor's recent history, certainly in the last 10 or 15 years. So we have extended the margin profile of that business. We'll continue to improve at exactly the dynamic as you get to the various components and pieces of our that components business unit portfolio between turbochargers and app treatment and the like. Whether or not it fully gets to go to all those, it's tough to tell specifically, but we're going to get it as close as we possibly can.

From my -- just going back quite some -- a few years ago, but from my coverage of WABCO, I remember this whole dynamic of discs displacing, drum brakes and Meritor had a reasonably strong footprint there. Where are we in terms of that adoption rate? And I know there was a push not just on the -- the first fit side, but also penetrating the aftermarket side, absolutely on that?

Yes, absolutely. So tough to get perfect data, but roughly, 2023, the best numbers we have would suggest that on a first-fit basis, kind of the split between drum and air disc brakes in North America Class 8 was about 50-50. Get into the smaller applications, the medium-duty stuff, it's still far lower penetration of the disc brake technology. So as you then step back and look at the kind of installed base, it's such that it's kind of still 85-plus percent drum relative to the disc brake that's growing. And so we're pretty excited about our potential to kind of winsome share on the air disc brake side, both on the first fit side. And then as that continues to be a more significant piece of the installed base puzzle that we have an opportunity to win some business there as well. And so our forecast suggests that it will go from 50 up to pretty linear ongoing progress towards 55, 60 in that type of range over the coming years. And it will stay there. And then like I said, we're working very hard to make sure we're appropriately positioned on that air disc side to make sure we're winning market share and way similar to what we've been able to do on the drum brake side. So pretty attractive potential growth opportunity for that business, we're excited about that.

Which is it's primarily still a North American-dominated business with Meritor and Doritos.

Yes, the Doritos business, yes, North America is the biggest piece they had. They have business in Europe and South America, Brazil, in China and in India. So not quite as balanced as the overall Cummins picture, but they do have presences there, and obviously, with some of the same customers. We have -- the growth potential there for us is one where we continue to work to introduce that portfolio into some of our partnerships and some of our deeper relationships. We do think there's some growth opportunity there. We think that's going to be probably a longer term, kind of a medium-term opportunity for us to really start to deliver and unlock that. So quite frankly, that doesn't play a really significant part of that kind of 3-year synergy value capture target we modeled that some of that just stuff just has a longer gestation period to really start to unlock meaningful revenue growth opportunity. So it is there, but not working from a base of 0 and it takes a little bit of time to get that integrated more globally.

Good. Take a break here. Does anyone have any questions from the audience?

One over here.

Maybe if we can go back to the Accelera business and I was thinking, could you give a little bit more color on how you guys are planning to backlog to -- especially since you guys got the plan in the Accelera?

Yes, I can start and then you can just jump in. So yes, the backlog is for the electrolyzer business, about over $500 million. And just to be clear, that backlog is like firm orders that we're working on. It is taking longer to get these implemented. This is very fledgling stages of the industry. So I think it has taken some time to move this along. The early rule of thumb was it's like from backlog to revenues about 12 to 18 months. As the projects get bigger and more complex, that's getting more like 18 to 24. So I think we're working through that. And I think it is -- we just like the whole industry going through some growing pains. But I think we still see a really good outlook for the demand. But it is -- it has some dependencies on regulatory and otherwise. Jeff, anything else you would add?

No, no. The only thing I would add is I do think this dynamic of kind of the regulatory and subsidy-based underpinnings of some of this early stage adoption, not just in hydrogen, across some of these things is, of course, a real driver that we watch very closely. And so that will have an impact certainly this decade on the pace of what we see in terms of the revenue.

Is it right, but are there accounting work on that, Chris, is that percentage of completion or is it...

You have pieces when you deliver it and then you have it on installation. So it's kind of split up yet. It's not quite a percentage of completion starting old corporate controller add-on, but no.

Going to call you out on that. With -- on the -- within components, one of the other somewhat recent any more investments on the Eaton side, it was pretty big growth last year in that AMT. What -- where are we in terms of upticking that, there was an emphasis to make that more of a global -- where are you in terms of...

Yes. I think the biggest piece of headway is probably in China where that has continued to uptick. And even when we made that kind of joint venture with Eaton, China wasn't really much in the business case because the feedback at that point in time is still never adopted. And then as they became introduced to it, it's now kind of taken off and been growing at a very, very good clip. It's obviously stalled out a bit with the market itself, but I think we still see a really good penetration on the AMT side.

Okay. We can transition to power systems, one that's had seen a nice margin uptick recently. Obviously, some of the higher-margin businesses within that have been strong. But maybe talk us through -- I know you've made some cost-saving moves within that. So talk us through kind of the margin outlook there. And I think you're expecting further increase in '24.

Yes, we're really happy, happy to talk at all about Power Systems because for a long time, it was just kind of middle margin kind of steady, but not really all that excited. I didn't get many questions on it. But now we've really turned the corner on it. It's come with -- we've done some focused efforts on margin improvement that those are still ongoing, working on that, basically trying to raise our -- raise the floor of the margin and take some structural cost out. What we found over time is just Power Systems is the latest example of that is if we put like a focused effort on a piece of the business, that's when you can take cost out permanently versus more widespread actions. So that's what we're working on now. And we've been able to continue to drive pricing, adding more value in there and particularly in the power generation side, where those margins tended going backward to lag behind in the industrial margins at least on the first-fit side because they don't generate as much aftermarket. So it's -- now we've raised those up to a much more comparable level. So that has really helped a deal. And we're still in progress, making really the growth outlook for that business are very strong, particularly on power generation. And I think we're seeing the margin outlook continue to improve. And so we're really happy with the progression there.

Yes. I was reading something coming down here yesterday and it was a blurb from an electrical distributor, and it was a lead time, a list of their key products. It was like electrical distribution. So all the different, down to like circuit breakers, but then it's a 1.5 megawatt and above generators and pre-COVID was like 40 to 52 weeks. Now I think it's 110 weeks or something. I mean I imagine that -- again, back to your point about probably a good pricing backdrop when supply is falling that...

Very much so, yes. And I guess the data center has become a bigger and bigger piece of that. And now it's like -- it's inflecting upward from already a very strong position, and that's helping us as well. So it is -- that's a place where we've talked about like we're looking to add capacity in that space as well because that -- we get ranges from the big data center customers. And at the low end of their range is really strong growth. At the high end of the range is astronomical growth. So I think we have to make the choice on where we invest, but I think there's some good growth outlook there.

Obviously, your big competitor in that space is doing the same thing. And is that -- the power gen, historically, you even had a pretty strong footprint in China as well within the data center market. Is that -- I'm guessing it's very much a global business, just given the spending patterns by the big...

Definitely, yes. I think we've been able to establish positions all over the world, right, in the larger gen sets that back up these data centers, including some of the big customers in China, in India and elsewhere around the globe. So that has turned into quite a success story with obviously a lot here in North America, but we continue to see obviously, pretty similar underlying structural trends that are driving the expansion and growth of the data center market and it is not exclusively a North America story. So it's turned into a really strong, solid growing business for us.

But to your point earlier, Chris, just like if you had a backup generator for this hotel, I mean, it's designed to not operate, right? So -- and it's -- to your point, there's not a whole lot of typically a lot of parts and service that comes with that. So is it -- would it be because of the nature of the complexity of the design, is it a better margin product than your traditional standby or is it...

Yes. The first step margin -- the initial sale margin is strong and much stronger than it was more comparable to industrial. But you're right, it doesn't generate a lot of products. Ideally, doesn't get run very often, they've been testing. There is service, they're service events they want to make because these are critical pieces of equipment for them because just in case, things go down. So I think there's probably a little bit more on the service side just for upkeep that they make sure it's going to work.

Yes, we do see some margin in our distribution, but mainly in the installation and the commissioning and then some of the ongoing, just service and demand. So it is not a parts consumer like the mining business and some of the highway trucks business, but it does have a nice complement to our channel or sales and service network that drives revenue and margin despite the fact that it's not consuming a massive amount of parts.

Yes. Just what you touched on within industrial mining being a big piece, you lost, I think, that [ Ballard ] at one point was almost half of that business. I think -- and I'm guessing that's close to 0 now. So with that, despite that, where is the business in terms of what you're modeling for '24?

Yes. It's pretty remarkable over the last couple of years to take out a very large customer like the [ Ballard ] to take out the Russian market. And the China market, not assuming as much common as it was, and the market is still very strong. I think it's still at a strong level. Over the last couple of months for '24 keeps firming up. So we're feeling more and more bullish about '24 in the long-term outlook looks good. We have great partners. And it seems like the gap where [ Ballard ] was selling is filling in outside of Russia and those areas, but where they sold internationally, it seems like a [indiscernible] and that we're participating well with them.

Do you think some of that is a function of the miners that are saying, well, we've committed at least the big public miners committing to these GHG targets in a couple of years that rather than committing to a 20-year diesel power and new mine truck will do an overhaul to kind of band-aided and extend the life? Or i.e., are you seeing more of the demand from kind of from a rebuild perspective than a unit? Or is it to...

Pretty mixed. I mean these have always been like a high level of parts consumers, the mining trucks are the top in terms of parts consumers, they rebuild them usually 4x. So 4x initial sale imports and that's kind of continuing. We haven't seen much. There usually -- I mean there's -- you hear more and more about efforts as they are trying to make the mining more green, but it's not making a huge in roads right now, just from my perspective.

I was going to say something. It's not obvious that what we're saying is just merely trying to buy the next kind of 3, 4, 5 years just to see it to whatever the next solution is, like they absolutely are and understandably so working to test various alternatives, hybrid solutions, looking at hydrogen solutions, fuel cells and things like that. So that's very much a set of activities, but still remains pretty, pretty nascent and again, comes with a pretty significant amount of infrastructure and operational and economic challenges to really pull off at scale. And these are remote pretty nasty operating environments that it's not an easy problem to solve on that front. So I think it's more a reflection of just the general mining cycle that continues to be quite strong, more so than extension of the diesel for [indiscernible] so long.

A couple of minutes left here. Maybe a few on distribution, which has again, also had one of the nice, consistent march is higher from a profitability perspective. A lot of that was done on the heels and that the consolidation and the reorg in North America. What's kind of the next step in terms of taking presumably margin, those margins higher?

Yes. I think we've been really happy with the trajectory of those margins to my -- what I mentioned earlier, the targeted focused margin improvement efforts, that was the first step was in North America distribution and bumped a couple of hundred basis points, really strong improvement there. There are some learnings that we can take from that, that we can take internationally. But in the end, I think there is a finite level for a distribution business. We don't -- I mean you could -- we could very easily take some profitability from our product businesses and put it to distribution, but it balances out. So I think it's probably at a pretty good set of different view.

No, that's -- I mean I think what we're continuing to look at is where -- a couple of things, where the distribution business just can continue to reinforce our medium- to longer-term strategic positioning as we go through the synergy transition. It's not easy things to replicate the sales and service network we've built and enjoy. And so how do we use that to maximum advantage. How do we continue to drive additional services and profitability of those services, how do we get more efficient at delivering them? And again, we break this down, we think about this in the form of kind of what I'll call in-shop, where we have literally bricks-and-mortar distribution sites around where we want to continue to be. And that for us is largely how do we deliver services more efficiently because we do get a lot of vocational trucks, fire trucks and cover tricks and things like that, that drive a nice business for us, and we can do so profitably. And then the other one is remote sites, where we actually go out and are servicing equipment out in field. Some of these remote mining locations and other things like that, that we think we can continue to the digital tools to get smart around how, when and where we deliver back to the customers and the profitably. So a lot of that stuff adds up to the start of the distribution business, especially from a growth and profitability. One is a lot of smaller, more incremental things to continue to be to build on rather than a 1 or 2 really big things, right? It's about continuing to push on incrementally being more efficient, adding more content, doing more services and underpinning our long-term strategic positioning with the customers.

But to the extent -- I mean, services being a focus, I mean, that you're probably walking a really fine line there, right, because you potentially encroach upon the work that your OEM dealers are doing, right?

And I think we've -- there, of course, can sometimes we get some conflict and some tension. But by and large, we think involve, understood kind of where is the right place for us to add value where less so and how do we manage that. So I view that a little less as you're right, we do have to be cognizant of it and thoughtful about that. But I still think there is opportunity for us to continue to grow and do that in a way that doesn't come totally and fully at the expense of our direct OEM customers and partners, which, of course, we would want to do quite thoughtfully.

Chris, I shouldn't waited this long. Just a minute left, just a few things coming about the last week with share exchange, debt offering, roll that together and then the thoughts around or the plans for capital returns in '24. I don't think that was this clear coming off the call.

Yes, we certainly had an eventful Wednesday last week. So I think we're kind of digesting that all the missed transactions progressing should be including middle of March, and then we're balancing that out with the debt offering, paying down some of the existing debt, balancing that out and then saying, okay, what does it mean for the capital allocation for the future. So that's more what we'll share on our Analyst Day, like not only just for the plan for the rest of the year, but planning moving forward because, again, as we widen out the margins and get through this investment bubble, particularly, in the engine business, the cash generation is quite robust. Looking at continuing strong returns to investors.

Excellent. Good stuff, guys. Thank you.

Thanks.

Thank you.