Jerry Revich: Okay. Super. And lastly on the Cummins front, with the transition of dialer medium duty engines, nearly 100,000 units over the next, call it five or so years, is that a global opportunity for you folks? Would you benefit across the Board on that or are there any regions where you wouldn’t participate in? And how do you expect the cadence of that transition to play out as you plan your capacity?
Steph Disher: We would absolutely expect that to be a global opportunity for us and to play out over the period of time. Our investment, we pre-plan, obviously, our investment in capacity, and we are investing in capacity to ensure that we can meet and service that demand and support our customers.
Jerry Revich: Okay. Thank you.
Steph Disher: Thanks.
Jack Kienzler: Sure.
Operator: Our next question comes from the line of Andrew Obin with Bank of America. Please go ahead.
Andrew Obin: Hi. Yes, good morning.
Steph Disher: Good morning.
Andrew Obin: Congratulations on a great quarter. Just a question in terms of when you talk about your aftermarket, you sort of mentioned that destock is almost over. So as I look at your forecast, what is the headwind embedded in your number from the destock for the year and what sort of I guess I’m trying to sort of figure out sell through versus sell in.
Steph Disher: It’s interesting, Andrew. As you look at the aftermarket projection, and I’ve given a range in our aftermarket of 0% to 3% as part of our overall guidance, with a mid-point of 1.5% and so it’s difficult to, I would say disentangle some of the freight indices and the freight activity from the destocking activity. While you would think that the destocking activity is just a supply side issue, I do think it is intermingled in the freight downturn that we saw in the cap index, for example, of 9% in — at quarter three and four. So look, the best projection I can give you in aftermarket at this point as we turn that corner, and as I said, it’s going to be more weighted to the second half is my expectation, particularly as we saw those headwinds in the second half of 2023, that it’ll be in that range of the 0% to 3%.
We haven’t seen the inflection point yet, particularly in the on-highway markets of that turning. We’re still seeing depressed freight activity. As I said, the destocking we’ve seen mostly conclude, but we’re still seeing the depressed freight activity. We’ll need to see that turn before we can give any more optimism around the aftermarket outlook.
Andrew Obin: Well, rush to rush called the bottom on freight for the summer earlier today. So there we go. Sorry, couldn’t resist. But you know him, he’s a character. So just a different question actually, a full separation from Cummins. Is the Board planning to revisit potential cash return to shareholders? I know folks are asking questions on M&A. Is that the first priority? What’s the thinking on sort of return of capital to shareholders? Thank you.
Steph Disher: No. Thank you for the question. We certainly will revisit that with our Board as we move through the sherry strange and the transition that obviously is subject to the Board’s decision, but we would certainly look to revisit that. I think, Jack, it may be worth you just talking about how we’re thinking about the capital allocation priorities.
Jack Kienzler: Yes, absolutely. And thanks for the question, Andrew. So just a reminder, we are coming out of 2023 in a position of strength from a balance sheet perspective. As I mentioned, $586 million of liquidity and 1.4x net debt to adjusted EBITDA. Our number one priority is to continue to reinvest in the business to enable top-line growth across our growth platforms, in addition to a successful operational separation from Cummins. Obviously continuing to fund strategic growth initiatives with a focus on expansion into industrial filtration markets, as Steph mentioned, we will take a disciplined approach to that M&A balancing profitable growth with return on invested capital. And then, as you mentioned, continuing to evaluate cash returns to shareholders with a goal of delivering strong total shareholder return. We did pay down the revolver inside of Q3 and so I wouldn’t expect any significant debt reductions outside of the contractual ones that we highlight.
Andrew Obin: Perfect. Thanks so much.
Jack Kienzler: Thank you.
Operator: Our next question comes from the line of Bobby Brooks with Northland Capital Markets. Please go ahead.
Bobby Brooks: Hey, good morning, team. Thank you for taking my question. So, pretty strong year-over-year revenue —
Steph Disher: Good morning, Bobby, and welcome.
Bobby Brooks: Hey, thanks, Steph. I really appreciate it. So pretty strong, so really strong year-over-year revenue growth in the fourth quarter. Obviously, you already mentioned that it was driven by price pricing and favorable impacts of currency, but slightly offset by decreased volumes. So I was just wondering if you could maybe help frame how much of an impact each of those factors were in the fourth quarter and then also maybe discuss how those I mean you kind of already touched on it, but if anything incremental that you want to add on how those factors influence your 2024 guide.
Steph Disher: Thanks. Jack, do you want to touch on this?
Jack Kienzler: Yes, absolutely. And welcome, Bobby, good to hear from you. So some of the quarter-over-quarter dynamics pricing versus last year in the same quarter was about $17 million or just about 4% year-over-year, volume was about an $8 million headwind or about a 2% reduction, and then some FX benefits of about $5 million or slightly over 1%. So that’s kind of the top-line backdrop. As Steph mentioned, as we look at 2024, we would expect price to be about 1% of a benefit, share gains of about 1% offset by just about 1% of a net volume headwind, again with the impacts of first-fit offsetting the expected recovery in aftermarket. As we think about 2024 versus 2023 have not embedded any significant FX movements based on what we see right now.
Bobby Brooks: Got it. Appreciate that. And then kind of shifts into the next question, of the 11 distribution centers you guys had exiting 2023, could you just remind me how many of those are in APAC, Europe and that you plan to split off from Cummins or just plan to stand up as your own sole distribution centers? And then could you discuss the financial impacts you’ve seen from — and what you’ve learned from standing up the Brazil, Mexico and Dallas facilities and maybe how you will apply those learnings to the rest of your footprint.
Steph Disher: Thanks for that question. We have currently four of the 11 are shared facilities still with Cummins, and so we’ll look to transition those over a progressive plan, over the course of 2024. And I think South Africa extends into 2025 as the only remaining one beyond this calendar year. They are certainly we’re at the tail end, if I describe it that way, of our distribution center transition still obviously very important to us in terms of our global footprint. But as I talked about earlier, we have prioritized the Pareto or 80% of distribution centers and have moved through those effectively. In terms of what we’ve learned and the opportunities generally we’ve been able to phase the work within the quarter. I would say obviously there is some build of inventory inside a quarter as we make the transition of the different facilities and set all of that up.
Generally speaking, we’ve been able to do that in the quarter. There’s systems transitions and facilities transitions as part of this and, all I would say, I guess is with each one of these, you get slicker in how you manage it. And so I’m not — I’m not expecting any issues with the ones that are ahead of us. We have a clear plan, and I’d expect us to manage to support our customers through that transition very effectively, given how much practice we’ve had.
Bobby Brooks: Got it. That’s really good color. And then, maybe just touching on the fully automated line manufacturing line in France, could you maybe just remind us what the timeline of when that was completed and maybe talk about because I know you guys want to take the learnings from that, and obviously, you specifically chose to do that in a high cost region, right, to see those benefits most. And just so along with the timeline, just talk about maybe when you think you could get to a point where you’re comfortable with the learnings, to maybe apply that to your manufacturing footprint elsewhere.
Steph Disher: Yes. So, automation overall is a key part of our supply chain transformation strategy. For reference, our largest manufacturing facility is in at Mexico, in San Luis Potosi. And so our strategy for automation varies by location, I would describe, and also by the different lines and opportunity sets. And so we very much focus on the green cartridge line as one of our bigger automation undertakings. And it’s a fully automated line, as distinct from, in some cases, such as in Mexico, we’re using assisted robotics, which really removes some sets of the activity in the manufacturing line, but not all of it. So there’s been a lot of learnings for us in France, as we’ve installed the green cartridge line. That decision was taken last year, I think commissioned early this year.
We’ve been trying to scale that up. So certainly, I expect efficiency benefits as we get into 2024 associated with that line in particular, because just how that all works together has taken us some time to land. Also, part of that green cartridge line was not just the automation of it, but just the production ability that we had. And this will give us much more speed than our existing green cartridge line that’s more manual, to be able to support the really growing demand for this particular product in Europe and beyond. So we will continue to strategically invest in that kind of capacity. And I guess the matching there is, what’s the regional requirements? What are the global requirements? And then do we best service those through a fully automated line or this other end of the spectrum of just robotics to support parts of line.
