Q1 2022 Cummins Inc Earnings Call
Greetings and welcome to the Cummins, Inc. First quarter 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. 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 I would now.
If you turn the conference over to your host Chris <unk>, Vice President Investor Relations for Cummins, Inc. 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 2022 participating with me today are timeline Berger, our chairman and Chief Executive Officer, Jennifer Ramsey, Our President and Chief operating Officer, and Mark Smith, Our Chief Financial Officer.
We will all be available to answer questions at the end of the teleconference.
Before we start please note that some of the information you will hear or be given today will consist of forward looking statements within the meaning of the securities and Exchange Act of 1034.
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 more.
More information regarding such risks and uncertainties is available in the forward looking disclosure statement in 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 were we will refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website within the Investor Relations section at Cummins Dot com.
With that out of the way I'll turn it over to our chairman and CEO , Tom Linebarger to kick. This off thank you, Chris and good morning, I'll start with a summary of our first quarter financial results, then I'll discuss our sales and end market trends by region and I'll finish with a discussion of our outlook for 2020 to Mark will then take you through more details of both our first.
<unk> financial performance and our forecast for the year.
Before getting into the detail on our performance I wanted to take a moment to highlight a few major events from the first quarter.
The company announced two significant acquisitions there.
Spanned our product portfolio and are critical to advancing our de carbonization goals the acquisition of Jacob's vehicle systems, and the definitive agreement to acquire Meritor.
Jacobs vehicle systems as a supplier of engine braking cylinder deactivation start stop control and thermal management technologies, which are key components to meet current and future emissions regulations integration of Meritor, a global leader of drivetrain mobility, breaking an electric powertrain solutions for commercial vehicle and industrial.
Markets will position Cummins is one of the few companies able to provide integrated powertrain solutions across the full range of power technologies, including combustion engines battery electric and fuel cell electric systems.
In February Cummins also unveiled the industry's first unified fuel agnostic internal combustion powertrain platforms. This.
This technology approach to our new engine will be applied across Cummins X series L series and P series product platforms. It will help fleets reduce carbon emissions today by enabling vehicles to run on low to zero carbon fuels.
The platforms will utilize the leading engine technology the customers are familiar with and have a high level of parts commonality across fuel types to reduce costs and complexity.
Also Florida power and light company, a division of Nextera announced Cummins will supply a 25 megawatt electrolyze our system for the groundbreaking FPL Cavendish Nextgen hydrogen hub.
The hydrant hub will be Florida's first of its kind green hydrogen plant and will use solar energy to power the electrolysis process.
Once built this will be the largest Pam electrolyze or installation in North America.
These acquisitions product development announcements and project wins are all part of our destination zero strategy to evolve our company our products and our customers' products to the technologies needed for a de carbonized world.
This strategy, which we reviewed with you at analyst day includes reducing carbon emissions now by making improvements in the technology as we know today, while rapidly advancing the zero emissions technologies of the future.
Another important development during the first quarter was the Companys decision to indefinitely suspend our operations in Russia as the conflict in Ukraine persist with no peaceful resolution site, we are continuing to evaluate the best way to support our employees. During this difficult time in accordance with local laws and regulations we are.
Also actively working with community organizations, especially in Romania, and Poland determined to determine how we can assist refugees as they arrive.
Now I will comment on the overall performance for the first quarter of 2022 and cover cover some of our key markets, starting with North America before moving onto our largest international markets.
Demand for our products remains strong across all of our key markets and regions with a notable exception of China, resulting in record revenues for the first quarter of 2022.
Revenues for the first quarter were $6 4 billion, an increase of 5% compared to the first quarter of last year EBIT.
EBITDA was $755 million or 11, 8% compared to $980 million or 16, 1% a year ago.
First quarter results include costs of $158 million related to the suspension of operations in Russia, and $17 million related to preparations for the separation of the filtration business, which we have discussed in previous calls.
The costs incurred relating to the indefinite suspension of operations. Russia include inventory write downs reserves on accounts receivable the impairment of the joint venture investments and other costs.
My comments moving forward will exclude the one time financial impact of the suspension of our Russian operations.
EBITDA percentage decline in the first quarter as joint venture income dropped from a record high in the first quarter of last year, driven primarily by the slowdown in China market Research and development expenses also increased in the first quarter of 2022, as we continue to invest in the products and technologies that will create advantage in the future.
Particularly in the engine and new power segments.
Gross margin percentage improved compared to the first quarter of last year as the benefit of pricing we implemented at the beginning of this year exceeded the manufacturing logistics and material cost increases during the quarter.
This pricing only partially offset the impact of elevated supply chain and other inflationary costs that we carried through from 2021.
Our first quarter revenues in North America grew 12% to $3 7 billion driven by.
Improved pricing and higher aftermarket demand.
Industry production of heavy duty trucks in the first quarter was 65000 units up 8% from 2021 levels, while our heavy duty unit sales were 23000 flat with 2021.
Industry production of medium duty trucks was 29000 units in the first quarter of 2022, a decrease of 9% from 2021 levels. While our unit sales were 26000 down 3% from 2021.
We shipped 42000 engines, just Atlantis for their Houston Ram pickups in the first quarter of 2022 flat with last year.
Engine sales to construction customers in North America increased by 60% as nonresidential construction spending rose and rental companies increased capital spending.
Blues for North America power generation declined by 3% our supply chain constraints limited our production for both U S military and mobile power applications.
Yeah.
Our international revenues decreased by 3% in the first quarter of 2022 compared to a year ago.
First quarter revenues in China, including joint ventures were $1 5 billion.
A decrease of 31% due to lower sales in on highway and construction markets industry demand for medium and heavy duty trucks in China was 264000 units a decrease of 55% from last year last.
Last year's numbers were unusually strong supported by a pre buy ahead of NSX, but weaker new vehicle demand and economic impacts from shutdowns as the country responded to COVID-19 resurgence have pushed the market below normal levels or sales and units, including joint ventures were 35000, a decrease of 62%.
The light duty.
The market in China decreased 20% from 2021 levels to 468000 units, while our units sold including joint ventures were 34000 units a decrease of 24%.
Industry demand for excavators in the first quarter was 77000 units a decrease of 39% from record 2021 levels. The decrease was driven by declining demand within the property market and the COVID-19 impact on infrastructure.
Our units sold were 13000, a decrease of 41%.
Sales of power generation equipment increased 58% in the first quarter.
Primarily driven by datacenter customers.
First quarter revenues in India, including joint ventures were $621 million, an increase of 8% from the first quarter a year ago.
Industry truck demand increased by 18%, while our shipments increased by 16% demand for power generation and construction equipment also increased in the first quarter as economic activity continued to improve.
In Brazil, our revenues increased 10% driven by improved demand in most end markets.
Yeah.
Now, let me provide our outlook for 2022, including some comments on individual regions and end markets.
We have raised our forecast for total company revenues for 2022 to be up 8% compared to our prior guidance of up 6%. This guidance reflects this guidance reflects a stronger outlook in North America, and a weaker outlook in China as well as the indefinite suspension of our operations in Russia.
We are forecasting higher demand in global oil and gas and power generation markets and expect aftermarket revenues to increase compared with last year.
We are maintaining our forecast for heavy duty trucks in North America to be 250 to 260000 units in 2022, a 10% to 15% increase year over year to.
The supply chain constraints, our industry is experiencing continued to limit supply relative to strong end user demand.
And then North America medium duty truck market, we are continuing to project the market size to be 120000 to 130000 units of 5% to 10% increase from 2021.
Consistent with our guidance our engine shipments for pickup trucks in North America are expected to be down 5% compared to 2021.
Yes.
In China, We project total revenue, including joint ventures to decrease 10% in 2022, we now project, a 40% reduction in heavy and medium duty truck demand and 12% reduction in demand in the light duty truck market compared to a 30% decline and a 5% reduction respectively and our previous guidance.
Industry sales of excavators in China are expected to decline, 30% from record levels in 2021, consistent with our prior guidance despite.
Despite the projected decline in China in current economic uncertainty, we remain well positioned for continued outgrowth across our end markets in this region.
Industry volumes of <unk> products will increase this year as the new regulations are implemented more broadly are expedient experienced in meeting similar standards, the United States and Europe has prepared us to meet these standards, allowing us to offer strong support to our partners through the transition we continue to ramp production and expand our press.
Since an automated manual transmissions and build momentum in the new power space through partnerships and in country capabilities to establish a leadership position in that developing market.
In India, We project total revenue, including joint ventures to increase 10% in 2022 in line with our previous guidance, we expect industry demand for trucks to increased 20% this year.
We continue to project most major global high horsepower markets will improve in 2022 sales of mining engines are expected to be flat this year compared to the prior year a decrease in our prior guidance of up 10%.
Demand driven by continued strength in commodity prices is now being offset with a volume decline from our suspension of operations in Russia.
Demand for new oil and gas engines is expected to increase by 95% in 2022, albeit off a low base our previous guidance for oil and gas engines was an increase of 25%. Fortunately we were able to reallocate a significant number of our build slots from planned mining sales into Russia to meet increase.
Demand in the U S oil and gas market.
Revenues in global power generation markets are expected to increase 5% driven by increases in non resin doesn't nonresidential construction consistent with our prior guidance.
We are now projecting aftermarket sales to increased 15% from 2021 up from our previous estimate is up 10%. This is driven by parts demand within our North American on highway business as well as global power systems market and.
And new power, we continue to expect full year sales to be approximately $200 million, we have a growing pipeline of electric <unk>, which we expect to convert to backlog and be delivered over the course of the next 12 to 18 months.
In the first quarter, New order intake for Electrolyze was the strongest we have seen to date contributing to an already healthy backlog.
We will continue to accelerate our collaboration with Oems on both electrified power and fuel cell power for applications in 2022.
As a recent example, we are partnering Wisconsin, a world leader of trucks and buses for heavy transport applications to deliver 20 fuel cell electric trucks by next end of next year, demonstrating hydrogen viability as an alternative power power due to its energy density and flexible use.
In summary, we are increasing our revenue outlook for the year with year over year growth expected in most major regions, except China, we are maintaining our full year 2022, EBITDA guidance of approximately 15, 5%, excluding the impacts of an index of our indefinite suspension of operations, Russia and the costs associated.
We are preparing for the expected separation of our filtration business we.
We expect to deliver this strong profitability, despite the supply chain constraints and rising inflationary costs that we're experiencing.
During the quarter, we returned $518 million to shareholders in the form of dividends and share repurchases consistent with our plan to return approximately 50%, 50% of operating cash flow to shareholders for the year straw.
Strong execution resulted in record sales in the first quarter, despite the very difficult operating environment.
The ongoing supply chain constraints through the industry.
The continued COVID-19 related impacts and the effect of the competency in Ukraine, all present challenges to operating our business normally.
I am humbled by the commitment and resilience of our employees and leaders around the world who are navigating through these difficulties delivering for our customers and generating strong financial performance at the same time.
Cummins has never been in a stronger position, allowing us to invest in the products and technologies that will fund future growth drive advantage for our customers and help decarbonize our industry and we will accomplish this while generating strong financial results and return cash to shareholders now, let me turn it over to Mark.
Thank you Tom and good morning, everyone.
Key takeaways from my comments today are number one the global demand remains strong and we delivered record revenue in the first quarter.
Second we also delivered solid profitability in the quarter as gross margins improved compared to Q4 last year.
Tom said, we returned $519 million to shareholders in the form of dividends and share repurchases and we've raised our full year outlook. Despite the many challenges around the globe.
We have suspended our commercial operations in Russia indefinitely, which resulted in a pretax charge of $158 million in the first quarter of 2022.
Provide clarity on operational performance I am excluding the impact of this charge in my comments, we have provided a breakdown of the costs associated with Russia in our earnings materials broken out by operating segment and P&L line item, where you do your analysis and I will let me go into more details on the first quarter performance.
First quarter revenues were $6 4 billion or 5% from a year ago.
Sales in North America were up 12% and international revenues dropped 3% due to a sharp slowdown in China.
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Foreign currency movements impacted international sales.
2%.
EBITDA was $913 million of 14, 3% of sales for the quarter compared to $980 million or 16, 1% of sales a year ago.
The lower EBIT.
<unk> was driven by negative other income lower joint venture earnings primarily in China.
Higher operating expenses, principally engineering expense to support future product development.
Gross margins improved year over year and also from the fourth quarter, both of which were.
Relatively tough quarters from a gross margin percent.
Perspective.
Now, let me discuss each line item in more detail.
Margin of one $6 billion or 24, 9% of sales increased by $105 million or 50 basis points compared to a weak Q1 last year, the benefits of stronger volumes, including aftermarket and higher pricing more than offset higher freight costs and material costs from.
A year ago.
Selling admin and research expenses increased $79 million or 9%, primarily due to higher research costs, which support future growth as well as $17 million of expenses associated with the planned separation of our filtration business.
Joint venture income declined by 30 million $39 million versus a year ago, driven by lower demand for trucks and construction equipment in China.
Other income was a negative $52 million 45 million worse than a year ago.
Europe during our analyst day in February we highlighted our new advanced range of fuel agnostic combustion engines, which are receiving very strong customer interest as we finalized our plans for the new platforms, we wrote down the value of certain existing.
Assets, which negatively impacted other income by $36 million in.
In addition, we experienced $37 million of mark to market losses on investments.
Our nonqualified benefit plans in the first quarter. This compares to a $32 million of mark to market loss.
Joe.
Net earnings for the quarter were $565 million or $3 95 per diluted share compared to $603 million or $4 seven from a year ago.
Costs associated with Russia, and the planned separation of the filtration business reduced our Q1 EPS.
And <unk>.
The effective tax rate in the quarter was 26, 8%, which included unfavorable discrete tax items of $31 million.
Operating cash flow in the quarter was an inflow of $164 million.
Versus $339 million in Q1 of 2021, the lower cash flow result was the result of lower earnings and the highest payout of variable compensation.
This year compared to the payout in 2021.
I'll now comment on segment performance and our guidance for 2022 for.
For the engine segment first quarter revenues increased 12% from a year ago, while EBITDA increased from 14, 4% of sales to 15, 4% as the benefit of stronger volumes and pricing actions more than offset lower joint venture income and increased input costs in 2022, we.
Revenues to be up 8%.
<unk> from our prior guidance, primarily driven by higher aftermarket sales in North America.
2020 to EBIT dollars projected to be approximately 14, 5% down 100 basis points from our prior guidance, primarily due to lower joint venture income in China as well as acknowledging the impairment cost in Q1.
In the distribution segment revenues increased 15% from a year ago to $2 1 billion.
A record for the segment.
EBIT.
Increased as a percent of sales to nine 9% compared to eight 7% a year ago, primarily due to higher aftermarket volumes and prices pricing.
We expect 2022 distribution revenues to be up 11% compared to 2021 in line with our prior guidance. The increase in revenue is primarily driven by stronger aftermarket demand globally.
EBITDA margins are expected to be in the range of approximately 10, 5% up from our prior forecast of 10% primarily driven by strong aftermarket.
Component segment revenues decreased 8% in the first quarter, primarily driven by weaker demand in China.
EBITDAR decreased decreased from 19, 6% of sales to 16, 4% driven by the negative impacts of lower volume as well as higher material and logistic expenses.
We expect revenues to increase 6%.
From our client focused or 4%, primarily due to higher aftermarket sales.
Which more than offset weaker demand in China.
EBITDA margin is projected to be $16, 75% up from last year and our prior guidance, primarily due to stronger volumes and some efficiency gains.
In the power systems segment revenues increased 14% in the fourth.
First quarter and EBITDA decreased from 12, 3% to nine 5% of sales as the benefits of stronger volumes.
Were more than offset by higher supply chain expenses in 2022, we expect revenues to be up 8%, 3% higher than our prior forecast.
Primarily due to higher demand for oil and gas and power generation equipment globally EBIT dollars projected to be 11% for the full year in line with our prior guidance.
In the new power segment revenues were $31 million down from $35 million a year ago due to the timing of Electrolyzed sales.
Our EBITDA loss was $67 million in the quarter in line with our expectations as we continue to invest in the products infrastructure and capabilities to support strong future growth.
But the new power business, we still anticipate full year 2022 revenues to be approximately $200 million.
Representing an increase of 72%.
Net expenses in that segment is still projected to be approximately $290 million as we continue to make targeted investments.
We are raising our full year 2022 expectations for company revenues to be up 8% from our previous guidance of 6%, primarily driven by strong demand in North America, while maintaining our guidance for company EBITDA margins at approximately 15, 5%.
This guidance excludes the first quarter charge for Russia, and any expenses associated with the separation of the filtration business.
We continue to see challenges with global supply chain performance and rising input costs and have raised prices to counter the inflation. We will continue to monitor costs closely and evaluate the need for further price increases we expect earnings from joint ventures now to declined 20% this year, excluding the impact.
Our system, although suspension.
Suspension of rush of operations.
This is down from our prior guidance of down 15% to 20% due to weaker outlook in China.
We are projecting our effective tax rate to be approximately 21, 5% in 2022, excluding any discrete items.
Our outlook for capital investments is also unchanged at $850 to $900 million for the year.
We anticipate returning approximately 50% of operating cash flow to shareholders in the form of dividends and share repurchases.
To summarize demand remained strong and nearly all of our end markets with China. The notable exception.
We delivered record sales and solid profitability in the first quarter and have raised our outlook for the full year.
We remain focused on strengthening our position in our core markets invest.
Investing in technologies that will accelerate our plans for future profitable growth and generating strong returns. Thank you for your interest today and now let me turn it back to Chris.
Thank you Mark and we're ready for our Q&A session now out of consideration to others on the call I'd ask that you limit yourself to one question and a related follow up if you have an additional question. Please rejoin the queue.
Operator, we're ready for our first question.
Thank you if.
If you'd like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Directed please limit yourself to one question and one follow up our first question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, good morning.
Nice quarter, I guess, Mike My question and follow up one.
Can you talk to sort of pricing actions you've taken.
Last quarter.
Sanctions on price cost and like to what degree did the pricing action that we're taking this year.
Makeup for whatever we're losing.
To what degree the pricing actions this year can we.
Can help 2023 margin.
Yes, Im just guessing can.
Can we can can we recoup I guess port losing price cost in 2022, and then my second question. Tom If you could just sort of update your assumption given with Russia, Ukraine, China like what your assumptions are supply chain in the back half of the year.
Hey, Jamie it's Jennifer.
Given answer and then Mark can talk about some of the numbers as you know we saw growing niche.
Material and supply inflation over the course of 'twenty, one and as we talked about a quarter ago. We took actions and are in this year to increase pricing.
And first sedan aftermarket and also add some some surcharges in response to that and so we continue to see that cost pressure rolling.
Material cost supplier inflation and logistics costs and also impacting the efficiency of our operation.
We're able to recover some of some of that with the pricing actions that we took in Q1 and those went in place over the course of the quarter as we worked through our backlog and new pricing.
And to place and we are continuing to monitor.
Those cost pressures and take additional pricing actions over the course of the year.
Thank you Ann.
Answering your question about go forward it really depends on what we see over time with material costs and logistics costs, which have just continued to grow.
At this point.
<unk>.
And the market from a.
From our Russia business perspective.
As.
Tom alluded to we were able to we see strong underlying demand until we've been able to repurpose some of the material that we do have in place and to other markets and continue to maintain our revenue guidance given the strong underlying demand in oil and gas and other markets and offset the impact of Russia from our supply.
Perspective.
We're really watching tier two and tier threes impact on asset a tier one level.
It is not a big reservoir monitoring what's going on.
In terms of the underlying material that comes out of Russia like Palladia.
Gas and so at this point, we don't anticipate significant impacts that it's something we're paying attention to.
Jamie Hi, good morning by the way the only thing I guess I would add to John's comments is that.
As I said in my remarks, we have we did make we did make improvements in pricing, but we didn't make up for all of the costs cumulatively through the year just to just to kind of draw a tighter lineup you asked about how margins will be next year. If we don't take further pricing the pricing action, we will be worse.
On the same sales as we would have been before.
All of the Covid pandemic stuff started so suffice it to say as Jen said, we are continuing to look at future pricing actions to make up that difference because inflation continues all the things Gen set so right now I'd say, we're still lower than we need to be to get back to zero on gross margins. So our expectation is that we'll continue to try to.
Recover through pricing.
The as you said, though there's a lot of uncertainty about supply chain. So you asked about the effect of China, and Russia, I think were still very concerned about supply chain impacts in the second half. So we as you know in our in our.
Our original guidance for the year, we kind of expected things to improve in the second half, we still expect that but our our concerns grow.
Specially in chips and electronics and then with with.
Some of the shutdowns in China, our concerns grow that we may not see as much impact positive impact in the second half on supply chain as we'd hoped.
Which isn't to say that we don't know what to do about that we've been working on that for two years, we're getting better and better at dealing with uncertainty.
Our supply chain and disruptions and as we said we will continue to look at pricing to offset some of those costs, but it just the supply chain is not settling.
The agreed that we would hope again, it's not the second half yet.
But the China shutdowns did not help at all in the in the electronics.
Components that we expected to get better on onward from the supply of suppliers.
I'm, just we're just losing confidence that they're actually going to deliver so much better than we than we'd hoped.
Yes.
Okay. Thank you very much. Thank you thanks, Jamie.
Thank you. Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.
Thanks, so much so just wanted to highlight that green hydrogen electrolyzed or when.
Nextera, Florida power and light had had talked about that previously.
But it's I think a great reference point for how to build.
Hydrogen economy with Green power could you talk a little bit more about the pipeline of opportunities.
Potentially in Europe , where there is more policy support but here in North America.
Yes.
Exactly as you said it's that.
That project is a great demonstration project in our previous largest.
Installation was in Canada that was 20 megawatts. This is larger at 25.
So it's too it's two things one is it's a north American operation with Green energy going directly into green hydrogen.
Available for off takers, that's a that's a first for the U S. That's really good.
The thing is that it's a large scale use of Perm Electrolyzed yours and as we've discussed on this call before our view is Perm Electrolyze Theres electrolysis.
Is the right solution for the future both because it's the technology is improving faster and the flexibility of the technology means that you can build any size any place.
So we think it's the winning technology, but suffice it to say we haven't build as many large installations as we have in alkaline and other technology. So anyway. It's a great reference project Nextera is of course, a leader in this kind of work. So we're excited about that in Europe . We continue to see strong interest in similar kind of projects.
As you said Theres policy support there because there is a carbon tax.
Which which increases the.
The cost of gray hydrogen, meaning green hydrogen projects.
That much better plus theres EU funding. So those projects are easier to finance than ones in the U S still today, but growing interest in the U S for sure and our backlog continues to grow in the Electrolyze our space as a result.
Great if I could sneak one more in can you give us a little bit of update on the Jacobs integration thus far.
And then.
You can comment on it obviously, it's not expected close till the end of the year, but how youre doing some planning in advance for for integrating meritor.
Yes, Super I'll say, a word about meritor and then I'll, let Jen talk about jbs, which is sort of already done that so we're on with the integration there, but and meritorious case.
You remember we had both antitrust.
Approvals to get we still have some of those to get plus the shareholders' meeting is later this month the 26 I believe.
May so we won't really be able to advance <unk>.
Even our discussions about that until after the shareholders' vote, but so far things are.
Go along as expected there had been no no curve balls nothing strange happening.
So all going well, we just have to wait for the shareholders' vote before we can begin pre planning activities and other things. So we're still very positive on meritor, but but we have to wait for that and then Jim why don't you talk about how we're already started with Jacobs, yes. So we're excited to complete the transaction with Jacobs a few weeks ago. We've now.
Now.
Integrated that business into our components business and as you'll recall, we're one of that.
Hey, good reasons for doing that acquisition was the opportunity for engine braking and variable valve timing as a part of our.
Component technology going forward and so we're excited to have that part of the component business Youll see us starting to talk about that at the product components business and partnering with Cummins engine business.
If our future platforms as well as other customers to meet their needs with that technology, So often running and excited to have it as a part of that kind of thing.
Great. Thanks for taking the questions. Thank you.
Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Yes, hi, good morning, everyone.
Good morning, Jerry.
Tom.
Obviously gained share in medium duty engines I'm wondering ahead of the carb regulations.
To Mister car, you have incremental opportunities, particularly for some lower volume engines for the industry around.
Kevin leader.
Carb will be meaningful opportunity for you folks.
Well.
Carb regulations are challenging.
Complicated and unclear exactly what what is going to prevail, but yes. We continue to think that we've got the right offerings for the market, especially during these when regulations get tougher and more challenging we think we've got more solutions for customers.
<unk> was talking about.
We now have these these new technologies that we can add to combustion engine. So we're offering an entire range of platform.
Platform excuse me of fuel agnostic engines.
That means that if natural gas is going to be what people need in California, We think will have natural gas offerings for them.
We'll also have.
Engines that are very diesel engines, which are very low nox and competitive in the market and then of course, we will have zero emissions offering so.
I guess.
There's a lot to play out in carbon.
Low to speculate exactly but we are definitely positioning ourselves that with each regulatory move.
We will have more solutions for customers and therefore more likely to gate to gain share in the market.
Our strategy in a nutshell and we think we're well positioned for that but there's just a lot of a lot.
A lot of work left to be done about how the carbon regs are going to play out.
Super and then separately in new power.
Spoke about a meaningful order in the quarter I am wondering if you could just.
Share with us what the backlog looks like for that business and what cadence of New awards you expect over the balance of the year just to put a finer point on that or if you don't mind.
I don't mind, so our backlog is now in excess of 100 megawatts and again it's building.
The reason it's building as interest.
<unk> continued to grow in projects like the one that I mentioned with Florida power and light. There's a lot of them are smaller I think as Amy discussed in Investor Day, we have a few big ones and then a lot of small ones. The big ones were excited about because they give us demonstration points to them to show that Perm electrolyte solutions can.
Work in big bigger projects, which are going to be necessary to to fuel the hydrogen economy.
But they also take longer to finance and longer to build and smaller ones give us business sooner and are easier to deploy so we're excited about both types.
We're seeing both put it being put into backlog.
Today, and as I mentioned were at something like 100 megawatts or more now and we're continuing to build it we built faster in the last quarter than we've ever before so we're excited about that.
Okay terrific. Thanks.
Thank you.
Thank you. Our next question comes from the line of Rob Wertheimer with Melius Research. Please proceed with your question.
Hey, good morning, everyone.
Hi, Rob.
I'm going to continue the theme of interest in electric water business, which seems to be gaining some momentum I assume the orders and backlog increase you discussed kind of pre date, whatever accelerated transition Europe may do on energy and to the events in the war in Crane.
Is that the case is there any stepped up activity on future project that goes a little bit beyond backlog and then just a competitive question on that one.
What is the process like do you have any comments on market share on how you are winning the deals.
But you are winning on efficiency on price on whatever if you could flush out that that'd be great.
Yeah. Thanks for that Rob So a couple of things one is there is definitely increased.
Inquiry and quotes as a result of energy challenges in Europe . There is also increased level on finding new supplies for oil and gas. So I think we see in our oil and gas sector two huge demand for engines there. So.
It's kind of a split decision I guess, I'd say, Rob a whole bunch of Theres, a whole bunch of actors that think that the action, Russia should say that we should be moving to green energy fast and there's a whole bunch of actions I think we should back up on.
Could use oil and gas now because it's too dangerous.
I'm not sure exactly what all that means but let's just say there is definitely more inquiry level for <unk>.
So we'll see how much of that converts to actual backlog, but where we are seeing more inquiries, whether its more than we expected.
I really don't know the answer but it's a lot, let's just say it that way.
And I guess I would.
Further add that.
I think the big reason that we're seeing so much activity for Cummins is because we are the.
The premier.
Supplier of Perm and I do believe that more and more companies think that Pam electrolysis is the technology of the future is it's not a given there are still people that think alkaline because it's already been demonstrated in large.
Projects and because it's also improving although I would argue at a slower rate.
<unk>.
That's still that's still going to be a technology for a long time, but more and more companies are growing and their comfort with deploying Pam and want to.
Grow it I think that's one of the reasons that we're seeing so many inquiries and that's going to impact share. There are other providers of perm, electrolyze ours, but but but fewer and certainly fewer with the scale that we have the only place I think we we are not a European company and so there is some interest in national.
In Europe . So if you know what I mean like if you are a French company.
French projects, we'd like to choose a French company and things like that so we are of course trying to be as local as we can in every country we operate.
Put our plant in Spain, as a result of.
Trying to be.
A pseudo national champion anyway in Spain. So we will continue to try to make it feel like were local in each place and that we are the technology of choice for them.
That's great. Thanks for the comprehensive answer one follow up on profits and new power how should we think about that as you ramp into more and more revenues I assume the gross margins are positive I don't know theres, a lot of startup costs and a lot of different ways and then.
Any update on how long and how much.
You are willing to invest in the business and how we treat all of EBITDA as R&D and that will continue at this level for two years at this point or any update you're out there and I will stop thank you.
Yes, so it's a great question and.
Totally reasonable the answer is an electrolyzed. There's we are gross margin positive and thats not surprising given the fact that.
Demand is strong enough now that we're able to to scale up some and of course, we can price for those because there is demand in fuel cells and batteries. It's project by project because we are still the rate of improvement in those technologies in terms of cost is still.
It's still a pretty sharp ramp downward and of course, they're not really in the money most of the most battery and fuel cell transportation applications anyway.
There are essentially working on subsidies or some kind of project. So I would say we're much less consistent there. Despite a project by project, but an electrolyzed as we R&D gross margin positive in our view is with each of these as we start to ramp technologies gross margins will go positive quickly and then as you as revenue increases.
We will go positive in the whole sector. We are definitely investing ahead of demand. So you talked about.
Is it all just R&D expense not exactly we are delivering projects that are live and running like for example, our fuel cells into into trains in Europe in our electro licenses that we just talked about but we are also doing a lot of projects like the 20 units I mentioned in partnership with Scania that look more like engineering prototypes to try things out than they look.
Like commercial sales and so it's a blend I guess and we are investing ahead of sales for sure.
Thank you.
Yeah.
Thank you. Our next question comes from the line of David Raso with Evercore ISI. Please proceed with your question Hi. Thank you my question relates to components and it'll dovetail into my follow up on China.
The rest of the year the numbers look strong obviously Jacob vehicles is a big part of the reason why you have strong margins, especially starting in the second half for for components, but even pulling out.
Jacob it feels like a fairly strong number in <unk>.
15% of that business consolidate is China and 50% of its JV income is also China I just want to make sure I understood where there are other elements in there that are improving that maybe I don't appreciate that'd be scant, even pulling up Jacob.
The growth rate is nine 5% for the rest of the year ex Jacob you were down in the first quarter. The margins are still up sequentially. Even if you pull out a nice margin for Jacob I know the margins are above segment average. So I'm just trying to level set that with your China comments, taking China down for the rest of the year. Thank you, yes, I think it was.
A couple of factors and then either of them are enormous but they all contribute to a stronger outlook. So we are seeing stronger demand across pretty much all of our businesses for aftermarket, which is also true for the components business certainly here in the U S. And then some of these markets that's an important factor.
I think it's fair to say the components business was heavily impacted particularly in the second half of last year with a lot of the Univision inefficiencies and rising costs. So we have been.
Making sequential pricing improvements in that business and we expect to continue to generate more operating efficiencies as we go forward, but there is no one big.
Leasing assumption out of the analysis, that's really just improving ops more aftermarket.
<unk> pricing.
I appreciate that and then thinking about China exiting 'twenty two the way Youre playing out China in your numbers, where do we sort of leave China at the end of 'twenty two when it comes to.
National five standard trucks is that inventory gone.
Just curious also if you're hearing anything on stimulus in China that we should be thoughtful about given where the market is going to be at the end of August in 'twenty two.
Yes, I think.
We don't expect a return to the levels, we saw a year ago in China. However, we feel like we're at a low point now as you said because of inventory burn off because of Covid lockdown.
Overall economic situation in China, and so we do expect improvement to a more normal level.
At some point I think.
Again Covid is a big question Mark will there be any.
Stimulus, we haven't seen that yet, but I think those are great questions that that could positively impact that and then we are well positioned with our <unk> product as the market does come back to a normal level with increased components content and we think really strong product in the market that will perform well again.
That competition so.
China does come back.
I think that'll be a positive for us.
The components and engine business, but simply put Dave were below trend I mean theres no question into 'twenty, two we finish well below like normal levels. It's not the sales levels arent kind of like market filling these are below market filling numbers, whether its snap to jens by whether it's snaps back in Q1 or it takes longer we really.
Just don't know, but what we do know is we are below trend.
Alright.
History would say boost in Q4 would be a positive sign but we're not seeing anything yet at this point in time.
Thank you.
Okay.
Thank you. Our next question comes from the line of Tim Thein with Citigroup. Please proceed with your question.
Thank you.
Wanted to circle back to a comment earlier with respect to pricing and as to is there a way to help think about with all the pricing actions that were implemented as well as some of the contractual step how do we think about incremental pricing from from <unk>.
I don't know if you did.
You send it out but how you think that is it enough to cover material cost.
And again thinking about that that progression as we go from <unk> to <unk> bulk price and material costs.
Well, what I would say is.
Pricing isn't going to change dramatically from <unk> to <unk> will continue to evaluate it theres always something of a lag where we're responding to input costs.
We'll say Tim though.
They are going to be more pricing for this year than we'd anticipated.
Three to six months ago were looking at around 3% for the full year and the reason for that is our costs have continued to rise so.
Three months ago, we said about one 9% in pricing now, we're talking about probably 3% pricing.
There will be some additional aftermarket pricing in the mid year, but nothing significant in Q2.
Okay, Alright Thats helpful. Mark. Thank you and then just on power systems.
Margins for the full year.
You highlighted.
As you did pretty much every segment that strength in aftermarket and then I would think that maybe I'm wrong in that but I would think that selling engines in that in the oil and gas is probably a better trained in selling engine mining engines to belive, but.
And then again I know there is more to it.
Certainly the supply chain issues that you've highlighted.
Even large tier there is high level on that as well so maybe just take us through that revenues up.
From before and then.
Whats dragging on that.
On the margin side. Thank you.
Elevate is up a little bit so I think the big picture Tim is that.
We've put in place some pricing increases last year.
Supply chain lead times are longer on those large engines and so we are into the situation where costs have continued to rise we've continue to revisit pricing, but there's going to be a bit of a lag there before that all flows through our P&L, so expecting stronger margins into the second half of the year.
And then this business has been particularly disrupted by Russia, and so Tom talked about efforts, we've made to redeploy engines, but that isn't instantaneous.
And I think.
Explanation of oil and gas versus mining isn't the thing the thing is disruption and rising costs, which were trying to address through pricing and redeployment.
Tim and just just at a nuts.
Nuts and bolts level. So we redeploy we did the <unk>.
Play the engines, but we had to modify them essentially taken an engine that was line set to go into a mine truck and then you're having to take it offline and do something else to it to make an oil and gas and reprogram changed the timing and so you lose the margin and the markets don't have significantly different margins as a as a general.
Matter.
But I would just say that that redeployment and every time you redo anything in our plan. It's just tough for money. It's just that simple, but we're super excited that we could do it because of course, losing the sales and losing the margin would have been really bad and we were able to do it to do it. It's just that the incremental margin is a little worse than it would've been if we just sold the mine my engine.
Okay Alright.
A bit of an over simplification on my part so I apologize.
Just a wee bit though Tim.
I'll take them on mobile or we can get it.
Thank you.
Okay.
Alright.
Thank you. Our next question comes from the line of Matt Alcott with Cowen. Please proceed with your question.
Good morning.
First a quick follow up on the diesel.
A question in relation to the conflict in Europe . I think you guys said mid to late decade is when you expect diesel to peak and then aftermarket growth for a decade after that.
Based on the energy and security associated with the conflict do you think that this timeline might be a bit too. Soon do you think peak diesel might happened actually later.
It's a great question Matt.
As you remember from our Investor day.
We gave you kind of.
An outlook that we thought was a reasonable outlook and we also gave you some ranges of outlooks from other market Watchers, Mckinsey and other people who study this and you remember the range. We gave you kind of a late <unk>.
Late twenties peak and other people have it earlier than other people have it later.
And I would say that the fact that people are worried about energy security.
Does indeed make people wonder if it slips later makes me wonder.
But I just don't think it's clear.
Climate change is a gigantic problem that is existential in its nature.
Russia conflict is terrible and tragic and it's affecting People's lives and it's probably temporary.
It's hard to know how a temporal.
Issue affects a existential crisis I just don't.
I know thats, maybe putting it too broadly, but I just it's just unclear to me what I think is that Europe continues.
To work on making.
Carbon intensive industries find ways to decarbonize they have they didn't relax very many rules they haven't.
But I also theres a lot more discussion about energy security. So, let's just watch this space and revisit it.
Maybe next February around Investor day kind of time again, and say do we see would we move our trend line out right now it.
It would be difficult to move it but it would also be it would also be dumb of us to lock down its got to be then I think we just have to keep watching.
Yes.
Sense I mean conversation has certainly shifted around diesel new power technologies since.
The continuation of the conflict in just one question actually.
Can you talk about any other parts of the business that you guys are evaluating for potential sale.
And if.
If you could update us on what the criteria are that would make a part of the business a good candidate.
Yeah sure Matt So just let me just say that.
Jen and I host a strategy session twice a year.
We have strategy meetings every single month with our leadership team, but we twice a year, we do something where we step back a lot higher and ask ourselves portfolio questions. Do we have the right portfolio do we have are there things that we should be looking at that very very differently just to make sure that we don't get kind of stare at our Navy.
Don't just look down, but look up and out and we have a process by which we look at our portfolio and say is there any reason to think strategically.
We need to shift it one way or the other that was the process that led us to make all the acquisitions and get moving in new power that was the same process that caused us to drive the preparation for the separate separation that duration business.
I would be loath to announce any division of our company that might be up.
In that review process, because you can imagine if you work in that division, how disappointing that would be to hear that you are in that sector. So suffice it to say I will not identify any for you on this call, but what I wanted to say is the criteria is simple. The criteria is do we think that we can continue to create advantage.
And that technology.
<unk> does that having that technology create advantage.
In a related businesses. For example, we were pretty clear that our ability to do emission solutions systems creates advantage for both those and four engines because we're good at those things and so if one of those things or both of them are true. We think the division is worth keeping as long as we can earn.
Turns that satisfies shareholders and if we.
If those arent true even if it is a strong shareholder return company, we will likely site. It because we think theres, probably another owner that would make take more advantage of it.
That's kind of our criteria.
Great Tom Thank you very much I appreciate it thank you.
Okay.
Thank you ladies and gentlemen, that's all the time, we have allowed for questions I'll turn the floor back to Mr. Linebarger for any final comments.
Thank you everyone for joining the call today as you can tell we have plenty of challenges.
Operating the business normally us in probably every other company that you listen to call them. However, we are incredibly well positioned with our technologies to both work on Decarbonizing our industry one of the critical things.
At least in my lifetime that we need to do and we have a very we have a good portfolio of both internal combustion and zero emission technologies, which means as we work on de Carbonization, you will see Cummins continue to generate strong profits strong returns and therefore being a shareholder of Cummins is a way that you can.
Not only help decarbonize our industry, but you can also earn a return along the way. Thank you very much for your interest.
Thank you everyone that concludes our teleconference for the day I appreciate you participating and your continued interest as always the Investor relations team will be available for questions. This afternoon.
Thank you that concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.