Q1 2020 Earnings Call
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Executive Director of Investor Relations. Please go ahead.
Thank you.
Good morning, everyone and welcome to our teleconference today to discuss Cummins results for the first quarter Twentytwenty.
Participating with me today, our chairman and Chief Executive Officer someone bargain.
Our Chief Financial Officer, Mark Smith.
And our president and Chief operating Officer, Tony Shatters wage.
We will all be available for your 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 Exchange Act of 1934.
Such statements expressed or forecasted expectations hopes beliefs and intentions on strategies regarding the future.
Our actual future results could differ materially from those projected in such forward looking statements because of a number of risks uncertainties more information regarding such risks and uncertainties is available in the forward looking disclosure statement in the slide deck and our filings with the FTC.
Particularly the risk factor section of our most recently filed annual report on form 10-K, and any subsequently filed quarterly reports on form 10-Q.
During the course of this call 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.
Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website www dot Cummins dot com.
For the heading of investors and media.
How does the way well begin with our chairman and CEO some linebarger.
Thank you James good morning, everybody.
Thank you for being with us today.
Today actually marks the first for us since Mark Tony James and I are all doing this call from our respective homes and I expect many of you are listening from your homes as well.
I'm hopeful that technology will work well, but we lose align the others are ready to step up.
I wanted to start today by providing some initial comments on the environments in which we are operating and then move to our first quarter results.
I missed the unprecedented Kogan 19, pandemic health and safety of our employees and the communities in which we upgraded our first priority.
For a possible our employees are now working from home.
And for those frontline workers, who are keeping our plants in operation to support our customers and critical supply chains. We've introduced many additional safety measures in line with government and Health Authority guidelines.
Across the communities, where we operate we are working through the come its foundation to support families in children impacted by the cobot crisis.
There were many challenges in these communities before coated there are many more now.
We've also partner with Dupont and three M. to address current shortages of personal protective equipment, particularly and 95 respirator masks in Paris, <unk> powered air purifying respirators, using our filtration technologies.
We're also deeply committed to meeting customer needs. Our teams are working hard leveraging both our internal capabilities and the capabilities of our global network of partners and suppliers to support our customers to despite major challenges in the supply chain.
During or 100 your history, we've encountered many unforeseen crises.
I'm confident that we will successfully navigate this one and emerge stronger than ever.
Cummins enters this period of uncertainty in a position of strength with the very strong balance sheet, leading products technology diversity and strong relationships with a leading customers in our industry.
We've also invested in sustain face to face leadership development with our top 200 leaders for over 10 years, providing us with a group of capable collaborative in Brazilian leaders, who are ready to lead in this crisis.
We entered this period from a position of financial strength as well with $2 billion of cash and marketable securities and 1.9 billion up committed credit facilities at the end of March.
The strength is due to successful execution of our strategy over a number of years and more recent steps we took to prepare for a downturn in 2020.
During the second half of 2019, we initiate a number of actions to reduce costs.
Addressing underperforming parts of our business and to drive performance improvement.
These actions included the restructuring actions, we announced in November.
Taken together these actions will say between $250 million to $300 million in 2020, and real critical and supporting our strong performance this quarter, despite a 17% revenue decline.
We have continued to prioritize investments in new products and technologies that will help us emerged stronger.
As we have in prior global downturns.
As we entered March and the impact of Cobot 19 expanded across the globe, we moved quickly to take additional actions to lower cost.
In mid April we implemented temporary salary reductions that will save approximately $30 million per month.
We've also lowered our projected capital outlays by 25% compared to 2019 and reduced discretionary spending across the company.
These actions will help us maintain our strong financial position.
While positioning us to deliver strong profitable growth when demand returns.
Well most of our manufacturing sites around the World currently operating there are doing so at reduced production levels. Both due to changes in facilities line layouts and work practices to support social distancing, an employee safety and because customer demand is weaker in almost all markets.
We are unable to project the full impact that the pedantic and the secondary effects will have on or demand for the remainder of year of the year, but we are planning for a week levels of demand for some time.
Now I'll move to a summary of our strong first quarter results in a discussion of our major end markets. Mark will then take you through more details of our first quarter financial performance and update you on the balance sheet and liquidity.
Revenues for the first quarter of 2020 were $5 billion.
Decrease of 17% compared to the first quarter of 2019.
EBITDA was 846 million or 16.9% compared to $1 billion or 17.2% a year ago.
The impact of lower volumes was partially offset by the benefits of restructuring reduce warranty costs material cost reductions and higher joint venture income.
The increase in joint venture income was primarily due to recently passed tax legislation, India and technology fees associated with the development of new products to meet lower emission standards.
Engine business revenues declined by 19% in the first quarter compared to a year ago lower production in North American truck markets.
Along with weaker demand from global construction customers drove most of the revenue decline.
EBITDA margin for the quarter was 16.9% compared to 16.5% for the same period in 2019.
Cost savings related to restructuring activities and increase joint venture income more than offset the impact of lower volumes.
Sales for our distribution segment declined by 9% year over year with lower revenues in domestic and international markets.
First quarter, EBITDA was $158 million or 8.7% of sales compared to 8.5% in the first quarter of 2019.
EBITDA margins increase as we began to realize the benefits of our North American transformation work as well as the impact of lower variable compensation expenses and higher joint venture income.
First quarter revenues for the components segment declined 19%.
Sales in North America declined, 24% driven by lower truck build rates well revenues international markets declined by 12% as a result of lower truck demand in Europe and India.
EBITDA for the first quarter was $279 million or 18.6% compared to 17.5% in the same quarter a year ago.
EBITDA percent increased as lower warranty costs higher joint venture income and the benefits from restructuring offset the impact of lower volumes.
Investment in research and development decreased by 9% from elevated levels a year ago as our global six products are now in full production, India, which transition to the new be six emissions regulations in April.
And global six products are also ramping up in China, where a phased adoption to the new regulations should be complete by next July.
Our system sales in the first quarter declined 18% year over year.
Industrial sales declined 30% driven by continued weakness in oil and gas and mining markets.
Power generation sales decreased by 8% lower revenues in both North America, and international markets with particularly weaknesses weakness in India, where the economy has slowed in recent quarters.
EBITDA in the first quarter was 8.7% compared to 12.8% a year ago.
The impact of lower volumes combined with lower joint venture income in China more than offset the impact of cost reduction actions.
In the new power business EBITDA was a loss of $43 million in the first quarter inline with our expectations.
Cost associated with the development of new products and the explosive expected slow ramp of new technology adoption.
The two primary contributors to the EBITDA losses.
No comment on some of our key markets, starting with North America, and then I'll cover some of our largest international markets.
Our first quarter revenues in North America declined 16% to $3.1 billion.
This reduction was driven by our lower lower industry build rates of medium and heavy duty trucks.
Continued weakness in engine sales to construction and oil and gas markets.
And lower demand for power generation equipment.
And just.
Preproduction Bucks declined 32% in the first quarter compared to a year ago.
But 10% sequentially.
With Oems, reducing build rates due to continued low order rates and shrinking industry backlog.
Well OEM production was down 10% sequentially, our shipments of engines were flat.
Our new X 15 efficiency series engine, which meets 2021 greenhouse gas standards and provide improved fuel economy is being well received by customers.
We also look forward to launching the low weight X 12 platform on the Freightliner Cascadia day and sleeper cab chassis is.
Which customers can order today for delivery later this year.
Production of medium duty trucks decreased by 38% in the first quarter and it was impacted by Oems shutdowns at the end of March.
We continued to maintain our clear market share leadership in the medium duty truck market. It will start supplying medium duty truck engines to Mac for the first time later this year.
Total shipments to our North American pickup truck customers decreased 1% compared to a year ago and were impacted by an unplanned OEM shutdown in the last week of March.
And domestic off highway markets engine sales for construction equipment decreased by 39% from the near record levels experienced a year ago, but were consistent with levels of demand the second half between 19.
Revenues for power generation equipment fell by 9% with lower demand, an RV and backup power markets.
Demand for engines in oil and gas markets declined by 81% due to a reduction in equipment purchases of new fracking equipment.
Now I will turn to our major international markets.
International revenues decreased by 17% in the first quarter up 2020 compared to a year ago.
First quarter revenues in China, including joint ventures were $1.1 billion, a decrease of 19% and were significantly impacted by Kobin 19 related shutdown.
The pandemic started to impact industry production of equipment in early February and the majority of our facility experienced shutdowns for four to six weeks and like.
All of our manufacturing facilities in China were fully operational by the end of the first quarter.
And we have experienced high levels of demand since reopening.
Oems prepare for a rebound in demand.
In the first quarter industry demand for medium and heavy duty trucks in China decreased by 17% compared to a year ago.
Our market share was 12.4% up slightly from the first quarter of 29 King.
Our share was negatively impacted by lower sales of trucks by our partner don't phone, which is headquartered in Koubei province.
Industry sales of light duty trucks declined by 32% in the first quarter and our market share was 8% flat with last year.
First quarter demand for excavators in China decreased 8% from a year ago, our market share was 15% compared to 14% last year driven by the strong performance of our domestic customers.
While demand was lower compared to a year ago. It remains at near record levels.
Demand for power generation to quit in China declined by 12% in the first quarter sales were negatively impacted by Kobin 19 related production and transportation disruptions.
Demand from data center customers in China remains robust.
First quarter revenues in China include excuse me in India first quarter revenues, India, including joint ventures, with $318 million a reduction of 32% from the first quarter, a year ago due to lower industry truck demand and weakness in power generation and construction markets.
Industry truck sales.
In India decreased 57% compared to very first very strong first quarter last year, while construction in power generation sales declined by more than 30%.
Demand remains low in most end markets due to continued weak economic conditions and reduced access to credit.
In addition truck production was negatively impacted in the first quarter as result of Oems, reducing inventory in preparation for a transition to the new B S. Six emission standards.
The transition to be Essex standards occurred on April 1st as schedule.
But the Indian government is allowing industry participants to sell B S. Four trucks that were produced before April 1st for a limited period in recognition of the disruption caused by the national shut down and that containing the krona virus.
In in government implemented some of the most stringent locked out of procedures in the world in response to cope with 19, which resulted in a closure of all of our manufacturing facilities in late March.
Starting last week, a phased approach of reopening our facilities began with strict limitations on the number of employees allowed to return to work.
Outside of China, and India, we saw year over year revenue declined 21% in Europe, and 18% in Latin America, primarily due to lower truck production.
Global sales of mining engines declined 48% compared to you a year ago estimates for 2020 capital expenditures by miners continued to decline with weakness is especially pronounced in coal markets.
Coal prices are now 50% below their late 2018 peak and near to trough prices reached in 2016.
In China, the government backed coal transportation and distribution Association recently called for domestic coal producers to cut production to support prices.
As you know the headlines today are filled with negative reports about economic activity and rising unemployment in many countries.
Data more specific to many of our end markets is not encouraging.
And we are prepared for a week levels of demand until global economies stabilize and start to recover.
Our leadership team is spending a lot of time planning ahead.
Running a number of scenarios and responses, including identifying opportunities to strengthen our competitive position during this time.
And of course, we will continue to invest in the new products and technologies that are key to our future success.
We're able to plan ahead with confidence because of the strong position we started it.
Today, we had the highest credit ratings in our industry fully funded pension plans and robust liquidity.
Tony Mark and I and all of our business leaders and many other members of my staff have been through several downturns wallet comments and all were in senior leadership positions during the 2008 financial crisis.
While this pandemic is clearly different than 2008, we have all experienced leading through challenging times and understand the importance of paying close attention to economic conditions preparing for the worst taking thoughtful and decisive actions in periods of uncertainty.
To be clear our actions will not be not aimed not only at reducing costs, but also continue investment in our products and capabilities that will advance our competitive advantage.
When demand returns, which it will comments will be in a strong position to deliver the products and services that will drive our customer success and deliver even stronger financial performance for shareholders now, let me turn it over to Mark.
Thanks, Tom and good morning, everyone.
First one wesco some of the comments made by talking about the resilience and determination of our colleagues in these challenging times.
Cross Cummins our teams continue to relentlessly focus on safety is a top priority.
While also helping to drive multiple initiatives to protect profitability.
Preserve cash and leave room for continued investments in the new technologies that will then depending on what strong future.
While the cobot 19 pandemic is having an unprecedented impact on the global economy or experienced leadership team and our financial strength Cummins and a strong position.
That's really navigate the challenging period ahead.
First quarter revenues were $5 billion, a decrease of 17% from a year ago.
Sales in North America declined, 16% and international revenues fell 17%.
See movements, principally driven by a stronger dollar negatively impacted revenues by 1%.
Earnings before interest and tax depreciation and amortization or EBITDA was 100 $846 million or 16.9% sales for the quarter.
Compared to $1 billion or 17.2% of sales a year ago.
EBITDA decreased by 18% year over year, driven by the negative impact of lower sales, partially offset by lower product quality and variable compensation expenses.
We also realized the benefits of the restructuring actions that we announced in 29 team, which was substantially completed in the first quarter.
First quarter results included a 37 million build a benefit to joint venture income related to recent changes in tax law in India, which will then anticipated three months ago.
As a reminder, our share of joint venture earnings is reported on an after tax basis.
Gross margin of $1.3 billion, 25.8% sales decreased by $238 million from a year ago, but increased by 30 basis points.
This improvement as a percentage of sales resulted from a number of initiatives that yielded ceilings and quality people and material costs.
People cost declined.
As we saw the benefits of our restructuring actions I know a variable compensation from flex down with weaker market conditions as it's designed to do.
We reduced selling admin and research costs by $46 million or 6% year over year.
$784 million.
Selling general and administrative expenses decreased by $47 million or 8%.
Primarily due to the benefits of restructuring and lower variable compensation expense.
And on to take you know restructuring and other cost reduction actions. We made the choice to protect engineering programs that will deliver new and improved products to drive profitable future profitable growth and that resulted in a 1 million builder increase in research and engineering expenses you will begin.
Joint venture income increased by $37 million, primarily due to higher earnings in India, which benefited from the recent change in India tax law.
The receipt of a technology fee, which we flagged during our call last quarter.
In China joint venture income declined due to the impacts of Corona virus on our own operations and those of our partners and who they province and beyond.
Other income of $39 million decreased by $44 million compared to a year ago, primarily due to strong gains last year on investments that underpin our non qualified benefit plans. We also had gains on these investments this year, but at a much lower level.
Net earnings for the quarter with $511 million, all $3 41 for sure.
If you check compared to $663 million will build is 20 from a year ago.
First quarter results included the benefit of $35 million for 23 cents to diluted share related to the recent text change tax law change in India.
The tax rate in the quarter was 19.4%.
Operating cash flow in the quarter with inflow of $379 million down $33 million or 8% year over year on a 17% decline in revenues.
In fact, if we strip out the $48 million of cash payments in the first quarter of Twentytwenty associated with restructuring actions operating cash flow actually increased year over year.
Capital expenditures in Q1 was $75 million down from $109 million a year ago.
In the first quarter, we repurchased $550 million of shares as we completed our trading plans placed in the fourth quarter of 2019 and early Twentytwenty and paid 195 million build is out in cash dividends.
The dividend remains an important part of our capital returns to shareholders. When we currently have no plans to reduce it.
As the impact to the pandemic has grown we have responded by taking additional actions to reduce costs and preserve cash beyond the steps. We'd originally planned for the use. These actions include temporarily lowering salary costs costs across the business.
Starting mid April which will result in an estimated pre tax benefit of $13 million.
We've adjusted down our cap once the capital expenditures to to be the between 500 million and 525 million build as this you down more than 25% from 2090.
Our industry faces a challenging second quarter, given the broad disruption caused by the Corona virus.
Customers and suppliers now taking steps to restart operations after widespread closures in late March through April.
We also faced an uncertain outlook for the remainder of Twentytwenty not providing forward looking guidance for revenues and profitability.
As Tom said coming into this period of uncertainty in a strong financial position at the end of the for this quarter. The company you know cash cash equivalents, a marketable securities of $2 billion and has committed borrowing capacity of $1.9 billion under existing revolving credit facilities.
We have maintained long term credit ratings of eight listen they too from standard and Poor's, a moody's with stable outlooks.
Our pension plans a fully funded debt to capital <unk> remains below 30%.
We will continue to monitor market conditions closely.
It may take additional steps to boost our already strong liquidity.
To summarize the cobot 19 pandemic as presented all of those within an unanticipated challenges.
Cummins isn't as strong financial position to navigate this environment.
We delivered strong first quarter performance on a continuing to take actions to reduce the impact of food a hidden headwinds in a challenging second quarter.
But isn't even as we aggressively cut costs and Reprioritize work, we plan to continue investments in new products and technologies to put does and then even stronger competitive position when the inevitable rebound in market demand because thanks for joining us This morning and for your support let me turn it back to James.
Thank you Mark out of consideration to others on the call I'd ask that you limit yourselves to one question unrelated follow up and if you have additional questions fleets. Please rejoin the queue.
With that operator, we're now ready for our first question.
Thank you I'll first question comes from the line as Tim thing with Citigroup. Your line is now open.
Thank you and good morning, maybe at a short and longer term question first Ah I guess from Mark.
In terms of operating cash flows for the year should mark we still consider that they tend to 15% of revenues as a good good way to think about targeting on on cash flows.
Asset in some somewhat or others and flags working capital being potentially more of a of the drag.
As we look to the remainder of the year, so maybe or just your thoughts on that I'll start there.
I think there's no doubt Tim you know out inventories in particular were impacted in March.
As we start the to face all of these disruptions and shut down so yes normally.
We would expect you know a very strong inflow from working capital and that would go some ways towards a accepting the.
Reduction in cash earnings I would say, yes, we're still trying to get into that range, but you know with an uncertain outlook.
Difficult to predict with with certainty right now what I can say is we already have very strong liquidity and we expect to maintain very strong liquidity throughout the rest of the you. So we'll keep you posted as we move through the course.
Okay, all right understood and then maybe Tom for you at the Analyst day.
Talked a lot about market share opportunities is its customers have to prioritize investments and.
Essentially outsource more to pick comments I'm curious if you think.
What we're living through now drives more of a change in corporate behavior in terms of.
And just more of a risk aversion.
We all thought that financial crisis was kind of 100 year flooded and now a little over a decade later, where we're going to something even more significant so it's obviously totally hypothetical at this point, but I'm just curious if.
Again, if this may be drives a different thought and it may be expedites some of that potential.
Outsourcing of of Capex or or other projects to a company like comments.
Good morning, Tim Thanks for the question. So of course, we don't know yet today there is everybody's just grappling.
With what they see around them and trying to figure out how they can move from.
Their heels to their toes.
Really given all the things that have changed and again trying to look ahead, but.
My observation so far is that this crisis has put people's attention even more.
What are the critical investments I need to make for the future, which are the ones that I don't need to make anymore. So my suspicion again, we'll see how it plays out is that all the decisions about trying to sort out those things that I want to outsource those things that I want to do myself.
Get sharper move faster because just because there's not as much money. If that was you just have less resources test spread across more projects and you're trying to figure out what to do but but we'll have to watch it play out and see out goes from our part of your comments is still pushing ahead with our strategy to.
To make sure that we have the technologies that will take us into the future the new power technologies, but also that we lead in the current power technologies. So that we can be partners to our customers as they decide which projects. They want to do it don't you don't want to do we can be there to support them.
Okay. Thank you good luck.
Thank you. Our next question comes from the line of Rob Wertheimer with my least research. Your line is now open.
Yes, hi, thanks for.
Picking the question and I hope everyone as well just just a couple of quick ones on whether you can say anything on order trends are going through April I know, it's very near term and obviously very chaotic.
Don't know, whether there has been signs of stability on orders or not and the other one on short term. It's just supply chain disruptions well that's already peaked and you can sort of see what the shape of the year or the next couple of quarters looks like or not and how much on and on anticipated cost we might try to factoring from supply chain disruptions. Thank you.
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Hey, Rob Tony satisfied here, let me try and cover that one.
We are seeing a little bit improving trend in the in the context that we're seeing more Oems reopened.
Realty here in April.
They are essentially opening at very low production rates until although it is improving and it's not improving significantly if not bouncing hard.
Our orders we are we the vast majority of our facility outside of Mexico, India are operating.
They are operating though at fairly low production levels.
Which is completely consistent with where our customers are so I would say things look like they're getting a little bit better, but I think that's better from a pretty low bottom.
If I look at where we where we've been from a customer activity perspective over the last kind of four to six weeks.
So we are seeing some improvement we are working to restart our facility.
Mexico in India, which have had the most aggressive shutdown.
We are hopeful that we will get some level of production started there in the next couple of weeks.
But the markets are very quiet.
Just say that end user demand is down you've seen.
Good reports I think as well as I have.
We are responding with our OEM customers.
Just to try to keep them supplied.
On the supply chain side, we've been dealing with disruption in the supply chain really said China.
China shutdown in early February.
I think our global.
That work has proved very valuable to us in that we've been able to move production around and we've been able to mitigate a large number of.
I have issues.
Back to actually even premium freight in the first quarter. This year was actually down from last year.
So we are managing through this fairly well and doing our best.
Deal with the issues that are coming up every day.
That's very helpful. You're trying to JV income stuff looks quite good actually so thank you for the responses and.
Stuff there thanks.
Thank you. Our next question comes from a line of Jamie Cook with Credit Suisse. Your line is now open.
Hi, good morning, and nice quarter income considering everything I guess just building on the last question about the joint venture income, even if we back out the benefit from yeah, the India taxing the to 37 million or so the JV income was probably more resilient and what I would've thought so I guess, how are you thinking about that for the year given what you.
Christine in China, and do you expect that part of the business to be more resilient, which were not obviously helped the margin and then my second question. Tom You know you talked about you guys have been early to get the 250 to 300 million you talked about the salary cuts of 30 that will result in 30 million of savings for year I'm, just trying to better understand you know the different levels love.
As you could talk assuming we're in this downturn for a longer period of time in what you would sort of he need to see to sort of before but does thanks.
Thanks, Jamie I appreciate your questions and thanks for joining US I would let me let me go first Oh I asked that question then I can give it to mark Dr. Mark on the JV income, but I.
I would say that the as you said it it's good that we took action when we did.
And it's positioned us well for a downturn not not for one of the severity for sure.
We were positioned for a downturn, but this is obviously broader and deeper than anything we were contemplating where we took her was actually.
That's why we added the salary reductions.
That we did and and the time off that we did and we we took the other actions just recently, we did all that to make sure that we lowered costs further from our restructuring levels, while we tried to with that.
How far how long and how deep the this this economic impact from the virus is and we right now it's as Mark mentioned, we did so really don't have a clear view. So we put these cost reductions in to say these will be a in place while we while we tried to get a better sense of where it's headed and then based on that once we.
Get a clear sense, then we'll take longer term actions as necessary to respond to those and as your guests were running scenarios.
The usual ones you read about W.'s, NVS and use and Els and all those other shapes to figure out what we think about what we would do in each case and of course, what we would do in each case would be different if we if we did think we were emerging pretty quickly we might take relatively modest actions from here and carry on that doesn't look.
Very likely today, but you don't know when things get closer.
And we are prepared to fig with actions that we would take more dramatically. If we thought we will be in a lower sales position for an extended period of time, we've done it before we would know what to do.
I think also as I said my remarks and marks Mark also reinforce that we would continue to prioritize the investments in technology that we think position ourselves for our customers and look for other things to reduce a other businesses that look like in this environment, they're just not going to produce the kind of profitability lot.
Other activities, we think we could postpone or delay we would we would take actions on those.
Until we reached a cost structure that we thought would support our revenue.
As we emerge.
From the downturn again, how long it will last is just not clear today, but.
We are prepared for the scenarios the range of stars for ahead I guess, you also probably heard in my remarks.
A bias towards.
Assuming it's going to be pretty bad so that we don't get our get ahead of ourselves and.
Spend in ways that we can't sustain because it's hard to catch up from but when you're when you're when you're behind better to start out ahead and stay ahead, then that go the other way. So that's kind of how we're thinking about Mark Let me go to you for JV income.
Yes, I think the the positive that the outperformance in Q1, principally came from India, Jamie So that was the tax benefit.
That we talked about I also mentioned a technology. So you mean technology fees are an important part of our earnings stream from introducing new technologies, but I think to you go full would question.
The momentum in JV earnings is really you know really points to China and beyond this initial rebound in OEM activity.
Oh is demand for trucks, and construction equipment and power generation equipment.
Going to go from here, that's going to be the biggest driver the in India the economies.
I'd week was weak going in.
And then all indicators remain pretty weak we do have some upside in the second top of the year in consolidated revenues in India as we sell more advanced after treatment systems related to the new emissions rigs, but back to JV income kind of all eyes on China for the rest of either.
Okay. That's helpful stay well everyone. Thanks for your insights.
Thank you Jamie.
Thank you. Our next question comes from the line of David Raso with Evercore. Your line is now open.
Hi, Thank you kind of two related issues. The recent strength you've seen in China can you give us some sense of how much you feel it is just a bounce back and our your orders they are ready, reflecting it is just a catch up and you do you have a fade to it or just curious how you're interpreting it.
And within that JV income conversations about China, Mark you mentioned, the the technology fees I assume that's showing up in the royalty and interest income line is that correct. That's not part of the 37 and.
And if so again, how should we think about that royalty line as well, but obviously the question first on a on China.
I can say a few things on China, and Tony May or May want to jump in as well first the way that we're seeing it is there has been a you know the ramp up has been fast in the sense that.
We were completely out for four to six weeks and then as soon as.
The economy open back up again, we saw very steady ramp up and we're now producing at levels and many of our plants that was is higher than when before the crisis started which is pretty remarkable to say.
What we don't understand is whether end use demand is matching production rates today and again there is demand for excavators. There is demand for for trucks, whether it's at levels that they're producing now it's just not clear to us. So we are making sure were man monitoring truck.
Lots and things like that is to make sure there or sell through but I guess, what we remain as cautious David I just think given the.
Given the supply chains around the world and the fact that China is like like all the other economies and are linked.
With other other economies.
We're cautious about whether or not this level of production.
Can be supported by end use demand in China, a part of that will depend on the stimulus at the Chinese government takes and right now that's unclear, but the more stimulus they provide.
Potentially longer it could go a the less they provide them or it seems like it's probably.
A sustained for the entire year. So we're just watching like the other places to see but I guess I guess, it's safe to say, we remain cautious about whether it can be sustained this level.
To be clear Tom I don't think anybody is thinking we stay at the level of the peak of the catch up.
But just to be clear are you seeing beyond this catch up.
Truly a you know sort of a lack of owners a real notable slowdown.
Or is it more just a thought process that have we can't say at this level. This is catch up so it's really come down, but we're just not sure how much I'm trying to get a sense of what you're seeing burst.
Understandable radical via.
I think what your said was exactly where we are we just don't think it can say at this level. So we assume it's going to come down to what level, though we just don't know and it's it's again, it's tied up in what's the stimulus that the Chinese government is going to provide in China for to drive demand.
In the country, and then what happens with exports and imports and other things that affect the Chinese economy. Those are the two things that are still up in there that was sort of impacting the level that it settles out that.
Lets it but the orders aren't rolling.
Harder ready I'm, just trying to get a sense of of course, it's not down but now just want me, they're not yet and I'm sorry. The small question about the royalties just so we understand JV income.
So its mount David So yes, it's in the royalty interest income. So you will see that's up to $50 million. This Q1 versus 13 last year all of that increases royalty nothing do with China. It's all in India related to new technologies, the biggest six et cetera.
And that's not part of the 37 37 up and no other manufacturer.
Yeah, two separate issues ones tax related ones that takes the did call out the takes the last quarter as a reason I think it was cool you'd asked a question how could we possibly have an increase in Judy the earnings which is reasonable question I did call let out last quarter.
Nuts.
Part of our business, but it tends to come and looks lumps in chunks.
It's lumpy, but it does it doesn't sound very one off to us I'm just trying to make sure. It's 30, it's not going back to five or 10 per quarter, it's somewhat.
Lumpy, but sustainable it wasn't a one off completely is what I'm trying to understand.
Yeah, I mean these the it depends on the nature of it there's a lot of there it's going to come down from the 30 million, though that is that there's a high level typically sold but theres lots of agreements okay.
All right. Thank you appreciate it.
Thank you. Our next question comes from the line of Jerry Revich Goldman Sachs. Your line is not open.
Good morning, everyone.
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Good morning Gerry.
Okay, and what are you could just expand and they margin discussion you had your prepared remarks pretty interesting to see gross margin percentage up given that production decline. Jerry can you just flesh out for us manage price cost the magnitude.
Okay. When you spoke about in in other drivers.
As you think about the bridging the performance.
I've got an overall EBITDA bridge in front of me Gerry not every single line item.
But let me talk to the main points about that we've got about 80 basis points of improvement from warranty.
In the cost to sales.
Okay.
70 basis points of variable compensation 60 from restructuring.
70 from the India, Turkey.
And then you know there to see the pluses and minuses pricing cost was about 20 basis points of improvement and then the offsets were really will you.
260 basis point.
Well the written couldn't those lower investment gains about 60, and the rest is maintaining the irony, which went up as a percent sales and lower Jay either things in China.
Okay. That's helpful.
Yeah.
It quite a lot to drive the principally in cost little bit in joint venture earnings really helped out this quarter.
Okay, and as we think about deposits will get rental margins come second quarter and pieces that are going to say, we're guessing variable comp.
Warranty KCCC basis is somewhat easier compare so as you look at the opportunities for margin performance in the second quarter or do you feel comfortable that you could be in that 25% to 30% targeted range, even with the unprecedented production cut in April.
Can you.
Yeah, good cage.
I think what you're going to think to Jerry is April is completely unprecedented like I think in my career in Coleman's in the sense old such a high proportion of our customers suppliers.
Of course, some of our own operations shut down. So I think we think everyone's got enough to except for our industry. I mean, we don't publish April results, but that is going to be an anomaly and I think we're gonna have to when we get through that and see what will like on the other side. We're gonna have to you with comments about how different would the go forward month versus April I think.
Just going to be so unique hopefully it doesn't repeat in the remainder of the year based on some of the so no yields but.
You just the such a level of uncertainty about the pace of startup Gerry the reason why we've taken these temporary cost actions is we're just not shoe.
How long were going to go through these difficult Peter so I'm reluctant to commit.
Two extra decrementals were not managing the business to what happens in a very short period of time, although we're trying to make sure. We're on top of all our cost I'm going to try and avoid giving you a very specific number given the disruptions with leasing.
Okay I appreciate the discretionary share nice quarter Myspace record level. Thanks.
Thank you. Our next question comes on the line of Steven well when with Jefferies. Your line is now open.
Hi, good morning, everybody.
Most of my questions are answered but me.
Maybe this is a Tom question, but.
Some frustration around urgent listen the path you guys at work too so.
Great and yet the merging still fairly weak and obviously this is repayments, but I'm wondering just how you're thinking about that it's now and.
Additional 10 or.
Becomes a core business.
Hey, just and just thinking there.
Yeah, Thanks, Steven and thanks for your question today. So couple of thoughts first as you said, we worked very hard over the years to try to rightsize the power generation side. The generator set business. So what has been clearly a change environment in terms of.
Demand across the world the with the notable exception being Datacenters, which has been pretty robust and continues to be and lots of parts of the world. You know the rest of the demand has a.
Finished and competitiveness has increased across the market. So that's just been a reality we've been deal for some time and we feel good about where we are there.
In terms of restructuring and and getting the cost structure right for the business. Most of what we saw in in terms of margin deterioration here came from the industrial side of the business. It's a terrific business the mining business and oil and gas another large Asian business terrific business for comment it it's just.
Cyclically going down and of course, the crisis is going to make it doubly worse.
So you know that was we saw that deterioration it was a big impact and we are trying to figure out how to get the business.
Right sized for when we come out of this downturn and and and make sure that we're positioned from a cost structure point of view right for that but we do believe that business will return strongly and we think it'll be a good business long run for Cummins and at this stage. We think the generator set business. It's also a structured right to be would be able to perform.
Long run so the company Tony has been working really closely with our that later that business Norbert newest or to get that business to where we feel confident its long run future and its ability to return for that for the company. So so Tony I don't know if you I want to add any comments there.
Thanks, Tom Yes, Steve I would just adds remember that the power generation business link.
To the industrial business in the sense that it gives the volume base. The gets cost right and then it's also linked to our distribution business, which is the primary sales outlet for powergen. So it isn't important business across comment.
To put it impacts a couple of different be using so you would ask if we had changed our thinking on whether it was core or not and I would say no. We are still on the page, where we think it's an important part of common.
Makes the portfolio more successful overall.
We're trying to get the specific business, that's part of power systems to the right level of performance and I would say, we've we've done a lot of work I think it's starting to bear some fruit. It is a it is a difficult time, even in the powergen business, though.
Just in industry, although industrial did turn down much more aggressively here in the first quarter.
So we haven't changed our view I still think we see it is a core part to.
It makes the portfolio more successful overall and we're working hard to try to get it sets up to perform the way we want within the power systems business unit.
Thank you guys stay safe.
Thank you.
Thank you. Our next question comes from the line of Ross Good Lord <unk> with Bank of America. Your line is now open.
Yeah. Thanks, good morning, everybody.
Tom I was wondering if you could if you could maybe just comment in somewhat related to.
Tim kinds question to open up but less on and outsourcing and insourcing.
But on alternative powertrain and just how you're thinking this whole existential threat from alternative powertrain, specifically easy to the internal combustion engine.
For for trucks in a world, where we've got $20 barrel crude and very cheap diesel I mean does the whole.
Push in evolution potentially take a step back people will the newer entrants to these markets survive and do the customers gravitate more towards comments, because they simply no you'll be around because they've got the financial strength to do so.
Well. Thanks, so much for that question and thanks for joining the call today it is sort of.
I've been pondering that question.
Pretty much every day now since the crisis started it it does laker Tim's question, how our Oems thinking about.
Their future and what they want to spend money on and then what happens.
With the technology and the environmental thrust when nations and and customers are threatened with economic viability and what one obvious point is that it does feel like.
People are going to be more cautious about making taking technology and capital risk associated with adopting new technologies, just from a consumer point of view from.
An OEM point of view, how much do I want to commit to a technology, where the price is much higher capital risk of resale is much higher I think that.
That is definitely the case.
How long that we'll lap is unclear what doesn't seem to be changing that much though is government view that.
Over the long run.
Two and global warming, it's still a gigantic threat and needs to be addressed so I, what I'm, what I'm hypothesizing today is that the role of regulation.
We'll increase versus the role of technology, and what I mean by that technology still has to be driven to provide customers with good products, but the the driver for for for substituting one technology for the other might switch from the fact that I just prefer it to regulation is driving it.
This was likely likely anyway, but it seems like it's going to grow more likely now given the economic crisis because.
The capital just won't be there to take more chances and I do think the economics of the new technologies are just not in place with with such cheap oil. So so right now we still think and investing in that technologies is critical because we do believe the regulations will be there to drive people to lower C O two products.
And so we need to be ready, but we do think that that regs are going to play a bigger role thing than maybe even just economic trade off.
I was interested to see the announcement in Europe about Daimler and Volvo joining forces on.
Fuel cell because it does reinforced one of the things that we've been seeing in our own technology development is that large scale batteries for ease.
And commercial over the road trucks long range trucks.
Look like.
Don't look as promising is maybe they once did and fuel cells, maybe look more promising.
And I think that that's evidenced that that those large truck makers think this this could be a more likely winning technology. We've made a significant investment and that technology over the last couple of years out through the acquisition of Hydrogenics in our growing more confident with the long run viability as that technology. It is going to take awhile, but it does look.
Like a better solution and batteries for at least large energy large long range used vehicles.
Thank you Tom and then just a quick follow up just.
From Q1 the Q2.
We can all see the industry forecasts on class eight and medium duty truck production in North America.
For that portion of your business.
Is there any reason to believe that Commons in production trends don't track that delta fairly closely.
Tony you want to take that one.
Yes.
Yes I.
I think Ross if I interpret your question. Your real question is is our share going to change that.
I mean, we do not see any major shifted share we're not expecting any major shifts.
We expect to follow the market, particularly we'll see what happens but that is what we're expecting and I wouldn't I wouldn't be planning anything significantly different no.
Okay, just said they cannot currently.
Ross, we can't really track.
Current production with.
Inbound orders for the move just where we are within the industry's been working on a backlog and then we've got disruptions, but yes.
The to them.
Should be moving in Oregon.
Okay, great. Thank you got.
Thank you I'll now open.
Also on the line adult.
With vertical research.
Your line is now open.
Hi, Good morning, Tony just related to your to your comments on that last question. I mean, I think we did see outperformance relative to the industry in North America on highway in the quarter with with you more flattish and industry production that was down.
Can you talk about if thats just sort of.
Timing and sometimes you see these things versus you know did you see your customers trying to stock a little bit in anticipation of supply disruptions.
Yeah, Joe let me answer that we share moves around a bit quarter to quarter for a bunch of different reasons.
We feel good about the position we have right now.
The 13 efficiency series, which Tom mentioned, which meets 2021 greenhouse gas.
A year ahead of time and also offers customers better fuel economy is performing very well, we're getting very good feedback.
We've got the ex 12 coming out in the Cascadia chassis that you can order now for delivery in the middle of the year and finally, we've got the Mac launch. So we're pretty pleased about how how position we are and how the products are doing.
Performance of the extra Thene as I said earlier has been very good we've had great feedback from customers.
And so.
Yeah, I don't think it's anything specific related to two customer stocking or well anything it's hard for us to tell a bit like Mark said previously.
But we feel good about where we are we feel that where the product is doing well in that at the end of the day. We know is one of the biggest impacts on our share and so we're not expecting any significant changes this year through the course of this year.
We are pleased with our new product to now that perform and then hopefully that will bring more customers are way.
And then Tom in your prepared remarks, you commented on through some of the scenario analysis that you're doing now you're also looking at opportunities to improve your competitive position through some of these disruptions and.
Whatever degree you're willing to comment on where you see some of the greatest opportunities in terms of improving competitive position as we move through this.
Yes. Thank you Joe for that question so.
Not probably won't surprise to you that it's in line with strategy that we've been following for several years me. We do believe that if we continue to invest in the technologies that are critical to outperforming in our core business and the diesel and natural gas engines and the components that support.
With that we can offer customers better fuel economy, better cost et cetera, and we can play an increasing role in that industry as some customers to side, that's not where they want to put their scarce investment dollar. So that will continue to be a focus for us both the investment and that the opportunities associated with helping partner with customer.
Great those products for them.
End of if you can area that we're looking at is how do we expand our footprint in and around the engine.
Seen as to our transmission.
Ben joint venture with Eaton, well continue to look in those areas and up and down engine race to say are there areas where.
The businesses that are where those businesses are are not successful and there would be better better if we own them. So we will continue to look for acquisitions and partnerships as we have before.
I think today is not the day for an acquisition or partnership, but just recognizing that when disruptions like this happen.
New opportunities get created that weren't true before the disruption and so we'll just be having our eyes open we know what where we want to be in and if we can get the right right investment we would and then I guess lastly, just making sure that we have our new product portfolio tuned into where the opportunities are what I mean by that is a little bit.
Back to the conversation we had earlier, we have batteries fuel cells electrified powertrains hybrids and making sure that we don't just launch and go but think through where are the opportunities biggest first so we launched our electrification businesses and and buses city buses school buses, we've now moved over.
Terminal tractors and things that work at the port because there's a lot more activity there, making sure that we continue to examine that portfolio spend our money where the opportunities are going to happen first so that we can position ourselves going to lead that's both in terms of application, but also in terms of region of the world. So we're we're just continuing to scan those strategic.
Opportunities and make investments on purpose and the places where we think we can gain advantage here again, our perspective is that that some of the things that we wanted to do we're not not affordable are not bright for shareholders back during the last three or four years may become so as a result of this disruption.
Thank you.
Great.
Thank you everybody and I think that takes us to the end of the hour today.
As always the pick thinking through everybody for your interest in Cummins.
Please stay safe and then I'll be available for any follow up questions. This afternoon.
Thank you.
Thank you.
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