Q1 2021 Cummins Inc Earnings Call
[music] together.
Greetings and welcome to the Cummins, Inc. First quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If he would like to ask a question at that time. Please press star one on your telephone keypad, if anyone should require operator assistance during the.
Conference. Please press Star zero on your telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host Jack Kinsler Executive director of Investor Relations. Thank you you may begin.
Thank you good morning, everyone and welcome to our teleconference today to discuss Cummins results for the first quarter of 2021.
Participating with me today are our chairman and Chief Executive Officer, Tom Linebarger, Our President and Chief Chief Operating Officer, Jennifer, Colombia, and our Chief Financial Officer, Mark Smith.
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 and will consist of forward looking statements within the meaning of the Securities Exchange Act of $19 34.
Such statements express our forecasts 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 and uncertainties and.
More information regarding such risks and uncertainties is available and the forward looking disclosure statement and the slide deck and our filings with the Securities and Exchange Commission.
Particularly the risk factors section of our most recently filed annual report on form 10-K, and any subsequently filed quarterly reports on form 10-Q.
During the course of this call we will be discussing certain non-GAAP financial measures and we refer you to our website for the reconciliation of those measures to GAAP financial measures are.
A press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website at www dot com and dot com under the heading of investors and media.
With that out of the way, we will begin with our chairman and CEO and Tom Linebarger. Thanks.
Thank you Jack good morning, everyone.
I'll start with a summary of our first quarter financial results and then I'll talk about our sales and and market trends by region and finish with a discussion of our outlook for 2021 Michael.
Mark will then take you through more details of both our first quarter financial performance and our forecast for this year.
Demand accelerated and the first quarter as the global economy continued to improve driving strong sales growth across most businesses and regions, most businesses and regions and resulting in solid profitability and <unk>.
<unk> and breadth of the rebound in demand has surpassed our original expectations and we've raised our full year outlook, we were particularly encouraged by the significant growth of our components business and the first quarter, which is now clearly capturing the benefits of the increasing content, we're able to offer our customers and.
And partners as they move towards more complex and stringent emissions regulations in China and India.
This business is also benefiting from its global leadership position as truck markets recover.
While there is strong demand across our end markets generated strong revenues.
The pace of recovery has placed a strain on global supply chains, leading to increased costs and significant challenges and fulfilling all of our customers' orders.
<unk> of key components, such as semiconductor chips has been the primary challenge with adverse weather conditions labor shortages, and some regions and bottlenecks and global logistics further adding to order backlogs.
The ability to supply is our key focus now and we're doing everything we can to mitigate the impact I want to thank our global employees, especially those in our supply chain and manufacturing operations and are committed suppliers for their extraordinary efforts to manage through these challenges and supply our customers.
We are optimistic that the situation will improve and the second half of the year. However, we expect demand to remain strong making it difficult for the supply chain to catch up unless the industry extends the order cycle.
Before moving.
Moving to our first quarter financial performance I wanted to take a moment to highlight a few important strategic partnerships that we announced during the first quarter.
These new and expanded partnerships are consistent with our strategy to deepen our relationships with key customers and existing segments, while continuing to invest and new and alternative power solutions as.
As the leading independent global power solutions provider Cummins is committed to ensuring our customers have the right solution anywhere and everywhere our customers operate by offering them a broad range of power solutions from advanced diesel near zero and natural gas fully electric hydrogen and other technologies.
In February we announced a global strategic partnership from medium duty engine systems with Daimler truck and bus.
As part of the partnership Cummins will invest and the further development and global production of medium duty engines and components for Daimler trucks and buses the partnership builds and our strong existing relationship with and there is north American brands and.
And North America, Daimler will replace their vertically integrated engines with Cummins engines ahead of Carb regulations in 2024, and EPA regulations in 2027.
In addition, Cummins engines will be used and Daimler and medium duty chassis, and Europe, Brazil, and India, coinciding with next generation emissions regulations and those regions and.
And the future global medium duty engine systems for Daimler trucks and buses all over the world will be provided by Cummins.
We also announced the global medium duty partnership and advanced engineering collaboration with the suits. It building upon the Isuzu Cummins powered partnership.
<unk> formed in 2019.
And as new trucks powered by Cummins B six seven diesel platform engines will be introduced and North America, first and 2021, and and Japan Southeast Asia and other regions at later date.
Finally in March we announced and medium duty engine offering with Hino will come and six 7% and <unk> engines will be available and Hino trucks in North America by the end of this year.
In addition to the above announcements, we continue to investigate areas and which we can strategically collaborate with global Oems across a number of regions technologies and power solutions.
We believe these collaborations will not only allow us to significantly grow our core engine and components businesses. While also further strength in the important relationships, we have with a number of Oems and end users. These.
These relationships coupled with our application expertise and broad sales and service channel will position us well to manage the transition from internal combustion engines to lower carbon hybrid and eventually to zero emissions products and the future.
Now I will comment on the overall company performance for the first quarter of 'twenty, one and.
And we will cover some of our key markets, starting with North America before moving onto our largest international markets.
Revenues for the first quarter of 2021 were $6 1 billion and.
And an increase of 22% compared to the first quarter of 2020.
EBITDA was $980 million or 16, 1% compared to $846 million or 16, 9% a year ago.
EBITDA dollars increased as a result of stronger sales and record joint venture income, partially offset by significantly higher premium freight and other costs associated with supply chain disruptions as well as higher variable compensation expense.
Our profitability, especially in the engine business was impacted more than expected by supply chain disruptions due to the extraordinary measures we had to take to meet customer commitments.
Our first quarter revenues in North America grew 7% to $3 3 billion driven by higher industry build rates of heavy duty trucks and light duty pickups.
Industry production of heavy duty trucks, and the first quarter was 60000 units and increase of 15% from 2020 levels.
While our heavy duty unit sales were 23000, and an increase of 25% from 2020.
And industry production of medium duty trucks was 32000 units and the first quarter of 2021, and an increase of 2% from 2020, while our unit sales were 27000 units and increase of 5% from 2020.
We shipped 42000 engines to salons us for use and their Ram pickups, and the first quarter of 'twenty, one and an increase of 49% from the 2020 level.
Revenues for power generation grew by 10% due to higher demand and recreational vehicle and data center markets.
Our international revenues increased by 45% and the first quarter of 2021 compared to a year ago.
First quarter revenues in China, including joint Ventures were $2 1 billion and increase of 95% due to the higher sales and on highway and construction markets.
Industry demand for medium and heavy duty trucks, and China was 587000 units and increase of 95% driven by increased and has five pre buy ahead of a broader and a sixth implementation in July of this year and an effort to secure inventory amid supply chain concerns.
Our sales and units, including joint ventures were 91000 or an increase of 146%.
The light duty market in China increased 73% from 2020 levels to 581000 units, while our units sold including joint ventures were 45000 units and increase of 63%.
Industry demand for excavators set another quarterly record of 127000 units and the first quarter and increase of 84% from last year. Our units sold were 21800 units and increase of 107% as our customers continued to gain market share.
Demand for power generation equipment, and China increased 41% and the first quarter driven by our by growth and data center markets and higher demand for standby power.
First quarter revenues in India, including joint ventures were $577 million.
And the increase of 82% from the first quarter a year ago and.
Industry truck production increased 63%, while our shipments increased 88% driven by better penetration with our JV partner is the heavy duty commercial vehicles segment recovered from a year ago.
Demand for power generation and construction equipment rebounded strongly in the first quarter as economic activity continued to improve.
And Brazil, our revenues increased 31% driven by increased demand in most end markets.
Now, let me provide our outlook for 2021, including some comments on individual regions and end markets.
We have raised our forecast for total company revenues for 2021 to be up 20% to 24% compared to our prior guidance of up 10% at the midpoint.
This guidance reflects a stronger outlook and most markets and regions.
We've raised our forecast for industry production of heavy duty trucks in North America to 264000 units up 45% compared to 2020 and above our prior guidance of 255000 units.
Despite the supply chain constraints, our industry is experiencing demand has continued to outpace our expectations from the beginning of the year.
And the medium duty truck market, we are increasing our forecast for industry production to 140000 units up 35% year over year and above our prior guidance of 125000 units.
We expect our engine shipments for pickup trucks, and North America to be up 15% compared to 2020 and increase of 10% from our expectations three months ago.
And China, we continue to expect domestic on highway demand to decline from record levels a year ago. Despite the strong start to the year.
However, we are increasing our outlook for medium and heavy duty truck market demand to one 5 million units compared to our expectations of $1 3 million units at the beginning of the year. This.
And this would still represent a 15% decline from 2020.
And the light duty truck market, we continue to expect a 7% reduction and demand in line with our previous guidance.
We now expect industry sales of excavators to decline, 10% from the record levels achieved in 2020.
This compares to our prior guidance of down 20%.
And India, we continue to project broad recovery versus 2020.
We anticipate industry demand for trucks to be up 90% compared to levels experienced in 2020, and our other businesses are showing promising growth due to continued infrastructure investment, we do anticipate lower demand and all end markets and the second quarter due to new Lockdowns as a result of an increase and COVID-19 cases and are monitoring the events and the <unk>.
And closely.
Given the rapid increase and COVID-19 cases, and India. We are very concerned about the health and safety of our employees and those of our suppliers and partners.
We are continuing to operate all of our manufacturing facilities, but with robust safety measures in place.
And Brazil, we continue to forecast truck production to increase 25% and 2021.
We now expect demand from mining engines to increased 45% and 2021 up from our expectation of 15% three months ago, and Thats due to continued strength and commodity prices.
Demand for power generation equipment increased 18% and the first quarter and we continue to see strong order activity in most geographies and segments.
We are now expecting global power generation revenues increased 15% compared to our previous forecast of up 5%, primarily driven by data center and recreational vehicle markets.
In summary, we are increasing our revenue outlook for the year with year over year growth expected to be.
Expected and most major regions, except China.
Demand in China remained very strong and the fourth quarter, but we do anticipate a weaker second half of the year driven in part by the transition to the new National standard six emissions regulations for trucks and beginning in July.
We are increasing our EBITDA guidance range from 15, 5% to 16% compared to 15% to 15, 5% at the beginning of the year due to stronger volumes and improved outlook for JV income, which we expect to more than offset significantly higher supply chain costs.
During the quarter, we returned $615 million to shareholders and the form of dividends and share repurchases consistent with our plan to return 75% of operating cash flow to shareholders for the year.
We continue to take necessary precautions and all of our facilities to mitigate the spread of COVID-19, and our focus remains on the health and safety of our employees.
We are optimistic that continued vaccination distribution globally will reduce the impact of the virus and the second half of the year, but there is still a risk of an increase and cases somewhere in the world that could result in lower customer demand additional facility shutdowns or additional supply chain interest rates and the future.
Having managed through an extremely challenging 2020, and a dramatic ramp up and the first quarter of 2021, Cummins is and a strong position we have secured some important new business wins, and our engine and components businesses and at the same time, we continue to invest and future growth, bringing new technologies to customers and generating strong returns.
And for shareholders.
Thank you for your time today and now let me turn it over to Mark.
Thank you Tom and good morning, everyone and full key takeaways from our first quarter results flow.
First we saw continued recovery and demand in most major end markets and regions, resulting in record revenues for the first quarter and a much stronger full year outlook.
Second the elevated level of demand across our markets has strained global supply chains and our industry.
Resulting in higher premium freight costs and other associated inefficiencies high.
And then we anticipated at the start of the year.
The strength of demand or the backlogs and lack of inventory and the pipeline indicate that some level of elevated costs are likely to continue.
In the coming quarters.
Despite the cost headwinds associated with a tight supply chain, we delivered solid profitability and cash flows and the first quarter and have raised significantly our outlook for the full year and finally, we returned $615 million to shareholders through cash dividends and share repurchases consistent with our plan to return 75.
5% from operating cash flow to shareholders. This year.
Now let me go into more details on the first quarter.
First quarter revenues were $6 $1 billion and increase of 22% from a year ago.
Sales in North America grew 7% and international revenues Rose 45%.
Currency movements positively impacted revenues by around 1%.
Yes.
Earnings before interest taxes, depreciation and amortization or EBITDA was $980 million or 16, 1% of sales for the quarter compared to $846 million or 16, 9% of sales a year ago.
EBIT.
<unk> increased due to the benefits of higher volumes and stronger earnings from joint ventures, and China EBIT percent declined primarily due to weak or weaker gross margin percentage.
Gross margin of one $5 billion or 24, four percentage of sales increased by $192 million, but declined as a percentage of sales by 140 basis points.
First quarter gross margins included approximately $105 million of additional freight labor and logistics costs associated descriptions across our supply chain.
We expect elevated cost to continue at least through the second quarter.
And have incorporated additional costs into our full year guidance.
Partially offsetting these supply chain efficiencies was a $44 million positive change in estimate and our product coverage.
Coverage expense, reflecting lower costs across several products, primarily and our components and power systems businesses.
Selling general and administrative expenses increased by $28 million and our research expenses increased by $22 million and both increased primarily due to higher variable compensation expense.
In 2020, our variable compensation plan worked as designed flexing down due to the weaker outlook associated with the impact of the global pandemic and.
And in 2021 variable compensation expenses are expected to be high for the company and all individual segments consistent with our forecast for improved full year profitability. This year.
Joint venture income was a record $166 million and the first quarter up from $129 million a year ago.
Continued strong demand for trucks, and construction equipment and China led to the strong performance.
And as a reminder, joint venture income and the first quarter last year included a $37 million benefit related to changes in tax law, and India and income of $18 million from a.
Coffee also in India that did not repeat this year.
Adjusting for these onetime items in 2020 underscores just how strongly earnings growth was and the first quarter from our joint ventures.
Other income decreased by $46 million from a year ago, primarily driven by mark to market losses of $32 million on the investments that underpin our nonqualified.
Benefit plans and this compares to a $17 million mark to market gain and the first quarter last year.
The mark to market losses were recorded within eliminations and not allocated to our operating segments.
Net earnings for the quarter was $603 million or $4 seven per diluted share compared to $511 million or $3 41, since a year ago.
The increase was primarily due to stronger after tax earnings and a lower share count as a result of per share repurchase activity.
The effective tax rate and the quarter was 22%.
Operating cash flow and the quarter was an inflow of $339 million compared to $379 million a year ago stronger earnings were more than offset by an increase in working capital associated with our revenue growth this year.
I'll now comment on segment performance and our revised guidance for 2021.
For the engine segment first quarter revenues increased by 14% from a year ago.
Driven by growth and demand for trucks, and the U S and construction equipment and China.
EBIT decreased from 16, 9% to 14, 4% and sales.
And the engine business bore the brunt of the premium freight costs and other associated efficiencies arising from supply chain disruptions.
We now expect full year revenues to be up 23% to 27%.
And increase from our prior guidance of 12%.
Primarily driven by stronger demand and North American truck and global construction markets.
We have increased our forecast for EBIT margins to be and the range of 14.5% to 15% as we anticipate stronger volumes and higher than previously expected joint venture income were more than offset the additional supply chain costs.
And the distribution segment revenues increased 1% from a year ago and the first quarter.
EBITDA was flat as a percentage of sales at eight 7% was the benefits of our North American transformation work and improvements and some of our international businesses.
Somewhat offset by weaker pump sales, resulting from supply chain challenges on the line underlying demand for pumps remains strong.
We have maintained our 2021 artwork for distribution revenues to be up 6% to 10% and.
And we now expect EBIT to be 9% at the midpoint of our guidance.
Hello, and our prior guidance of 10, 1% due to our reduced outlook for parts and stronger demand from power generation equipment and other engine sales.
Components revenues increased 43% and the first quarter.
Driven by stronger demand for trucks in North America, China, India and Europe.
EBITDA increased from 18, 6% of sales to 19, 6% due to the benefit from stronger sales.
And lower product coverage costs.
2021, we now expect components revenues to increase 30% to 34% up from our prior guidance.
Of up 11% and we've raised our forecast for EBITDA margins.
And to 17% at the midpoint.
Up from 14, 9%.
And power systems revenues increased 16% and the first quarter driven by stronger global demand for power generation and mining equipment.
EBIT increased from eight 7% to 12, 3% of sales.
Primarily due to the benefits of higher volumes and lower product coverage costs.
We now expect power systems revenues to be up 18% at the midpoint compared to our prior guidance of nine.
EBIT margins are projected to be and the range of 11 to 11, 5% of sales.
Up from our prior guidance of 10, 6% due primarily to the strongest sales outlook and lower cost of quality.
And then the new power segment revenues increased to $35 million, 250%.
And due to stronger sales of battery electric systems fuel sales and electro largest.
EBITDA losses for the quarter were $51 million in line with our expectations as we continued to invest and new products and scale up ahead of widespread adoption of the new technologies.
For the full year, we are maintaining our new power revenue outlook.
At the $110 million to $130 million and we also expect a net expense to be and the range of $200 million with the midpoint of our guidance.
The net impact of the changes to individual segment projections is that we forecast total company revenues to be up 20% to 24% and 2021.
And from our prior guidance of 10%.
We are raising our forecast per company EBIT margins to be between 15, and a half and 16%.
Prior to our previous guidance of 15 to 15 and a half.
This increase is primarily driven by the strongest sales outlook, which we anticipate will drive incremental earnings that more than offset the increased supply chain costs.
We now expect earnings from joint ventures to be down 5% this year compared to our prior forecast of down 25 to 30.
Continued strength and China truck and construction markets, especially in the first half of the year.
The primary reason for the increase in net we're focused.
We currently project and the first quarter will Mark the high point for joint venture earnings this year with results expected to ease and subsequent quarters and particularly the second half of the year.
Adoption of the new National standard six on highway emissions regulations and China in July.
We are projecting our effective tax rate to be 2025%. This year 22, 5%, excluding any discrete items.
Expenditures were $87 million and the quarter up from 75, a year ago.
We expect that our 2021 capital investments will be and the range of 725% to $775 million unchanged from prior guidance.
As Tom mentioned, we returned $650 million to shareholders through dividends and share repurchase in line with our plan to return and 75% of operating cash flow.
This year too.
To summarize we delivered strong results and the first quarter of increased both our sales and profitability outlook for the year.
Supply chain tightness, along with the ongoing impact of COVID-19 will continue to present challenges in the coming weeks or months I want to thank all of our employees for their commitment to support our customers through these challenges and deliver strong full year financial results, we will continue to prioritize investing and the products and technologies.
And that will drive profitable growth and return capital to shareholders, while improving the day to day.
The company. Thank you for your interest today, and let me turn it back now to Jack.
Thanks, Mark out of consideration for others on the call I would ask that you limit yourselves to one question and a related follow up and if you have additional questions. Please rejoin the queue.
Operator, we are now ready for our first question.
Thank you as a reminder, if you would like to ask a question and at this time. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is and my question queue. You May press star two to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
First question is coming from the line of Ann Duignan with Jpmorgan. Please proceed with your question.
Hi, good morning, and thank you.
Could you just provide more color on your change in guidance on the components business and it does sound like.
Most of the change has been driven by a higher than expected and pre buy and China.
And am I reading too much into that and then my follow up is.
Based on that could you provide some color on the cadence of your revenue and.
Profitability over the next couple of quarters, you guys just balancing that pre buy first and is India.
And then what the back half might look like as input costs.
Dissipates and potentially.
Thank you.
Thanks, Tom This is mark I'll take the first pass at that.
We are seeing a rising outlook for most end markets.
That's going to benefit the components business, which is our leadership position and global markets. So it's not just China.
Right, China is definitely help that business, where we have consolidated operations. Its benefited our results that's primarily in the first half of the year.
Impact of nuts.
Strength in China is expected to ease and subsequent quarters and the second half of the ill come back and talk about the overall joint venture income for the company rather than just components and a moment. So I guess, that's stronger volume and our components business doing a good job of converting that to additional profitability and then the second thing is the component was did benefit from.
Lower quality cost and a positive change in estimate and our.
Our product coverage of warranty expense and the first quarter, which boosted the results a little bit which is why the full year margins a little bit below the first quarter level of performance.
India, India was an important contributor we had consolidated revenues of around about.
$600 million, and China, and India combined for the components business and the first quarter, so kind of and annualized $2 $5 billion business.
We expect that could drop from that rate and the second half of the year by as much as 40% depending on the impact of demand on the other hand.
Supply chain permitting and we're expecting obviously, the North America demand to continue to improve.
By now circle back up to the total company picture.
Really the story is the same on China that we expect a significant drop off.
And the second half of the unit and we don't have great visibility into that that's an assumption right now Q1 remained stronger than we'd anticipated three months ago.
But there is there are some signs of concern as elevated inventory levels.
Obviously, the price of trucks goes up with the introduction of the new emissions regulations. So we baked in.
Kind of a 40% to 50% drop off.
And the earnings run rate quarterly and the second half of the year from where we are today, so hopefully that.
The big picture on China.
Thank you. Our next question comes from Jerry Revich with Goldman Sachs. Please proceed with your question.
Hi, good morning, everyone.
Good morning, Jerry.
Hey, Tom Congratulations on the medium duty engine wins announced over the course of the quarter I am wondering can you talk about how the collaboration discussions are going with some existing medium duty engine customers for <unk>.
Providing more services on the electrification side to what extent does that help the.
And the discussions could you just give us.
Contacts and whether theres any impact as a result of working closer here.
Yeah. Thanks, Jerry Here's what I would say is broadly speaking as we said in previous call. We are talking now to every OEM about their technology requirements going from the day all the way through.
And the and eventual transition to zero carbon and those those technologies include diesel and.
And more advanced versions of diesel and natural gas.
Bread electric and fuel cell.
And as I've also said before from many of them the diesel side looks less less valuable from an investment point of view just because there.
And our volumes are relatively smaller than ours, and most ranges, but certainly and mid range. So that's I think why youre seeing the announcements you are saying and addition, though.
We are offering them the other technologies, including transition technologies to help them figure out how to get from where they are now to a place that's a viable.
Carbon solution down the road I would say that all of those conversations are all going on but it's difficult now for Oems to understand what the timing of those transition looks look like and exactly what their technology approach wants to be just.
And as it is for for most market watchers, it's hard because it.
And the viability of those technologies in terms of cost depends on either carbon tax or regulations or something else coming into play because still diesel is quite a bit cheaper than those other solutions today and of course, it's providing improved fuel economy with every generation. So yes.
And those conversations as you suggest are going on but I would just say that for the most part were.
We're doing work with folks, but what exactly are their plans are going to be and what role we're going to play and those future technology and is still being talked about we're at the diesel stuff is moving now because they have to make investment choices today to invest and a new platform or do I ask someone else investing.
Okay. Thank you and Tom on the light duty diesel side can you talk about your level of optimism about similar opportunities that we're seeing falling and and your.
And the medium duty side.
What's your level of optimism about the opportunity set and light duty.
I would say if youre thinking about passenger cars and that sort of thing my view is that there are limited opportunities.
They are out there we are having conversations with people, but its less and and I think primarily because I think most passenger car companies see investing and new diesel platforms is probably not a good investment. They are thinking themselves that they are trying to invest more for a nearer term and future of conversion to hybrids or electric vehicles.
And again that isn't too across the board and be clear pickup trucks and some of the others are the transitions less clear, but even there I would say that yes.
The movement in that direction and it is towards let me think about what my next diesel platform is.
Thank you.
Thanks, Jerry thank.
Thank you. The next question comes from the line of Ross Gilardi with Bank of America. Please proceed with your question.
Good morning, guys and I just wanted to expand on Jerry's question, maybe the other way what about heavy duty engines and just the likelihood of Daimler outsourcing, it's heavy duty diesel engines too and on the medium duty side have you said.
How much additional content.
And we'll potentially get on the component side or is that still determined.
Still to be determined.
Yes, and so let me let me first address the heavy duty question Ross Thanks for that.
And our heavy duty of course, what daimler's decision would be and that would be would be best to ask them not us, but I would just say that we are we're having conversation on heavy duty with a number of partners.
As you get the volume.
Discussion that I mentioned earlier about trying to invest for for limited volume, it's much more dramatic and medium duty and the relative volume of our customers versus ours is dramatically different and mid range. It is not it is different and heavy duty two we clearly have a larger position, but it's not as picketed line.
So those conversations are likely to take longer and it's not as easier call for an OEM on heavy duty as it is on medium duty that said.
And they still haven't and platform investments to make and as do we and so the question is how many of us want to make those so I do expect.
More partnerships to occur on heavy duty, it's just that those conversations are still ongoing.
Let me just talk a little bit on the components businesses quantify probably don't meet guidance.
Tom.
Yes of course, our strategy with our partner <unk> has been to offer and James where we're thoughtful of Fei.
License and supply and when we don't play and as we often supply components to them from our components business.
Look at these new partnerships and just thought.
And in some cases, we have the components business already for some of our other components. So it will provide incremental.
Growth opportunity for US and then of course, we also extended our partnership conversations on components and complete a deal.
And we do see good growth opportunity and Michael.
Results of these.
Our partnership Tom.
Hi.
Sure.
Thank you.
And then just more broadly do you think all the supply chain concerns out there plus.
Perhaps some of the controversies on some of the newer entrance to the to the truck market is shifting customer interest on EV and hydrogen and more towards some of the incumbents like yourselves that are established and diversified manufacturing capability around the world.
I would say Ross, it's hard to say, here's what I think and fit.
Not surprisingly some of the new companies that are starting up and our pure plays and.
Low carbon technologies, having trouble demonstrating a business model that works now that's not surprising because the volumes really low.
People know the transitions are coming at some point, but they are not viable without rates regs or some other kind of.
While the carbon tax or something that moves the needle so they're struggling to show a business model that shouldnt surprise anyone that that's.
It is and our view is that.
We are well positioned to provide people with solutions today solutions that are kind of transitioned kind of solutions natural gas and hybrid and then final solutions and so we hope that proves to be.
And the best answer and we think investors do well to find companies like us who can take the whole make the whole lap.
But.
I think.
The timing of how that's going to work and what and whats going to where the supply chain is changing people's mind or it's just the business models that don't look viable im not sure, but I noticed the same thing you do that there is volatility vault and the.
And the capital flows and the values of these companies and also and their perception of success and I'm sure they'll have a brighter day as well as they have access and cloud.
Cloudy day to day, we just think we have the most robust solution that Cummins.
And thanks, very loudly and.
And as we always knew we are communicating and transparently with our customers and doing everything we can to meet their demand even with hospital supply challenges.
Continuing to do that.
Maintaining channel relationships.
Yes.
Thank you.
Thanks Ross.
Thank you. Our next question comes from Rob Wertheimer with Melius Research. Please proceed with your question.
How does it kind of a macro question after that.
And just within power systems power Gen is that recovery broad based or is it a little bit data center focus analog data centers are probably been climbing and the relative mix.
And then just and the rest of the business and mining seems like a pretty strong recovery is there anything particular to call out we all know commodity prices are strong and that will help there.
And anything one off there. Thank you.
Hi, Rob its mark.
Hey, yes data centers all of the enduring secular growth three go through them, but we have seen a broader recovery.
And power Gen and demand this quarter versus a year ago U S, China, India, and Asia Pacific regions, and certainly within the U S. China.
Data centers are an important element of that but it's a little bit broader and then and mining most of our growth and engine sales originating and international markets right now.
Okay.
It definitely the outlook has improved our confidence has improved a little bit Oman and yet.
Okay.
Yeah.
Thanks.
Thank you. Our next question is coming from the line of Steven Fisher with UBS. Please proceed with your question.
Thanks, Good morning, guys.
And wondering what you have assumed for freight and other costs and the next few quarters relative to that $105 million that you incurred and the first quarter and and.
And then translate to the cadence of the engine margins over the course of the year and just wondering if that maybe gets a little bit weaker before it gets a little bit better.
Yes.
Jennifer Ramsey Thanks for the question Yeah, we saw.
Higher than anticipated premium freight and Q1, just as we dealt with growing revenue.
And just trying to keep up and our supply chain disruptions and we do expect that that's going to and prove that we ran a one seven per forma falloff from Q1, and we think that will improve as we go and that Q Q2 slowdown from around 105 million day more like $60 million and then continue to improve over the course of the year we will.
And to see disruptions that are higher than typical.
Backorder and we're trying to.
And so essentially from up and I'll add that and <unk>.
And an NDA.
Uncertainty fast right now and how that might impact.
Tom local market share as well.
<unk> and <unk>.
And James.
And then on the engine business margin, Steve or two swing factors. So one yes, we've assumed some improvement, particularly in the second half and some of these excess costs.
Not all of them, but most of them are showing up and the engine business and then measured against that is the expected.
It did decline and China truck demand and in particular, which will impact with joint venture earnings net of the there are two moving parts, but the net sales is not a dramatic change.
Quarter to quarter.
Those are that those are the two big assumptions that mostly play out and a different way and the second half of the year.
Okay, and then just curious how a bigger picture how you think about how natural gas fits into the picture long term and how does that drive the investments youre, making and natural gas today.
So we have all the lead.
And <unk> position today in North America with natural gas product line.
James and the U S are already certified to meet the Carb 24 also low Nox regulations, so that may create some additional mall.
And <unk>.
And we also are offering natural gas products and other parts of the world. So we think it is.
And bridge solution.
And we will plan to.
Continue to offer products to meet our customers' need and nathans approach between Dean.
Diesel engines and all.
And kicking all carbon.
Steve I mentioned in my remarks, and Pcs transition solutions are important because.
And the zero carbon solutions that we're working on are those are the eventual solution that will win the day.
Eventual is the hard part that again the cost and.
And the infrastructural requirements of electric electric fleets and.
<unk> fuel cell and hydrogen fleets are significant and so.
We believe working with Oems that we'll be able to get those costs and those infrastructure in place, but we will need we will need infrastructure will need other investments by by governments and other things to get that done. So in the meantime. These interim solutions are going to play a significant role and how long and from them is isn't clear and it could be extended so our view is that natural gas.
And hybrid and some of these other technologies that we have will really help our customers get through those periods, which again could be.
And we could sell across our range and 1 billion engines and those ranges before transition could be 1 billion engines.
So a lot of engines over the years wrightwood across the entire industry across multiyear. So it's really it's important to be thoughtful about those transition and technologies just like it is the final solutions.
Makes sense. Thanks, so much.
Yes.
Thank you. Our next question comes from Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, good morning from Colton Zimmer on for Jamie Cook. Our first question is on China and your outlook are you assuming that the downturn and this market isn't as bad as maybe you initially thought or is it just pushed to the right and 2022 could be another down here and then our second question and just on the setup for Incrementals next year.
As the supply chain headwinds and costs go away is there a chance to earn outsized incrementals and 2022 or did we miss it the cycle. Thank you.
Thanks, and I'll talk a little bit about about China. So.
The market for the year.
A little bit higher than we had originally forecast and that and we really think that is strong demand and the first half of the year. So we're seeing growing demand for the NFS five product ahead of the transition that happened in July.
And that pre buy as well.
And challenges and the supply chain and it's driving our Oems.
And that is possible at this 0.1 other dynamic that we think is going to impact from.
And in the second half of the year is that some regions have extended the period with rich and Thats five product can be registered as we go into Q3, and we're going to see and.
Inventory and a five product starting to reduce.
And then what.
And really watching to see how quickly customize stock to buy that NSX, Patrick and then it will come at a higher price with added content.
And so that is wrong and dynamic strength in the first half of the year and then.
And our branches.
And and that drop and the second half of the year 2021 day record year, and we obtained we think that all come back in line and of course with continued to Tim.
Thanks, John.
And a bit unpredictable, but we do think we will see a fall off and the second half of the year and.
And it's too early to say much about next year as we've seen in the past couple of years.
Government has been able to.
Effectively.
Setup some incentive programs has it really been a tale.
Well by customers. So there is it's just hard to say what the future plans are.
Basically to take older emissions trucks.
Out of circulation. So it's too early to say certainly second half of the year expect and a big drop off.
I wouldn't like to comment yet on 2022.
And then obviously your comment about the incremental margins and certainly.
The longer these inefficiencies persist eventually.
It is clearly a headwind for this year, we've called it out.
We expect they're going to improve and the second half of the year. We do expect that there's going to be improvement going into next year on that particular line items. There is a lot of moving parts and incremental margins, but yes that line item alone sitting here today, and we'd hope and expect to be to.
To be better next year than it is this year the rest will leave for a later day.
Alright, thank you.
Thank you. Our next question comes from Steve Volkmann with Jefferies. Please proceed with your question.
Great I wanted to go back to Tom your discussion around transition solutions.
Because it seems like a lot of people are forecasting some pretty significant hybrid solutions over the next decade, or so, but we never really seem to discuss those kind of projects are you working on those projects do you have customers and I'm wondering if that actually plays to your strength because hybrid would presumably have a little bit smaller engine.
All things being considered just curious about your commentary there.
Yeah.
And the answer to the first question is yes, we are definitely working on projects now they're specific very specific to have launch dates and they will be launched.
And these next.
Several years, we will have hybrids on the road we will.
Be selling them through.
All key strategic Oems so.
Hybrids are on the move as you suggested and again their life, mostly depends on how the zero carbon solutions come down and cost and durability reliability and how the infrastructure gets built up and will need bulk sales.
I think that that's why I said that these two entities.
Transition solutions that are going in place well and may be in there for a while and they may be and there for a shorter period depending on.
Which country, which which application, which which region you're in because those two things.
Both the infrastructure and the cost depend on application and of course country and how much infrastructure and built but but the hybrid and programs are real they are getting launched its happening now and with regard to engine size I think initially what we'll see with hybrid is there'll be relatively mild hybrid the first step and those.
Make a big difference on engine.
How big the engineers won't be impacted very much by the size of the battery, but you are right that as you add larger batteries and then you need less engine to carry the same load.
But I think thats those are probably generation two solutions, rather and generation one.
Super and just a quick follow up maybe for Mark you talked a lot about increases in costs logistics et cetera.
But you didn't really mentioned price are you guys. Following this with increased pricing I would assume this is a pretty good environment just any thoughts there.
Thanks, Great question, Steve So excluding.
The premium cost, we talked and the start of the year about positive 40 basis points from price and material cost per combination of those we're hanging onto those 40 basis points, but I would say there is signs of a little bit of creeping inflation.
Overall, we had pricing and place.
And is about cost increase overall will just about hanging in there right now, but that's it.
Can I just add one thing.
Our cost as you saw were significantly higher than we anticipated, even three months ago, and and just call it out directly.
The big problem is.
Semiconductors.
And there was a lot of supply chain challenges.
Everything weather in Texas, and now new challenges with India.
And you name it and we have a shortage on it but semiconductors is the biggie. That's the one that's really hard to deal with and in this quarter. We ended up buying chips on the market through the aftermarket and bringing them back into production, we've rescheduled and rescheduled and rescheduled to meet our customers demand our customers after a pretty tough first half of last year.
And are finally, seeing demand and go up and really want to ship trucks to their customers and we really want to help them do that so frankly, we took it on the chin.
Basically brought and everything we could as fast as we could and shifted out to them and didn't raise prices are and in doing those things, we just ship them and.
And we took it took it hard this quarter and that's <unk>.
And the honest truth, and it's because we felt.
<unk> to those customers to get them the product as best we could while they're gone and was good and.
And so we're not really changing any of that other than hopefully as Jennifer said, we're going to we're going to get or are these costs better under control as we don't have to reschedule. So much we understand where our chips there arent enough, but we understand where they're coming from more now and we understand how many we have really and we will be able to levels and schedule as Tom and rich.
Premium freight and still awful, but it will be less awful and Q2 and less awful again in Q3, as we as we get more or set up but it was a it was a rough quarter and I feel good about what we did for customers and it was it was hard to get there.
I appreciate it thanks.
Thank you. Our next question is coming from the line of David Raso with Evercore. Please proceed with your question.
Hi, Thank you first a clarification the component growth rate, 43% of first quarter slowed to 28 and the rest of the year, while engines, the opposite 14% growth for the quarter, 29% for the rest of the year that that is simply all related to China, and India and the second half because obviously components.
So your exposure to China, and India than the engine Division correct. It's nothing related to how maybe your customers are taking product at this point.
Good day.
The maintenance there is no. It's a structure question and so it's not that the component of it is twice as much exposure, it's structured in a different way. So the engine business is principally through joint ventures, and China, India, and yes, you're right that otherwise thats. The main factor there can be some small timing differences, but that's not the point and you David It's just the way our business et cetera.
Yes.
My question the supply chain tightness that we're seeing and and maybe Tom how you usually think about year, one of a recovery than a year or two given the supply chain issues. How are you perceiving the cycle differently. How are you perceiving.
Inventories at the end of year, one and I'm, just trying to get and you had a little bit about how you are trying to digest. This cycle given it looks like the inventory is going to be tight throughout the year and that's both.
So it dovetails into a pricing question and I'm not trying to get 'twenty two 'twenty three guidance from you, but just bigger picture.
And I get your point, David and I'll, let Jen talk a little bit more about how she sees customers.
Orders, but I would just say broadly speaking.
Our view is that things that don't get shipped this year.
We will be shipped next year, because there is a supply constraint.
Long demand out there and that that if the cycle takes longer to recover our people can't get all the trucks. They want they'll get them next year, I mean, and we've seen that and other regions were.
We are the capacity of the truck manufacturers doesn't ramp up as quickly and in Europe. For example, and the last upturn we saw that and just took them longer to finish the cycle and I think thats what will happen here it will take longer to finish to the extent that the truck truck demand can't be fully supplied which would not be a bad thing per se.
And if it extended further I think that's the way we're seeing it as a long longer extended cycle, just because we can't fly.
Fly constrained and.
And I'll, let Jim talk about what you're seeing from customers in that respect, yes for sure as Tom said it.
Customers are really trying to get everything they can because they see high demand inventory and evolve.
Back orders are growing.
And I think Inc.
Our day supply and largely supply constrained.
The year, which is why.
We want to ship everything that we can to our customers allow them to build and meet the demand and.
And as I talk to customers and they think it is go ahead.
And the Nextgen and this is just not going to be able default and attack.
And it all of that demand at that day.
Alright. Thank you thank.
Thanks, David.
Thank you our final question will come from the line of Chad Dillard with Bernstein. Please proceed with your question.
Hi, Good morning, guys. Thanks for squeezing me in.
So just following year timeline and can you talk about the cadence of the transition from.
Medium duty Alright, and then.
Mentioned and that 2020 core car will be one catalyst and is there opportunity to gain incremental share between I guess next year her and winter months.
Yes, as we build out that partnership primarily the emission regulation change all of us what's going to drive.
Additional business over time and lifestyle that will happen and when you ask Bobby and then 24 time period and then.
I think in Colorado and Kansas.
Okay.
Primarily.
The cadence of growth.
Got it.
And then can you talk about your components opportunity just beyond and bought the China and India transition.
Transition and Barbara or seem to share.
And where do you see like over opportunities and increasing content in Pennsylvania.
Yes, So as you said and then a big growth opportunity from a components business has been China, and India with admissions growth.
And and customer so we're growing content with existing customers and then we're also gaining new customers additional opportunity that I want to highlight also in China is we're launching and Dara transmission and that's part of our Eaton Cummins joint venture and China. This year and the market in China for automated manual transmission, we think it's gone from 8% to 20.
And 2% this year, we have a low volume line that we now have are starting to produce product for well ramp that up to this year, that's another growth opportunity and our components business.
And China. This year, we're also launching.
<unk> version of that Ken mentioned later this year.
And then as regulations continue to evolve and we expand some of these partnerships that off line for their growth.
Opportunity from the component and <unk>.
Tim mentioned earlier Chad.
When we when we get stronger partnerships, we not only get more components, because our engines go and which of course all of our components, but also we just introduced more of our components to the remaining engines because it also reduces their technical investment to be able to use some of our components and our recipes on their edge and so that'll just continue that's been ongoing.
And that will continue.
Great. Thank you.
And <unk>.
And thank you we have reached the end of our question and answer session. So I'd like to turn the floor back over to management for any additional closing comments.
Thank you very much.
Thanks to everybody for your continued interest and Cummins and I'll be available for questions. After the call.
And I hope you all have a very good day.
Ladies and.
Gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.
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