Q2 2021 Cummins Inc Earnings Call
[music].
Greetings and welcome to the quarter, 2.2021, Cummins, Inc 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 anyone would like to ask a question. Please press star 1 on your telephone keypad, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad and please note that this conference is being recorded I will.
Now I'll turn the floor the conference over to your host Jack Kinzler Executive Director of Investor Relations you may begin Jack.
Thank you and good morning, everyone welcome to our teleconference today to discuss Cummins results for the second quarter of 2021.
Participating with me today are our chairman and executive Chief Executive Officer, Tom Linebarger, Our President and Chief operating Officer, Jennifer Rumsey.
And our Chief Financial Officer, Mark Smith, we will all be available for your questions at the end of the teleconference.
4 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 $19.34 and such.
Such statements express our forecasts expectations and hope.
<unk> 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.
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 our subsequently filed quarterly reports on form 10-Q.
During the course of this call, we will be discussing and certain non-GAAP financial measures and we 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 at www Dot Cummins is dot com under the heading of investors and <unk>.
Media.
With that out of the way, we will begin with our chairman and CEO Tom Linebarger. Thanks.
Thanks, Jack and good morning, everybody.
I'll start with a summary of our second quarter financial results and our market trends by region, and then finish with a discussion of our outlook for 2021.
Mark will then take you through more details of both our second quarter financial performance and our forecast for this year.
Demand remained strong and the second quarter as the global economy continued to improve.
Driving strong sales growth across most businesses and regions and resulting in solid profitability.
We are encouraged by economic trends across a number of our key end markets, which points to strong demand for the remainder of this year and extending into 2022.
And North America freight activity continues to grow leading to elevated spot and contract rates and driving fleet profitability and a rising backlog up truck orders.
Leading indicators for nonresidential construction continue to improve and fiscal support for investment and capital projects is robust led by North America and Europe.
Iron ore copper and thermal coal prices also remain high and supporting our positive outlook for mining.
Cummins is well positioned to benefit as these markets gain momentum due to our leading global position across a number of end markets and we continue to see demand for our products outpace our competition.
Before getting into our results I want to take a moment to highlight a number of partnerships and strategic milestones and the evolution of our next generation technologies.
And May we formed a partnership with <unk>, a leading global producer of renewable power to accelerate the global growth of business opportunities and the electrolyze on market and especially in Europe with a focus on the Iberian Peninsula.
The alliance will help position Cummins is a leading supplier of electric electrolyzed water systems for large scale projects in Europe.
As part of our alliance Cummins will be the electrolyze their supplier for a 230 megawatt project for a leading fertilizer producer that will serve as a benchmark for large pending scale electrolysis globally.
We signed a global joint venture with Sinopec and <unk>.
Sinopec NZ fund in June, which will accelerate the affordability and availability of green hydrogen and China to development of hydrogen generation projects and increasing manufacturing capacity of Electrolyzed yours, and other key products and the green hydrogen supply chain as.
And that's 1 of the largest hydro and suppliers and China Sinopec annual hydrogen production reaches 3 and a half million tons accounting for 14% of total China's total hydrogen production and.
China's embrace of Green hydrogen is great for the planet and Cummins and sinopec, joining together to realize the potential of green hydrogen is a huge leap forward for scaling our innovative Pam electrolyze our systems.
We recently announced a strategic collaboration with Chevron to develop commercially viable business opportunities and hydrogen and other alternative energy sources. The Mou provided.
<unk> provides the framework for Chevron and Cummins to initially collaborate on 4 main objectives.
First advancing public policy that promotes hydrogen hydrogen as a decarbonizing solution for transportation and industry Bill.
Building market demand for commercial vehicles and industrial applications powered by hydrogen.
Developing infrastructure to support the use of hydrogen for industry and fuel cell vehicles.
And fourth exploring opportunities to leverage Cummins electrolyzed water and fuel cell technologies at 1 or more of chevron's domestic refineries.
The partnership with Chevron and allows us to scale low carbon fuel delivery and build hydrogen corridor for use by fuel cell vehicles. In addition, we can work with chevron to decarbonize parts of their operations using our green hydrogen technology.
Finally, lastly, Cummins announced the signing of an Mou with air products to work together to begin the transition of air products heavy duty tractor fleet to zero emissions vehicles, and the Americas, Europe and Asia.
Cummins will provide hydrogen fuel cell electric powertrains and integrated into selective selected OEM partners heavy duty trucks for use by air products.
And the project will take a phased approach to transition air Products' fleet to hydrogen fuel cell electric powertrains, starting with 5 demonstration units to be delivered in Europe, and North America by the end of next year.
Following successful demonstration the project includes ramp ups, which with a total of 2000 trucks to be delivered by the middle of the decade.
This represents among the largest orders for fuel cell vehicles to date, and we will be working with a partner that has deep expertise and the generation transportation and use of hydrogen.
We've now deployed more than 2000 and fuel cells and 600 electrolyzed as around the world as we continue development of our hydrogen business.
In addition to accelerating our revenue momentum via these important strategic partnerships. We are also building out our electrolyze our capacity targeting the regions, which we expect to be at the forefront of green hydrogen production and commercial adoption.
Site selection search within the Guadalajara area of Castile on Mantia, and Spain is currently underway for Cummins, new approximately $60 million Pam Electrolyze on manufacturing plant that will house system Assembly and testing for approximately 500 megawatts per year of Electrolyzed, our production and we will be <unk>.
<unk> to more than 1 gigawatt per year.
Cummins envy the JV, we signed in conjunction with Sinopec will be located and folks Sean Guangdong Province in China.
The JV will initially invest $47 million to locate and manufacturing plant to produce <unk> electric <unk> the.
Plant will open with a manufacturing capacity of 500 megawatts of electric <unk> per year, but we'll also be scalable to more than 1 gigawatt per year. These investments and addition to our Buildout is underway at our current facilities in Belgium, and Canada will position us to have nearly 2 gigawatts of capacity by the middle of the decade with the flex.
The ability to scale up as demand accelerates.
And.
And the battery electric space, we continue to produce and sell fully electric powertrains and first mover markets such as transit school bus and yard spotters.
Cummins is collaborating with Pepsico and Frito lay on a battery electric demonstration truck for a pickup and delivery application that has been running daily routes since last November.
This truck will be showcased at the upcoming North American Council for freight efficiencies electric truck demonstration.
We are well positioned with our deep market expertise and electric powertrain technology and are continuously evaluating how we can adapt and improve to meet customer demand and market trends as the technology matures. This includes next generation battery electric systems to balance the durability needs of our customers while focusing on.
And delivering products at a compelling price point.
We are also continuing to explore new partnerships to enhance our capabilities improve our cost position and drive more volume and scale into the business.
In addition to these important milestones for our new power business, we are investing and our engine and components businesses to develop advanced diesel and alternative fuel products, which will be critical to meeting customer and regulatory requirements and the coming years.
We announced the signing of an LOI to acquire <unk>, 50% equity interest and momentum fuel technologies.
The joint venture between Rush enterprises, and Cummins will produce Cummins branded natural gas fuel delivery systems for the commercial vehicle market in North America, combining the strength of momentum fuel technologies.
<unk> natural gas fuel delivery systems, Cummins powertrain expertise and the engineering and support infrastructure of both companies, we have seen increasing interest over last year and expect natural gas powertrains to become an increasingly popular choice for end users due to both a compelling total cost of ownership as well as the environmental benefit of such.
Powertrains, especially when utilizing renewable and natural gas sources.
We also began testing of our hydrogen fueled internal combustion engine for heavy duty truck applications.
Moving on Cummins existing technology leadership, and gaseous fuel applications and powertrain leadership to create a new power solution to help customers meet the energy environment mental needs and future. The hydrogen engine program can potentially expand the technology options available to achieve a more sustainable transport sector.
Complementing our capabilities and hydrogen fuel cell battery electric and renewable gas powertrains.
We are committed to bringing customers to the right solution at the right time doing so requires us to maintain our broad portfolio of power solutions to meet our diverse customers needs and to minimize total carbon emissions throughout the energy transition.
Now I'll comment on the overall company performance for the second quarter of 2021 and cover some of our key markets, starting with North America before moving on to our largest international markets revenues.
Revenues for the second quarter of 2021 were $6.1 billion.
And an increase of 59% compared to the second quarter of 2020.
EBITDA was $974 million or 15, 9% compared to $549 million or 14, 3% a year ago.
EBITDA increased as a result of stronger global demand and higher joint venture income.
Partly offset by significantly higher premium freight and other costs associated with supply chain disruptions and addition to higher compensation costs.
Our global markets experiencing experiencing unprecedented shock from the impact of COVID-19 during the second quarter of last year and while we have been encouraged by the ongoing recovery across all of our global markets. Our industry continues to experience significant constraints across the supply chain, leading to an extended period of inefficiencies and.
Higher cost despite the supply chain impacts, though we are continuing to deliver strong financial performance, while supporting our customers.
The ability to supply our customers remains our key focus now and while we are optimistic that the supply chain constraints will ease with time there.
And they are likely to persist through the end of the year.
Our second quarter revenues in North America grew 74% to $3.5 billion driven by high <unk>.
Higher industry build rates across all on highway markets.
Industry production of heavy duty trucks, and the second quarter was 67000 units and increase of 180% from 2020 levels, while our heavy duty and unit sales were 23000.
And increase of 217% from 2020.
Industry production of medium duty trucks was 29000 units and the second quarter of 2021 and increase of 94% from 2020 levels. While our unit sales were 22000 units and increase of 85% from 2020.
We shipped 42000 engines to the launches for the for use and the Ram pickups, and the second quarter of 2021 and increase of 272% from 2020 levels.
Revenues for power generation generation grew by 48% due to higher demand and recreational vehicle standby power and data center markets.
Our international revenues increased by 42% and the second quarter of 2021 compared to a year ago second quarter revenues in China, including joint ventures were $2.1 billion and increase of 8% due to higher sales and power generation and mining markets. We also.
Experienced a higher penetration rate with our joint venture partners and the heavy and medium duty on highway markets as they prepare for broader implementation of NSX and July of this year and.
Industry demand for medium and heavy duty trucks, and China was 566000 units a decrease of 4%, but still well above replacement.
Driven by continued pre buy pre buy of Nf 5 trucks ahead of the broader implementation of the new NSX standards and July of this year.
Our sales and units, including joint ventures were 85000 units a decrease of 5% versus the second quarter of 2020.
The light duty market and China decreased 8% from 2020 levels to 614000 units, while our unit sold including joint Ventures were 38000, a decrease of 28% driven by supply chain constraints, particularly in these lighter displacement vehicles.
Industry demand for excavators and the second quarter was 97000 units a decrease of 5% from very high 2020 levels. Our units sold were 16800 units a decrease of 7%.
Demand for power generation equipment, and China increased 47% center and the second quarter, driven by growth and datacenter markets and other standby power markets. We continue to hold a leading market position and the data segment separate data center segment, driven by strong end user relationships and a compelling product offering and that space.
Second quarter revenues in India, including joint ventures were $392 million and increase of 219% from the second quarter of 2020, despite experiencing a terrible second wave of COVID-19 during this period.
Industry truck production increased by 40, 468%, while our shipments increased 535% is our joint venture partner continued to gain share.
<unk> for power generation and construction equipment rebounded strongly in the second quarter compared to a very low base a year ago. We remained encouraged by the continued economic recovery driven by anticipated government infrastructure spending.
And Brazil, our revenues increased 175% driven by increased demand and most end markets.
Now let me quickly cover our outlook for 2021 based on our current forecast we are maintaining full year 2021 revenue guidance of up 20% to 24% versus last year EBITDA is still expected to be and the range of 15, 5% to 16% and the company expects to return 75%.
Operating cash flow to shareholders, and 2021, and the form of dividends and share repurchases.
And summing up the quarter strong demand across many of our key markets drove continued sales growth and the second quarter and resulted in solid profitability. We have secured important new partnerships and our new power segment and at the same time, we continue to invest and bringing new technologies to customers outgrowing, our end markets and providing strong cash.
Return to our shareholders.
Before passing it over to Mark I wanted to take a moment to highlight and important announcement. We included in our earnings press release. This morning regarding our exploration of strategic alternatives for the filtration business.
Cummins filtration is a premier filtration platform and a technology leader specializing and filtration products used in heavy and medium duty and light duty trucks, and industrial equipment and power generation systems. The.
And the business generated revenues of approximately $1.2 billion and 2020 and remains well positioned for continued growth sustained margin performance and strong free cash flow generation.
Cummins filtration has a strong global footprint with leading positions in North America, India, and China, and a significant presence and other key markets supported by long standing local partnerships.
We are exploring a range of on options to unlock significant shareholder value, including the separation of filtration into a standalone company with a dedicated management team, who are well positioned to drive the business forward and diversify its business leverage leveraging and strong technology portfolio and footprint.
Execution of this exploration process is dependent upon business and market conditions of course, along with a number of other factors and considerations.
And any costs associated with the evaluation of these alternatives for the filtration business has been excluded from our financial outlook.
And we plan to share a lot more about this and other elements of our strategy during our analyst day on February 2000, and <unk> are.
Our purpose and delaying this event from November of this year until spring was to be able to hold it in person and we will provide more details as we get closer to the February 2003rd day. Thank you for your time today, and let me turn it over to Mark.
Thank you Tom and good morning, everyone and have a full key takeaways from our second quarter operating results.
And underlying demand remains strong outpacing supply and increasing backlogs and some of our largest markets and but to global supply chains remain constrained due to the elevated levels of demand and complications arising from COVID-19, resulting in higher premium freight costs and other associated and efficiency inefficiencies.
And we anticipated 3 months ago.
We delivered solid profitability and cash flows and the first half of the year. Despite the continued cost headwinds associated with tight supply chain and for the full year, we are maintaining our revenue and profitability guidance and.
And fourthly, we returned $860 million to shareholders and the quarter through cash dividends and share repurchases and $1.48 billion for the first half of the year consistent with our plan to return 75% of operating cash flow to shareholders This year and.
And I will let me go into more details on the second quarter.
Second quarter revenues were $6.1 billion and increase of 59% from a year ago. When the impact of COVID-19 was at its most severe sales in North America grew 74% and international revenues Rose 42%.
Currency positively impacted revenues by 3% driven primarily by a weaker U S dollar.
EBITDA was $974 million or 15, 9% of sales for the quarter compared to $549 million or 14, 3% of sales a year ago EBIT.
EBITDA increased primarily due to the benefits of higher volumes and stronger earnings from our joint ventures, and China, and India, partially offset by higher product coverage costs and high.
Compensation expenses, primarily variable compensation.
Gross margin of 1.5 billion on 24, 2% of sales increased by $588 million on 110 basis points, primarily driven by the higher volumes.
Global supply chain tightened and continued in the second quarter and resulted in approximately $100 million of additional freight labor and logistics costs.
We expect these costs to remain elevated and the second half of the year with demand and projected to remain strong supply tight and some increase in logistics and transportation costs.
Selling general and administrative expenses increased by $130 million on 28% due to higher compensation expenses and.
And research expenses increased by $87 million or <unk>, 46% from a year ago.
As a reminder.
Due to the significant uncertainty at the onset of COVID-19, we implemented temporary salary reductions and April of last year that lasted through the end of September.
Salary reductions resulted in approximately $75 million of pre tax savings for the company and the second quarter of 2020 across gross margin selling admin and research expenses and.
In addition, our variable compensation plan and worked as designed flexing down in the face of weak economic conditions last year, and flexing up with stronger financial performance. This year.
All operating segments experienced higher compensation cost and a year ago for these 2 primary reasons.
Joint venture income was $137 million and the second quarter up from $115 million, a year ago strong demand for trucks, and construction equipment and China as well as a broad recovery and and other international markets led to the improved profitability versus a year ago.
Other income increased by $30 million from a year ago due to a number of positive items, including a 1 time $18 million gain on the sale of some land and India, which benefited our distribution segment.
Net earnings for the quarter was $600 million or $4.10 per diluted share compared to $276 million or $1.86 from a year ago, primarily due to stronger after tax earnings driven by stronger volumes on the.
Gain on the sale of land and India contributed 5 cents of earnings per share this quarter the effective tax rate in the quarter was 21, 4%.
Operating cash flow and the quarter was an inflow of $616 million compared to an outflow of $22 million a year ago stronger earnings and dividends received from joint ventures more than offset increases in working capital.
I will now comment on segment performance and our guidance for 2021, which is unchanged from 3 months ago.
For the engine segment second quarter revenues increased by 75% driven by increased demand for trucks and the U S and construction equipment and U S and Europe.
EBIT increased from 10, 5% to 16, 1% of sales, primarily driven by higher volumes and lower product coverage expense.
Which more than offset higher cost and inefficiencies associated with global supply chain challenges and all.
Low supply chain costs in this segment remain elevated from a year ago. They did improve a little from first quarter levels.
We expect full year revenues to be up 23% to 27% and EBITDA margins to be and the range of 14.5% to 15% for the engine segment and distribution revenues increased 20% from a year ago and <unk>.
EBIT increased as a percentage of sales from 10% to 10, 5% primarily due to stronger performance in North America.
And.
We have maintained our outlook for segment revenue growth to be up 6% to 10% and EBITDA margins to be 9% at the midpoint of our guidance.
And the components business revenues increased 73% and the second quarter, driven primarily by stronger demand for trucks in North America EBIT dollars increased from 12, 3% of sales to 15, 1% due to the benefits of stronger volumes, partially offset by higher product coverage costs.
For the full year 2021, we expect components revenue to increase 30% to 34%.
EBITDA to be 17% at the midpoint.
And the power systems segment revenues increased 47% and the second quarter, driven by stronger global demand for power generation and mining equipment EBITDA increased from 11, 7% to 12, 2 percentage of sales primarily due to the benefits of higher volumes and lower product coverage expenses, we are maintaining our power systems.
<unk> guidance of revenues up 16% and <unk>.
And EBITDA margin and the range of 11 to 11 and a half percentage of sales.
And the new power segment revenues increased to $24 million up 140% due to stronger sales of battery electric systems and fuel sales.
EBITDA losses for the quarter was $60 million in line with our expectations as we continue to invest and new products and scale up ahead of widespread adoption of the new technologies.
Full year, we currently project, new power revenues of $110 million to $130 million and EBITDA losses to be and the range of $190 million to $210 million.
Total company guidance remains unchanged with revenues to grow between 20 and 24% and.
And EBITDA margin to be between 15, and a half and 16% for the full year.
EBITDA percent for the first half of the year.
16% some of the key factors expected to influence second half profitability on the pace of improvement and truck production in North America.
The rate of decline and demand in China and.
Performance of our global supply chain.
And we now expect earnings from joint ventures to be up 10% and 2021 compared to our prior guidance of down 5%.
Stronger than expected demand and China truck and construction markets, especially in the second quarter is the primary reason for the increase and how focused.
Joint venture earnings are expected to ease and the second half of the year with industry truck sales are expected to decline.
Following the broader adoption of the new National standard 6 on highway emissions regulations in China and July.
And we also anticipate a softening of demand for construction equipment.
Coming off all time high levels in the first half of the year.
Our effective tax rate is expected to be approximately 21, and 5% excluding discrete items down from our prior guidance of <unk>, 22.5%.
Due to the mix of geographic earnings Capex capital expenditures were $125 million and the quarter.
Up from $77 million, a year ago, and we expect our full year capital expenditures and high end of our range.
Of 725% to $775 million for the full year.
We returned $869 million to shareholders through dividends and share repurchases and the second quarter.
Bringing on our total cash returns.
The $1.4 8 billion for the first half.
Excuse me for my Joy through.
To summarize.
And we delivered strong results and the second quarter, Despite continued supply chain constraints.
And elevated costs demand currently exceeds supply and a number of important markets pointing to strong demand for our products.
Into 2022.
I want to thank our global employees.
For their ongoing commitment to meet the needs of our customers, while delivering solid financial performance.
We continue to extend our leadership position through advancing the technologies that power the profitability of our customers today.
And we will continue to do so for some time to come.
This sets the company.
This sets the company up to further increase the earnings power of our coal business, while we continue to invest and a range of new technologies and <unk>.
New partnerships.
Debt position.
Company for additional growth.
Our strong balance sheet focused on improving performance cycle over cycle and consistent cash flow generation.
And sure that we can sustain and important investments for the future through periods of economic uncertainty and distribute excess cash to shareholders.
Thank you for your interest today, and I will turn it back over to Jack.
Thank you Mark out of consideration to others on the call I would ask that you limit yourself to 1 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.
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And for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, 1 moment, please while we poll for questions.
Our first question comes from Jamie Cook with Credit Suisse. Jean You May ask your question.
Hi, good morning, and.
Nice quarter.
Tom a couple of more strategic question is just on the filtration business can you remind us where the margins of this business are and just your thoughts on timing and what this business can achieve as a standalone public company versus being part of comments or is it more likely that this asset would be interesting to someone else and then I guess my second question I appreciate.
And a lot of the color that you spend on new power systems incentives some of the.
Net relationships that have emerged I'm, just wondering as youre thinking about this business today.
A lot and the growth obviously has been organic.
Is there an inorganic opportunity here with the new power systems over the next sort of 12 to 18 months that could potentially perhaps.
Accelerate.
And this business would go longer term in terms of.
Earning a profit et cetera are and technology.
Thanks, Jamie good morning to you so.
Let me start with your filtration question first.
The answer is that the profitability of filtration is pretty much in line with the components business the segment and that business are very similar.
And the strategic logic is simple, it's a great business by the way very profitable great cash flow a terrific leadership team and then we've done a lot of improvement and that business over the last few years, which has really really improved its financial performance as well as its operating performance and so we feel like it's operating on all.
Cylinders related just for and engine analogy there but.
And the challenges that looking forward the opportunities to grow shareholder value and look primarily to us and diversification.
Number of technology innovations for the truck business or for our end markets look like they're limited in front of us, whereas the opportunities to take that technology platform and global footprint to other filtration segments look significant and when we think about using our shareholders.
Capital to invest and those other segments the logic is and it's clear.
What is clear, though that the company has.
Come to a size and performance level and now where we think it can stand on its own or it could be part of a bigger and other bigger company that plans more diversification and other end markets. We are looking at all those options.
We're exploring everything from a sale to a spend too to some other kind of strategic option. What we want to do most of all though is realized value for common shareholders. We know that when we're the best owner and can make the most of the assets, we're going to do that and when we're no longer the best owner.
And we need to confront that too and Thats what were trying to do here is just to create value for shareholders and be direct about it again.
And the business is doing great. The management team is outstanding.
And we're really proud of the achievements of that business.
We just think it can operate separately from us more effectively going forward.
And then with regard to new power and thanks for your comments on the strategic milestones. We have achieved a lot already and we are exploring organic inorganic partnership options. All the time. It is such a fast moving area. There is so much development to do and infrastructure.
Just the product technology and the availability of fuel there is so much to do to decarbonize the.
Automotive industry no less all of the other commercial and industrial industries that were in debt there.
No lack of potential partnerships and opportunities we are those scanning always for inorganic options too as you know some of the.
Some of the valuations were elevated to a point, where they were really just almost silly.
That said that isn't that isn't always true now and we are always scanning for acquisitions that we think can position us strategically more.
Better positions from a scale point of view that you heard me mentioned that in our and our battery electric section that there is a scale advantage to.
And to be gained both and hydrogen and electric if we can get enough volume on some of those products. We can drive down costs significantly that depends in part on whether the whether the technology is viable and the application or not and that's why we're doing so much focus on what are the first mover markets and where can we actually get <unk>.
Kale and then if we if we can do that on and there are on acquisition can help we will do it.
Okay. Thank you I appreciate the color I'll, let someone else ask a question right.
Our next question comes from Ann Duignan with JP Morgan.
Please proceed with your question.
And your line is live and you May. Please proceed with your question.
Im sorry, I hit mute.
I didn't see it didn't work.
Apologies.
Maybe a little bit more color on and JV income and knowing your comments you said that most of the raise and the JV income and was on the back.
Q2, China performance, but.
Just beyond that maybe walk us through and the JV income and maybe a little bit more color on India James.
JV income and on a consolidator and just what youre seeing there from the funded backlog and that will be helpful. Thank you.
Thanks, Tom Yes, so we delivered about just over $300 million of JV income and the first half of the year, which was up from $244 million.
Year ago, and we're expecting that first half to performance to drop off.
Between 30, and 40% with the midpoint of the guidance were down to 100, and just under $200 million of earnings and the second half of the year we.
We have started to see some slowing orders for both construction and truck it's too early to say.
Yet with absolute conviction, where we'll end up for the year.
That's our latest power.
This forecast and India underlying demand, we think is robust, but its been very complicated.
With the.
On the Covid situation. So, yes, we think India earnings should improve churn and of course is a bigger contributor across.
Yeah.
Our next question comes from Jerry Revich with Goldman Sachs and Jerry you May ask your question.
Yes, hi, good morning, everyone.
Very nice day.
Really nice to hear about the Sinopec partnership I'm on.
And if you just give us on update on what the order bookings for electric <unk>, where for you folks and.
In the quarter.
And you can just talk to us about the size of that pipeline and when do we expect additional bookings.
As we look out thanks.
Jerry we haven't reported bookings from Electrolyze on markets.
What I can do though is take that and something you'd like to see and start to see if we can.
Published those that data, but we have not been doing that so I can't really answer your question on bookings for the quarter, but what I. What I can say is debt as I mentioned and my announcement that the project that we've got planned width with Ebola and Spain for the fertilizer.
And we'll be the largest of its kind and so we are we are seeing significant ramp up already especially in Europe, that's where in Europe.
The combination of low cost renewable power combined with European money supporting projects debt Decarbonize industrial uses of hydrogen is really driving is the primary driver of demand and we see some of that now beginning to form and China same idea.
Decarbonising industrial uses of hydrogen so theres already big consumers of hydrogen they already people already by a lot, but it's produced using natural gas III SMA and this supply chain and screen hydrogen supply chain takes renewable power and Pam Electrolyze are like ours and then.
In terms of it makes the hydrogen and low carbon or zero carbon and that's.
And that's kind of the biggest driver of Elektra risers today.
Okay. Thank you and then.
I'm wondering on the hydrogen truck and <unk>.
Smith with air products and can you just talk about your anticipated business model.
Initial hydrogen and truck orders is it going to be primarily retrofit or are there.
And any OEM partnerships that you can talk about how is that business model evolving versus your traditional powertrains.
Yes.
But we think the business model is going to be very similar these are not retrofit vehicles. These are vehicles.
<unk>, which will be built for purpose to have.
Fuel cell electric vehicle powertrains as you guessed that.
The big.
Development area, there is to have and electric infrastructure and the and the truck already and then when you then you can put the fuel cell and and take advantage of the electric power train or the electric infrastructure and the truck and Thats still under development most of the trucks that we put out now the.
And the electric infrastructure is either.
A prototype version or is has not been fully production is yet and I would say our early versions will still be that but but truck makers are electrifying vehicles at a reasonably rapid rate at least for and relatively small volumes. So we expect those platforms to improve.
Over time, and we will be.
Forming partnerships with Oems.
To deliver those trucks and my view is that the reason you haven't seen more partnerships already is it just isn't very much demand, so and everyone's trying to figure out.
What to do what Theyre scarce engineering resources, and I use them on developing advanced diesel and natural gas and renewable natural gas and electric.
Fuel cell electric and and since I can't do all at once which ones do I do first second and third.
So we believe that truck makers will be ready to to work with us on fuel cell vehicles. When there is demand. So that's why we're excited about and end user like air products and high quality company knows hydrogen and really well wants to wants to make their fleet fuel cells. So I think thats going to increased truckmakers interest and trying to figure out.
And our fulfill disorder.
Thanks, Tom.
Our next question comes from David Raso with Evercore ISI. Please proceed with your question.
Hi, Good morning, I'm trying to think about the supply chain and your ability to react to with pricing.
When you look at the second half of the year and you sort of made the comment we should expect and continued constraints through the end of the year. What are you hearing from the supply chain about the early part of 'twenty..2 that makes you feel more comfortable and your ability to price and to that market and 22.
Yeah, David Jennifer here, and I'll comment a little bit about what we're seeing right now.
Do you have a mark and Tom.
And what's happening across the industry and our supply chain and really ramping up to keep up with the demand we see index price.
And after market has has paced our ability to supply and our teams have done a phenomenal job working closely with customers and suppliers to minimize that impacted the.
And the results that we did and the second quarter, we see that easy and and many places quarter over quarter fell and proving through the back half of the year and then the 'twenty tail microprocessors and other.
And our industry and other industries continues to be that.
And the constraint on our demands are relatively small and on the broader picture of.
Microprocessors and supply and we had expected to see some improvement and June.
Sure.
With Covid, and Malaysia that delayed slightly but that and we think will ease and the second half of the year So where.
And then format.
And the second half.
And markets.
We see the supply chain Tom.
Price perspective.
Right now, we're anticipating our price to cost can be 30 basis points favorable for this year and that is down from 40 to 50 basis point positive and our prior guidance really because of those increased costs that we're seeing and materials.
<unk> and premium freight and we are working tail.
Gate that.
Some of our contractual things on material side, Hedgy, and and also looking at pricing and surcharges, where possible and in fact debt and aftermarket sale and won't comment more on 'twenty..2 at this point, but we do expect to see some and pull that sales and cost coming down and getting somewhat of a recovery.
Ended the second half of the year.
Alright, Thank you very much.
Our next question comes from Steven Fisher with UBS. Please proceed with your question.
Thanks. Good morning, just wanted to follow up that discussion about some of the costs I know.
We talked about $105 million of cost and the first quarter related to logistics and it it sounds like they're coming down a little bit.
Wondering if you can quantify that and what you experienced in the second quarter, and where you see that going and the next couple of quarters.
Yes, so we did see those costs come down slightly and the second quarter and the business cost improve more but we saw some increase on that component and then the power systems business day definition at debt.
And that came into that business and we do expect that to improve again, each quarter and the second half of the year.
There were projecting.
$295 million and incremental logistics costs for the full year, which is 105 million more than our prior guidance just based on what we're seeing.
So it's again, it's very helpful. Maybe just to say, we're more worried about that I think.
Like a lot of a lot of companies.
The continued outbreaks of COVID-19 around the world and now the Delta variant and just keep throwing more curve balls into the system, because we can see labor shortages and we see other things and so some of these costs as Jen mentioned, we had we didn't.
Expected it to go from 100, and the first quarter to 30, and the second quarter and then be gone and so now we're talking about 1.
Almost 300 million for the year, So just I want to be cleared and that's a big hit to what we really generally expected.
I guess I wanted to highlight is that.
Our company continues to earn good margin despite that by finding other ways to do it.
Been able to price and the aftermarket and we still have a big opportunity going forward and that we're as Jen said, we'll be able to add material cost adjustments to our and contractually as we as we move forward roll forward on the quarter and just.
And the sheer effort by our teams to get products out at the least cost as we can I think and and in fact, so therefore, we get revenue up which includes which improves our incremental margins and the plant and so I guess, we're kind of running up and down escalator, if you will and doing a decent job of it and so as those things start to get better and.
And even and even in the markets, where we're still seeing disruptions or supply base gets better and operating under the same lousy conditions. If they states if they stay stable even stable lousy, it's better than then changing all the time. So all of them are doing better and so we are seeing improvements its just wherever the new flare up.
This is where we're seeing the costs being driven.
Makes sense. Thanks, Tom and then just maybe a follow up on China I know you are anticipating.
The weakness and the second half I'm wondering if you're sensing any policy tides, turning more positively there and.
Bigger picture on that May influence on infrastructure spending and demand for trucks and construction equipment that might make might make your kind of second half weakness somewhat of a lagging indicator actually.
Yeah, It's a good question.
As a Chinese policy prognosticator I would be of course fire and immediately but I'll just say this debt.
That I believe based on my conversations with government officials there that they are concerned about.
And where the economy is and are going to continue to try to figure out ways to boost economic activity.
Especially given what's happening internationally to demand. So I do think it's entirely possible, we will see government responses to try to keep business moving during this time.
And to your point that Mike.
Might offset some of what we see as sort of structural issues like the changing of the emission standards and the price increases of trucks.
And the signals on evident to us yet, but that doesn't mean, it won't happen and we've been talking about this all year like.
We called this wrong before we've said China is going to fall off a lot and then it hasn't and we said the reverse China is going to grow a lot and then it fell off some so what we think is that generally speaking with this emissions change prices are going to go up people bought a lot of trucks last year second half of last year first half of this year. So we.
We see diminishing.
On demand and not just trucks also excavators, we see diminishing demand as the most likely expectation and we are beginning to see signs of that and so even if the policy and started to change now I think we would still see some demand drops and at least the third quarter and the fourth quarter until those things start to take effect.
I'll just add we feel really well positioned with the products that we're launching in China. This year for the NSX and Sn Sal is that does take effect and customers start to buy and we think we have really good products out there that will position us well on the market and of course and we also have some.
Our growth and our components business, both after treatment and transmissions that debt will start to see and Crazy Nashville, We're feeling good about where we are on that market.
Sure.
Perfect. Thank you both.
Our next question comes from Ross Gilardi with Bank of America. Please.
Please proceed with your question.
Good morning, everybody can you hear me okay, yes.
Yeah, Ralph How're you doing.
Great Tom Thank you.
I wanted to go back to your hydrogen event hosted earlier and in the year in and the target you had for <unk>.
I think it was 400 million and Electrolyze our sales within 5 years correct me if I, if I have that wrong, but I'm just wondering if all the wins.
Although collaborations you've announced like do you already feel like you've got wins and hand that take you to that target within 5 years and.
And is there an upside case based on collaborations already announced that debt.
Takes this to say a $1 billion and 5 years I mean I realize on all this is fluid.
And subject to very unpredictable timing issues and so forth, but it seems like you've got a lot on the hopper there already and I'm just wondering like how much visibility you even have it on that target at this point.
Yes, it's a great question Ross the answer is depends on if I give you the answer from a CEO of a 100 year old engine company or from a new startup CEO of an old engine company says, we don't have the orders in hand, yet because I think of orders as actual orders.
But to your point, though we project that the some of these partnerships and where we see this this decarbonising of and.
Industries, using hydrogen already and we'll take our demand.
Significantly over our estimate we gave at the hydrogen day again.
The orders on hand, they depend on European money and all these things all of which has been promise, but it's not all done right. So and the same thing in China there is projected.
<unk>.
Policy investments that will encourage green hydrogen, but the orders aren't there yet so that's why when you ask like do you have orders on hand, the engine guys has no.
But if you asked me is that the.
The CEO over new power I'd say I feel really good about it and I think we're going to exceed our target significantly.
Okay. Thanks. Thanks, a lot that's helpful. And then just kind of nearer term.
And also just based on everything you've announced and when do we see.
A real inflection and.
The quarterly run rate revenue for new power I mean, you kept your your outlook unchanged.
For this year and I realize all of these things they take a lot of time, but what do we do we see like a meaningful step up do you think and just sort of a quarterly run rate into next year at some point in 2022.
Let us hold on our 2022 guidance until we get there.
But.
And basically what we think the revenue guidance is going to be driven by most is this electrolyze our day.
Demand and this is the thing that's kind of go on the fastest everything else is moving you know that the vs or move and fuel cell trucks are moving just as I said, but but to your point those are all being driven by costs coming down and infrastructure being built all of which takes a long time. The electrolyze. Our demand is the thing thats right in front of us. So if we can.
And get the projects locked down all of the.
The European moneys subsidies and place.
You heard from my remarks, we are we are building the capacity to produce these units.
That means with regard to the quarters of 2022, we have some work yet to do to do that.
I'd like to tell you, yes, but I think we need to do the work and we need to see some of these projects locked down before we we say to ourselves and that's exactly this quarter and that quarter. So give us some time to work that but I understand the question well and what we would definitely give you visibility to that as we get it.
Thanks, so much thank you.
Our next question comes from Rob Wertheimer with Melius Research. Please proceed with your question.
Thanks, I had a couple on and thank you Tom for the overview on on on the new power stuff and I understand the comments on the old versus new world, but.
The updates.
And can I ask you know I don't know if youre willing to but if you were to go a step further.
Could you characterize how strongly you feel on your I mean do you have a lot of things you can choose to invest and others.
Drivetrains motors, whether it's on Electrolyze enable its fuel cells on those batteries et cetera.
Are you leading in some of those and sort of keeping up and others and maybe you can.
Show US where you feel most confident and I had a question on engines as well.
Yes that is definitely a longer conversation about each technology area, where we're leading on where were not which would be significant disputed by by other competitors and the industry I'm sure Rob, Let's just let me say it this way.
I think that we have.
And our position and the market, which has been built over a long time, where we understand the applications as.
And as well or better than anybody and the industry, we understand the technical ways in which the applications demand power from the powertrain.
And that gives us a significant advantage and developing whatever powertrain ends up winning because we understand what it actually has to do.
<unk> thing I'd say is that we've invested significantly in both hydrogen fuel cells and battery electric fuel.
Powertrains.
Meaning that we have as much experience technology investment as anybody in the industry.
And straight battery cells or that kind of anybody and the application of those units to commercial vehicles. So we're not behind anybody who's in commercial and industrial.
On.
And the market. So I believe that we have we are well positioned but I also think the industry is moving quickly as I said in my remarks.
Where are the strategic advantage will be gained will depend not only on the product development, but on where the infrastructure is.
What the cost of electricity is versus the cost of hydrogen a whole bunch of other factors that require us and other industry participants to be pretty nimble about how you think about what products are going to win and how advantage is going to be created so thats why I think it's important for us to say, we like these investments we feel like we are.
At the forefront of all of them, but we also need to keep keep thinking about where the where the puck is moving too and make sure. We're thinking about how to get advantage and that's a little bit why you heard my comments on investing and low carbon engine technologies because right now we can produce hybrid diesel engine and hybrid and natural gas and.
And at significantly lower cost than either <unk> or fuel cell power trains that are significant improvements and both carbon and criteria pollutants. That's worth a lot to either depending on whether you're on EPA or a regulator or Europe, a customer I know how to use those there are a lot cheaper.
And I understand how to fuel them and operate them and Meanwhile, they still significantly and their positive impact on the environment. So that's why I think we.
We're trying to make sure that we stay at the forefront of all of these and not just a plop down of debt and 1 big pile on 1 place.
I think that's not a winning strategy and this market.
Alright that was a helpful answer and I don't know and this will be another tough 1 but on the flip side you guys have the opportunity to provide your expertise and scale and the last stages of diesel engine and you've done it a little bit I guess on medium duty already how do we.
On our side of the fence and think about what happens you see some of the mandates coming forward and time on auto that's a whole lot easier to do than on truck and I understand.
And we just expect maybe there was a big announcement and we all kind of guess as to how long. The tail end of these lives or are there are you willing to do that or is there a risk sharing or I don't know if youre willing to sort of characterize how those investments may go and I will stop there. Thank you yeah, yeah, Rob Thanks for that and it's a great question our view is that.
The tail end of diesel will be a lot longer than people expected and thats not because we have some we sit around and hope for.
The preservation of diesel and it's because.
The diesel market is so complicated there's so many applications on 100 years of applications and it's not like the cars, where theres just 1 application there is hundreds and.
Thousands and each 1 of them has unique demand and scale is very difficult to achieve and some of these and so we see the demand for diesel lasting a long time and that's why this investment and.
Both helping customers that are trying to move out of diesel as well as trying to think through how do we invest and those technologies and decarbonize through renewable natural gas or hydrogen IC engine or hybrids or other things.
Good investment because it allows these applications to move down the carbon curve have less carbon out lower criteria pollutants and.
And and engineering way and Thats going to drive and cost way, that's going to drive utilization and people are going to actually use it and not just delay purchases. So we think both for regulators and for customers. That's a good investment and that curve is likely to last a long time and the answer about how long is unfortunately for people that want a simple answer.
It depends on how it's complicated it's less a really long time, if any and all of them. If you mean like the the 1 truck application.
The largest volume it might happen sooner than the last.
On unusual kind of truck that that's a very small volume, but the accumulation of all of those curves and all those applications means diesel is around a long time and so on and these new applications and the lower carbon ones theyre going to be introduced.
Starting now and all the way through 2.
2030.
Wonderful thank you.
Yeah.
Okay.
We have reached the end of the question and answer session and I will now turn the call over to management for closing remarks.
Very good thank you and thank you everyone for your interest as always and Cummins.
We appreciate your attendance and that concludes our teleconference. Today I will be available per usual for questions. After the call and I hope everyone has a great day.
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Yes.
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