Q2 2022 Cummins Inc Earnings Call
Greetings and welcome to the Q2 2022 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 should require operator assistance. During the conference. Please press star zero on your telephone keypad.
A reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Chris Hello, Vice President Investor Relations. Please go ahead Sir.
Good morning, everyone and welcome to our teleconference today to discuss Cummins results for the FERC the second quarter of 2022.
Participating participating with me today are Tom Linebarger, our executive Chairman, John Ramsay, Our President and Chief Executive Officer, and Mark Smith, Our Chief Financial Officer.
We'll all be available to answer questions at the end of the teleconference.
Before we start please note that some of the information that you will hear or be given today will consist of forward looking statements within the meaning of the Securities Exchange Act of 1934 <unk>.
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 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 then any subsequent filed quarterly reports on Form 10-Q.
During the course of this call we will be discussing certain non-GAAP financial measures and we refer you to our website for the reconciliation of these 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 you over to our executive Chairman, Tom Linebarger, one more time.
Thank you Chris brilliant.
Good morning, everybody.
I had to start by.
Telling you about some rough math I did before I walked in today.
I believe this is my 70 <unk> earnings call.
It's also going to be my last.
I am very grateful to the analysts and investors who are part of this journey with me. Many of you help me better understand the perspective of our shareholders, which influence how we ran the company how we developed our strategies and priorities and how we communicated about our results and plans for the future are.
I always tried to ensure that the senior leaders in the company understood your views and perspectives and they understood who they were really working for.
Some of you have been at this work almost as long as I have and your commitment to understanding our company and its potential has been remarkable I just want you to know that it meant a lot to me.
I'm very proud to have served as the CEO for this company for 10 years as a senior executive for more than 20 years. It was an honor and a privilege.
This company stands for more than its products and technology, it's revenue or its earnings and even its performance for customers all over the world. The people that work here are exceptional humans, not just exceptional workers.
That's why this transition was so important to me is perhaps the most important work of my entire career.
And I have a smile a mile wide today because of the quality of the individuals that replaces me and the strength of the team beneath her.
Jennifer Ramsey is a once in a generation leader.
She combines a leadership and technical skills needed with the characters and values required and the inspiration of a CEO that can take this company to places where I could not.
I am as proud as I was on the day I took the job to see her <unk>.
Jen.
Yes.
Thank you Tom good morning.
I'm excited to join you this morning, and this new capacity as president and CEO for comments.
In July we announced that Tom would end his term as CEO effective August 1st.
It is a bittersweet moment for me as he has been one of the most significant influences in my career and leadership.
Tom has been an incredible leader for this company and a true partner and coach journey.
Because of his leadership, we are in a strong position to navigate what comes next and execute our destination zero strategy.
Tom and I share a common vision for comments and the role that our company plays and powering a more prosperous world I feel deeply honored and proud to serve as the new CEO of cabinets. The first woman and Justice seventh CEO of this great company.
My life and leadership have prepared me for this role at this moment during a critical period for comments and our planet.
Our focus on purpose people and impact has shaped my career and will influence how I lead I look forward to working with all of you as we move forward.
I'll start with a summary of our second quarter financial results, then I will discuss our sales and end market trends by region.
And I will finish with a discussion of our outlook for 2020 to Mark will then take you through more details of both our second quarter 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 second quarter.
The company achieved significant milestones related to two previously announced acquisitions Jacobs vehicle systems, our jbs and meritor and.
In April <unk> completed the acquisition of Jbs, adding engine braking cylinder deactivation start stop control and thermal management technologies, which are key components to meeting current and future emissions regulations.
On may 26th Meritor shareholders voted in favor of the comments acquisition bid further validating the potential of our comments and meritor can achieve together.
The companies are working together to complete the acquisition. This week as we have received all regulatory approvals to close the transaction.
During the second quarter, Cummins announced collaborations with Daimler truck, North America, and Scania to deliver fuel cell electric powertrains for heavy duty truck applications.
And with Komatsu undeveloped meant of zero, a message haulage equipment, including hydrogen fuel cell solutions for large mining truck applications.
Common Chevron and Walmart also share plans and a great comments ex 15, and natural gas engines powered by renewable natural gas into Walmart heavy duty truck fleet.
These customer collaborations are significant steps in alignment with our destination era strategy to evolve our company our products and our customers' products to the technologies needed for a de carbonized world.
This strategy was which represents a significant growth opportunity for comments includes reducing carbon emissions now by making improvements in engine based solutions that are broadly available today, while rapidly advancing the zero emissions technologies of the future.
We continue to focus on our people and their development as a strategic advantage for the company in the second quarter. The company posted its first human capital management report detailing our commitment to creating and maintaining a dynamic and exciting work environment for our employees.
Now I will comment on the overall company performance for the second quarter of 2022 and cover some of our key markets, starting with North America before moving onto our largest international markets.
Demand for our products remained strong across all of our key markets and regions with the notable exception of China.
Resulting in record revenues in the second quarter revenues.
Revenues for the second quarter of 2022 were $6 6 billion.
An increase of 8% compared to the second quarter of 2021, EBITDA was $1 1 billion or 16% compared to $974 million or 15, 9% a year ago.
Second quarter results included cost of $29 million related to the preparations for the separation of the filtration business.
As discussed previously we recorded a charge of $158 million in the first quarter related to the indefinite suspension of our operations in Russia and.
In the second quarter received certain inventory and other expense amounts reserved previously and incurred some small additional charges, resulting in a net recovery of $47 million.
Adjusting for these items EBITDA was $1 billion or 15, 7% of sales.
My comments moving forward will exclude the financial impact of the suspension of our Russia operations and the costs associated with the separation of our filtration business.
EBITDA percentage decline in the second quarter as strength in sales and increased gross margin were offset by a 31% drop in joint venture income from the second quarter of 2021, driven primarily by the slowdown in China markets.
Research and development expenses also increased slightly in the second quarter of 2022, as we continue to invest in products and technologies that will create advantage of the future.
Particularly in the engine and new power segments.
Gross margin percentage improved compared to the second quarter of 2021, as the benefit of pricing and higher volumes 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 and experienced in the first half of 2022.
Our second quarter revenues in North America grew 15% to $4 billion, driven by improved pricing higher volumes and higher aftermarket demand.
Industry production of heavy duty trucks in the second quarter was 62000 units up 9% from 2021 levels, while our heavy duty unit sales were 26000 up 12% from 2021.
Industry production of medium duty trucks was 30000 units in the second quarter of 2022, an increase of 5% from the 2021 levels, while our unit sales were 27000.
Up 21% from 2021.
We shipped 38000 engines to Lantus for the use in the Ram pickups in the second quarter of 2022.
Down 9% from 2021 levels due to supply chain issues, which temporarily limited truck production.
Engine sales to construction customers in North America increased by 9% as companies maintained strong capital spending.
Power systems, North America sales were flat compared to 2021 as strength in aftermarket offset lower volumes demand remains high and North American markets for power systems, but revenues for North America power generation declined by 3% as supply chain constraints limited our production for both U S.
Military and mobile power applications.
Our international revenues decreased by 2% in the second quarter of 2022 compared to a year ago.
Second quarter revenues in China, including joint Ventures were $1 2 billion, a decrease of 43% due to lower sales in the on highway and construction markets.
Industry demand for medium and heavy duty trucks in China was 173000 units a decrease of 70% from 2021.
Last year's numbers were strong supported by a pre buy ahead of NSX, but weaker new vehicle demand and economic impacts from shutdowns as a country is responding to COVID-19 researches.
Have pushed the market to the lowest level since 2007.
Our sales and units, including joint ventures were 25000, a decrease of 70%. Despite the very difficult environment in China, We did see growth in some of our power systems markets, particularly mining and oil and gas.
The light duty market in China decreased 38% from 2021 levels to 380000 units, while our unit sold including joint ventures were 23000, a decrease of 40%.
Industry demand for excavators in the second quarter was 66000 units a decrease of 32% from 2021 levels.
The decrease was driven by declining demand within the property market and the COVID-19 impact on infrastructure demand. Our units sold were 9900 units a decrease of 41%.
Sales of power generation equipment in China decreased 5% in the second quarter due to the economic impacts of the COVID-19 resurgence.
Second quarter revenues in India, including joint ventures were a record $594 million, an increase of 51% from the second quarter a year ago into.
Industry truck production increased by 131%, while our shipments increased 78% lagging the industry production due to lower growth in heavy commercial vehicle segment.
The high level of growth in the second quarter is coming off a very low base when India was experiencing a COVID-19 peak in 2021.
Demand for power generation and construction equipment increased in the second quarter as economic activity continued to improve.
In Brazil, our revenue increased 7% driven by improved demand in most end markets.
Now, let me provide our outlook for 2022, including some comments on individual regions and end markets.
Based on our current forecast, we are maintaining full year 2022 revenue guidance of up 8% versus last year.
This guidance reflects stronger performance in North America, and a weaker market 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 2021.
We are maintaining our forecast for heavy duty trucks in North America to be 250000 units to 260000 units in 2022.
A 10% to 15% increase over a year ago.
The supply chain constraints, our industry is experiencing continued to limit our collective ability to fully meet strong end customer demand.
In 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.
We are now projecting our engine shipments for pickup trucks in North America to be flat compared to 2021 and update to our previous guidance of down 5%.
In China, we are now projected total revenue, including joint ventures to decrease 20% to 25% in 2022.
An update to our previous guidance of down 10%.
We now project, 50% reduction in the heavy and medium duty truck demand and a 15% reduction in demand for the light duty truck market compared to a 40% decline and a 12% 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.
By the difficult economic and market environment in China, we have significantly improved our presence in profitability in the region compared to private prior cycles and are well positioned for continued outgrowth across our end markets in the region.
As an illustration from 2019 to 2022, the demand for heavy and medium duty trucks is projected to be down 40% while across the same period. We are forecasting an increase in earnings from joint ventures in China.
As we look ahead industry volume of six product will increase through 2022 as the new regulations are implemented more broadly.
Our technological expertise and emissions experience positions us well to continue to outgrow the market and support our partners through this transition.
We also continue to ramp production and expand our presence and automated manual transmissions as our market share increases and the heavy duty market is increasingly adopting this technology.
In India, We project total revenue, including joint ventures to increase 15% in 2022.
An improvement from our previous guidance of up 10%.
We expect industry demand for trucks to increase approximately 30% in 2022.
We continue to project most major global high horsepower markets will improve in 2022 sales of mining engines are expected to be flat in 2022 compared to the prior year consistent with previous guidance.
Demand for new oil and gas engines is expected to increase by 120% an update from our previous guidance of up 95%.
Strong demand in the U S and other oil and gas markets have fueled this improved outlook.
Revenue in global power generation markets are expected to increase 5% driven by increases in nonresidential construction consistent with our prior guidance.
We are now projected aftermarket sales to increase 15% to 20% from 2021, an improvement from our previous estimate of up 15%. This is driven by parts demand within our North America on highway business as well as global power systems markets.
And new power, we continue to expect full year sales to be approximately $200 million.
We have a growing pipeline of <unk>, which we expect to convert to backlog and be delivered over the course of the next 12 to 18 months. Additionally, we will continue to accelerate our collaboration with Oems on both electrified power and fuel cells for applications in 2022 as highlighted by the announcements I noted.
Previously.
We are maintaining our full year 2022, EBITDA guidance of approximately 15, 5%, excluding the impacts of the indefinite suspension of our operations in Russia the costs associated with preparing for the expected separation of our filtration business and the expected costs associated with the pending acquisition.
Of Meritor.
We expect to deliver the strong profitability, despite the supply chain constraints and rising inflationary dairy costs that we're experiencing.
During the quarter, we returned $240 million to shareholders in the form of dividends and share repurchases consistent with our players to return approximately 50% of operating cash flow to shareholders for the year.
Strong execution resulted in record sales in the quarter, despite very difficult operating environment.
The ongoing supply chain constraints and rising costs throughout the industry continued COVID-19 related impacts and the effect of the conflict in Ukraine, all present challenges to operating our business.
I am grateful for the commitment of our employees across the organization, who have worked tirelessly to overcome these challenges their efforts resulted in a strong quarter, enabling us to support our customers while generating solid returns.
Cummins is in an excellent position to continue to execute our destinations euro strategy invest in our products and technologies that will fund future growth and drive advantage for our customers.
We will accomplish this while generating strong financial results and meeting our commitment to return cash to shareholders.
It's an exciting time to become CEO . Thank you for joining US today now let me turn it over to Mark.
Thank you Jen and good morning, everyone. We delivered strong results in the second quarter, especially in the context of a challenging global business environment.
As Jen mentioned, our second quarter results included a $47 million benefit resisting the reserves related to the suspension of our operations in Russia.
Until $29 million of costs related to the separation of the filtration business.
To provide clarity on operational performance.
We exclude the impact of these items in my comments, we have provided a breakdown of the costs associated with Russia.
<unk> separation costs.
By line item by segment.
Earnings material.
You understand the underlying performance more clearly.
Now let me go into more details on our second quarter performance.
Second quarter revenues of $6 $6 billion.
From a year ago.
Sales in North America.
<unk> percent.
While international revenues declined by 2% due to sharp slowdown in China.
Foreign currency fluctuations primarily stronger <unk>.
Stronger U S dollar reduced sales by 1%.
EBIT was $1 billion or 15, 7% of sales for the quarter compared to $974 million or 15, 9% a year ago.
The lower percentage was driven primarily by negative other income and lower joint venture earnings in China.
Gross margins improved year over year from the first quarter.
Now, let me go into more detail by line item.
Gross margin of $1 7 billion or 25, 6% of sales increased by $208 million or 140 basis points.
The benefits of stronger volumes and higher pricing more than offset higher freight and material costs for this quarter of course, we have been facing increased costs.
This period of time and now our gross margins have returned back to 2019 at pre Covid levels.
Selling admin and research expenses increased by $16 million or 2%, primarily due to higher research costs supporting future growth.
Actually offset by lower variable compensation expense.
Joint venture income declined by $42 million.
Versus a year ago lower demand for trucks and construction equipment in China was the primary driver of the decline in earnings.
Other income was a negative $18 million 87 million worse than a year ago.
We experienced $48 million of mark to market losses on investments that underpin our nonqualified benefit plans in the second quarter. This compares to gains of $20 million a year ago.
This variation in this one category explains most of the change in other income.
Net earnings for the quarter was $678 million or $4 77 per diluted share compared to $600 million or $4 10 from a year ago.
Earnings per share increased due to higher earnings lower taxes, and a reduced share count resulting from share repurchase activity.
The all in effective tax rate in the second quarter was 17, 3%, including 36 million or <unk> <unk> per diluted share of favorable discrete items.
Operating cash flow in the quarter was an inflow of $599 million.
Compared to $616 million a year ago.
I will now comment on segment performance and our guidance for 2022.
For the engine segment second quarter revenues increased 11% from a year ago.
<unk> increased from 16, 1% of sales.
15, 2% of sales as the benefits of stronger volumes and pricing actions in our consolidated earnings were more than offset by lower joint venture income in China.
In 2022, we expect revenues to be up 10%, 2% from our prior guidance.
<unk> sales, primarily driven by higher demand for engines and pumps and North America.
2022, EBITDA is projected to be approximately 14, 5%.
In line with our prior guidance.
In the distribution segment revenues increased 17% from a year ago to $2 3 billion a record quarter for the segment EBIT increased as a percent of sales to 11, 2% compared to 10, 5% sales a year ago, primarily due to stronger parts whole goods.
Sales and pricing actions, we expect 2022 distribution revenues to be up 11% year over year and EBITDA margins.
In the range of 10, 5% of sales.
Both in line with our prior guidance.
Components segment revenue decreased 2% in the second quarter, primarily driven by weaker demand in China.
<unk> increased from 15, 1% of sales to 18, 2% of sales driven by the benefits of pricing actions, which offset material cost increases.
Lower warranty expense.
We expect revenues to increase 3% for the year down from an increase of 6% and our prior guidance primarily to a lower outlook in China.
EBITDA margin is expected to be $16, 7% seven 5% sales in line with our prior guidance.
In the power systems segment revenues increased 5% and EBIT decreased from 12, 2% to 10, 6% sales as the benefits of stronger volumes and pricing were more than offset by higher material and logistics logistics expenses.
2022, we expect revenues to be 8% and EBIT is projected to be approximately 11% for power systems.
Change from our prior guidance.
And the new power segment revenues were $42 million.
75% from a year ago due to stronger demand for battery electric systems.
Our EBITDA loss was $80 million in the quarter as.
As we continue to invest in the products infrastructure and capabilities to support future growth.
And was in line with our expectations.
In 2022, we still expect revenues from the new power business to be approximately $200 million booked 72%.
Net EBITDA loss is expected to begin in the range of $290 million for new power also unchanged from our prior guidance.
Okay.
As Jim mentioned, we are maintaining our 'twenty two expectations of company revenues to be up 8% and our EBITDA margins of approximately 15, 5% of sales.
This guidance excludes expenses outside of the normal course of business associated with the separation of the filtration business the pending acquisition of medical or the indefinite suspension of our operations in Russia.
We expect earnings from joint ventures declined 25% in 2022.
Excluding the impact of the suspension of our business in Russia.
And this is down from our prior guide of a decline of 20%.
Due to continued weakness on further weakness in fact in the China truck market.
Predicting our effective tax rate to be approximately 21, 5%.
For this year, excluding discrete items.
Expenditures were $147 million in the quarter from 125 million a year ago.
We still expect that our full year capital investments will be in the range of $850 million to $900 million.
Yes.
Okay.
We returned $240 million to shareholders through dividends and repurchase of shares in the second quarter.
Our total cash returns to $758 million for the first half of the year.
Yeah.
Excuse me.
We still anticipate returning approximately 50% of operating cash flow to shareholders.
In the form of dividends and share repurchases.
While high inflation and rising global interest rates present risks to global economic growth, we did not experience any significant changes in aggregate demand from our customers.
Over the past quarter.
Our focus remains on raising financial performance cycle over cycle in our core business, while investing in technologies that will deliver future profitable growth.
Including a new markets new applications with new customers.
We continue to advance our strategy in the second quarter delivered record quarterly revenues and earnings per share and recently announced an 8% increase in our quarterly cash dividend.
The <unk> straight year of dividend increases.
Thank you for your interest today now, let me turn it back over to Chris.
Thank you Mark out of consideration to others on the call I would 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.
At this time, we'll be conducting a question and answer session. If you would like a question press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would 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, one moment, please while we poll for questions.
Our first question is from Jerry Revich with Goldman Sachs. Please proceed with your question.
Hi, good morning, everyone and Tom Congratulations.
Thanks Terry.
So Tom over those 70 earnings calls so I just wanted to add some roadmap to so the earnings power of comments. This is up about seven fold.
Graduations to you and the team here.
Thank you chip.
You talked about the <unk>.
Margin environment you coach.
We're spending a lot more of your fleet can you do in a normal environment I'm wondering if you just flush that out for us.
Awesome.
Yes.
Sure Bruce.
In a normal environment, how should we think about whenever demand does slow.
Decremental margins might look like given.
Step down that we see.
Expedited freight.
And environment.
Great. Thanks Gerry.
Yes, we continue to experience an environment, where supply chain is limiting our production in most of our markets.
As you've seen the team here has worked really hard to navigate that and continued to deliver as much.
As we can do our customers who are also experiencing issues. Some of those issues have lessened. We continue however to experience constraints in particular in the electronics space microprocessors and other electronics.
Component, we've seen improvement in our premium freight.
And also are closely monitoring what's going on with the standard freight rates. So while we have.
Some improvement off the pace, we're still running at high levels as we continue to navigate.
Disruptions caused by a combination of supply constraints and COVID-19 related disruption.
And then you go to Brazil.
Go ahead Gerry.
Donald.
I was just going to ask.
<unk> is it possible to quantify how much hard that is normal.
Well at one point last year, we were running probably four times the normal level of premium freight.
And Thats come down it has been we've seen sequential improvement over the last three or four quarters, but we're still running two rigs to three rigs kind of X.
Cost for it.
And then you'd asked about got it.
Margins generally in the event, there's a slowdown.
What I would say to you is.
We have to embrace these cycles when they come.
We have a very experienced team that has navigated through several of them.
Very proud of our record of raising cycle over cycle performance of the fleet control review exact decremental margins, but know that we will.
Got it.
Well.
Okay.
And when the next cycle comes that's all I can say really at this point.
Got it thanks, Martin just lastly, Jaguar normally your margins tend to be done.
In the third quarter versus second quarter seasonality I'm wondering given the supply chain dynamics.
Sure.
We see a lot.
Margin flat to up three approach.
Essentially depending on the house.
I think the biggest challenge in the second half.
Baked into our guidance is that we see a drop off in earnings in China, We typically see about a 25% to 30% lower JV income.
In the second half of the year.
Projecting that again.
Third from some of our important customers what the trajectory looks like on the top line going into the third quarter.
There's still a lot of moving parts and it's still a lot of challenges we're working through.
We've maintained our full year guidance was slightly behind the EBIT the opposite.
For the full year through the first half of the year.
But we're on track.
So expecting extraordinary there.
Based on what we know today.
Thank you.
Yeah.
The next question from the operator.
Yes. Our next question is from Tim Thein with Citigroup. Please proceed with your question.
Yes. Thank you good.
Good morning, Hey, Tom and John Congrats to you both.
Alright, Thanks, Tim.
Yes, and Tom I Trust, you'll be you'll be dialing into that 71st call. Just just so you can hear Chris read through that legal disclaimer.
Yeah. Good question about it.
So Tom maybe one for you just yet.
A higher level.
Obviously you've observed.
A number of cycles through your time and I'm. Just curious you mentioned that you guys Werent seeing anything.
Of note.
Obviously, theres a lot of broader concerns regarding the potential for either a recession this year or on our doorstep.
Just curious.
As you go.
For conversations with customers.
What would you be alerting the team.
For in terms of of signposts or.
Indications of.
If that begins to.
In fact come through where would you be watching and what kind of signals would you be.
Turning to page four.
Hey, Thanks, Tim.
I have been through a lot of these and this is an unusual one.
Question about it but.
But I'm going to flip it back to Jim just because in terms of conversations with customers about where they are gen has actually been doing more of those than I have but I would say that.
Just I just kind of repeat the point Mark made it is an unusual period and it has been an unusual cycle and I think our team has continued to figure out ways to adapt to it and I think we will here too, but make no mistake a lot of us in the industry are trying to figure things out that we haven't faced before labor shortages part shortages over.
Extended periods and things like that like you've heard from Gen. But let me just turn it back to FERC kind of your perspective of the customers and what they are looking at yes, great great. Thanks, Tom.
Mark and Tom have said you know we're in a cyclical business, we have a strong team that understands how to navigate and manage over the cycles and use the cycles to strengthen the business and emerge stronger and this is not a typical cycle because coming out of the COVID-19 early part of COVID-19 pandemic, we have seen really strong demand.
<unk> has been constrained by supply chain supply chain constraints across the industry.
And we have been unable to meet our collective customer demand in these markets outside of China that have been strong.
Now for 18 months, you see that showing up in very high aftermarket demand as well as customers have been using these products heavily and had higher parts demand as they work to keep them running so despite the fact that we do see.
Some decrease in spot rates some.
Some reduction off of really high indicators, when I talk to customers and look at some of these backlogs and freight activity is still very strong and they still would like us to supply more than we're able to so the conversations are all focused on.
Where are we at with supply constraints and can we ship more to them.
Sure.
We continue to monitor those overall indicators at this point, Dan and customer demand is strong aftermarket demand is strong used truck prices continue to be.
Elevated and also recall with higher fuel prices. These more fuel efficient next generation products are attractive to customers and so we'll continue to stay close to it and monitor what happens, but right now we see supply being the constraint through this year outside of China.
Got it alright, I will move it along.
Thank you both for your time and best of luck.
Thank you.
Yeah.
Our next question is Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, Good morning, Congrats Jennifer and congrats Tom and thank you for all the support throughout the years.
I wish you, well and I'm sure you're going to Miss that.
All are very insightful questions on earnings calls.
Yes, I can.
Yes, Jennifer My first question for you understanding that you and Tom have been working closely together and you co destination zero strategy you. Both obviously work closely with and have buying but sort of every CEO puts their own sort of stay.
Stamp on our company.
So just sort of as you're thinking about leading the company sort of maybe nuances or differences relative to to Tom or how you're thinking about the company just slightly differently and then I guess just my second question.
Jennifer This is for you or for Mark, it's probably unfair, but I'll ask it anyway understanding you can't control a downturn, if we have one but I feel like coming downturn theoretically in 2023 could be different as you think about you know one we have we're adding meritor you have market share wins I guess, we won't have the.
<unk> business.
Maybe China is actually okay. In this downturn because we're so.
The markets are depressed so any any way you want to sort of put buckets around.
How that could be additive.
I'll turn.
Thanks, sorry for your first question is for sure.
Yes.
Thank you Jamie I appreciate that I. Appreciate the question as you noted Tom and I have developed a destination.
Zero strategy together I've been a member of the Cummins leadership team now for more than seven years as Chief Technical officer, leading the components business, Chief operating officer, and now CEO . So the strategy the focus of the company going forward remains the same the commitment to all of our stakeholders to deliver strong results.
To to to really create strategic advantage to our people will continue.
The big.
Difference is just that as we continue to operate in this evolving environment paying attention to how.
Markets are evolving technologies are evolving integration of meritor, a major new company and we're going to be thinking a lot about strategic execution and what does that mean for different parts of our business as our strategy evolves and paying attention to a more dynamic environment and thats one of the reasons why.
<unk>.
Kept the president.
Well in addition to CEO is to stay close to the business as we focus not only on continuing to refine that strategy, but really driving strategic execution and delivering results.
As it relates to next year, we will of course talk later more about next year, you've heard us say, we see supply being built.
Limit limiting factor through this year backlog is strong.
China is down and will.
We will improve.
There is a lot of opportunity to improve and Cummins is very well positioned our products are performing very well.
Customer demand for that product is strong we have new partnership opportunities in our core business and in new power.
We'll continue to invest in products that will position the company for the future and manage through the cycles as they come.
And by the way I'll Miss you Jamie.
No I mean Thats fine I was just wondering too I mean, the incremental walk us theres more opportunities on an officer Mary towards some of these market share wins start to help in 2023. If you. If you want to answer fine if not that's fine I can get back in queue. Thank.
Thank you just described most of my work plan from telephone.
And all of those thank you.
Thank you.
Jim.
Our next question is from Steven Fisher with UBS. Please proceed with your question.
Hi, Thanks, Good morning, I'm not sure if I missed this but what was your first half after market growth I know you raised the full year, the 15% to 20% from 15% just kind of wondering what youre, assuming for kind of the second half trajectory within that within that guidance if some of the.
The market activity is kind of slowing that down at all.
Yes, Steve it's Chris.
We experienced about that same level in the first half and we expect it to hold throughout the year I think the demand is still very high particularly in the heavy duty market in North America as well as the global power systems markets mining oil and gas had strong demand there for aftermarket parts rebuilt and whatnot. So we expect that to hold.
Certainly through the remainder of 2022 Q2 was a little stronger than Q1 was.
Tom and Jim mentioned, there have been some supply chain challenges. So those have eased a little bit and demand remains strong.
Okay and then.
Were kind of discussing with with Tim before I mean, it seems like we're kind of in this broad macro limbo at the moment I guess I'm just curious how that is affecting any of your investment plans or strategic actions, if thats changing the timing of anything.
Yes. So good question. So obviously, we've moved forward with our Jbs acquisition at Meritor will complete this week, we're continuing to make these these key investments.
In the future and we are still in the process on the separation of our filtration business as we've disclosed previously and monitoring.
The environment is that continues.
The thing I'd add is.
Well just as you would imagine we're not just waiting around for changing economic conditions is an important part of how we've grown the earnings over time.
Like a continual focus on trying to drive efficiencies in everything that we do it doesn't always make the headlines but almost every aspect of our work.
We're looking for efficiency better output. So we're always looking for those types of ways to improve the underlying performance of the business.
Got it.
As Tom and Jennifer Thanks, giving.
Thanks, Steve.
Our next question is from Rob pardon Yulia.
Helios Research. Please proceed with your question.
Hi, good morning, and congrats to both of you.
Thanks, Greg.
My question is really on new power, there's a lot that's changed in the world in the last six months your revenue trends were pretty good.
And I'm curious if you have any comments on competitive position within Electrolyze, whether you see it solidifying or expanding you guys have.
The wherewithal to invest presumably that pays off somehow.
Then just weather outlook into 'twenty, three 'twenty four I'm not sure how far along you backlog extends.
Inflected upwards as the world.
Reevaluate your tonnage.
Yeah, Yeah, Great question. So we did we delivered the highest revenue in the second quarter to date from our new power business at $42 million and made a lot of progress.
Across all parts of the business. So you saw announcements of new partnerships on.
Fuel cells, both on and off highway, where we think long term that the market will move.
<unk> going to make progress and having lots of conversations on the electric <unk> and demonstrating the capability of our Pam Electrolyze our solutions there.
And we believe as we demonstrate some of those larger.
<unk> a perm electrolyze are that the market is going to increasingly move towards that solution and that we're well positioned competitively. The market is lumpy at this point and a lot of our focus is on building up capacity at scale to meet the demand and so.
We will Amy and I will continue to be talking about what are those key milestones that we see in the market and in our scale up activity and how that's evolving we still feel very optimistic.
And with this energy.
Challenge that we see in the global World expect that the focus and interest in Green hydrogen will continue to grow and lastly, with the Meritor acquisition. That's another key component that we think positions us well in the electric powertrain and we'll be building on the business that we have and very complementary to our existing new power.
And electrified powertrains, so overall well positioned for the future with new power.
Thank you that's a comprehensive answer.
Inside track on whether the Placemen reduction Act gets passed and then.
We benefit obviously from green hydrogen with that.
No. If there is any production or any other obvious benefits that you saw that potential bill and I will stop there.
Yeah, great. So.
We're hopeful that the inflation reduction act will get past that has many key provisions that we think are important.
Four advancing.
Lower carbon solutions.
Well with our destination zero strategy, it's really critical that Theres investment.
To build out infrastructure and to make these technologies more affordable as they scale in advance. So we are have been active in advocating for some of the key energy provisions in them.
Act and we will continue to do that as our Congress considers that.
Okay.
Thank you our next our next question is from Matt Alcott with Cowen. Please proceed with your question.
Good morning. Thank you so you're after the initial COVID-19 shutdowns in China, we saw a pretty record recovery in the remainder of 2020 and into 2021.
I understand we're highly unlikely to see anything like that after the current lockdowns, but.
Do you have any sense of how things could play out when or if a China moves fully past lockdowns like most of the rest of the world has.
And just a longer.
But to your question related to China as a follow up.
You have seen some western companies like some automakers reconsider J P. As in China, you guys saw senior JV model in China is the right strategy.
Any updated thoughts on that would be appreciated.
Yes.
<unk> with China Covid Lockdowns is one of the big questions that we debate a lot at this point. They continue to have this dynamic locked down strategy and we've continued to see some smaller scale lockdowns that have been happening and and operating in kind of closed loop closer call environments within that.
From a business perspective so.
I don't see when and how they completely evolve out of that we're prepared to continue to operate in that type of environment. However.
We do we do think that that market is going to come back. It's a large market. It's an important market for us to be a part of because of its size.
We are committed to continuing to invest in the products and joint ventures that we have there while also ensuring from a global supply chain perspective that we have resiliency.
And in our supply chain, so that we can navigate through.
Covid weather disruptions and other constraints.
Yeah.
Great. Thank you very much.
Our next question is from Noah Kaye.
<unk> with Oppenheimer. Please proceed with your question.
Hey, Thank you and let me add to the congratulations here.
And I just wanted to follow up on the IRI. So obviously theres a lot of potential benefits for comments and this legislation, but among them you could be looking at after a $3 per kg production tax credit for green hydrogen.
And obviously this has been kind of on again off again for the last couple of years have to imagine that.
Some scenario planning has played out in some of these potential customer discussion. So at this point is it possible to actually dimension the magnitude of the opportunities domestically that might pencil out without kind of a PTC and then how quickly do you think you can move to convert those opportunities to revenue if it does come to pass.
Yeah, no. It's a great. It's a great question and within that.
Inflation reduction Act as you noted there is incentive for hydrogen production, which is significant as well as incentives for other.
Clean vehicles and clean fuels, it's important to note that there's also incentive for things like <unk>.
Diesel and renewable natural gas.
Within that so a lot of things that will help drive advantage, we have had active conversations.
In recent years in Europe , and growing conversations in U S and the U S. The bipartisan infrastructure Bill also put some significant investment and hydrogen infrastructure and so we believe that this will continue to add to that and and are really focused on scaling up our product in production to meet the demand.
We think we'll be there. So it's hard for me to mention that I mentioned, specifically to you right now as I said, we'll continue to talk about what we see as the key milestones in that business growing revenue.
And growing our return from the the Electrolyze their business over time.
Okay. Thanks, and maybe one quick follow up and there is some discussions about.
Preparing for a potential downturn and how you can flex down amidst that.
One variable that you I'm sure you are considering is just the investment cycle.
For the next step up in the emissions reduction so how do we think about that factoring into budgeting for next year.
Some potential increased investment spending on the on the combustion side.
In preparing.
Preparing for tighter emission standards.
Yes, so you've seen us increasing our investments in particular in both new power engine business as we invest in.
Yes.
Technology is an electrolyzed, there's a new power and also these next generation fuel agnostic platforms in the engine business. We have the scale advantage globally to do that so those are investments that we will continue to make and we're also looking at driving efficiency and improvement in parts of our business that can adjust.
With the cycle and so we will we will continue to deliver on our financial commitments in strong returns through the ups and downs as we invest in those key.
Key areas for our future.
Okay, great. Thank you very much.
Thanks Bill.
Our next question is from Jeff Kauffman with vertical research partners. Please proceed with your question.
Thank you very much and then like everybody else Tom. Thank you for your leadership and Jennifer Best of luck in the.
In the future.
I wanted to focus a little bit you discussed supply chain costs and talked a little bit about what was going on with raw material costs. If we looked at the inflationary part of.
Cost of goods sold.
How do those.
Cost stack up against each other in terms of how much of the increase in expense is more on the raw inputs side versus.
How much more are we spending on supply chain than we normally would and also noting that in recent weeks and months.
Supply chain costs, while still high have been easing raw material costs, while still high have been easing and I'm just kind of curious is any of that built into the guide.
This point, maintaining the margins where they are.
Yes, Jeff this is mark.
I'll say this year, if you look at our costs.
<unk> costs have been increasing that's been the biggest single driver on the cost side.
Lost you certainly the first half of the year. It was very heavy on the freight premium freight costs.
Then we start to see more inflation in materials.
Play out overtime, so as we talked about the premium freight cost.
Come down a little bit part of that through the call.
Ordination and management of the expenses.
Material costs continue to increase at this point in time.
Yeah.
We.
I would say that's fairly.
Within a fairly predictable range quarter to quarter. So for just one or two commodity costs have come off the peak, but remain fairly elevated levels of course, whatever changes are in the market costs.
Great.
Metal markets those take time to work through the supply chain.
Okay.
Mark back to the question, though.
So for the quarter.
Cost of goods sold was up about 5% on total revenue growth of about 8%.
X X inflationary.
Costs, what are we looking at in terms of that raw material.
Or the cost of goods sold inflation I'm, just trying to understand how much is kind of temporary cost inflation on materials, how much is temporary cost inflation on.
Supply chain costs and kind of what's the underlying rate.
Let me put our material costs in the second quarter.
<unk> by one 9% of sales year over year, just what is temporary and what we're always working to make changes to products.
Redesign things take cost out, but right now.
That's a pretty high level, but what we certainly pre COVID-19 pre this inflationary environment that has a high level of material cost increases.
Temporary and permanent is very hard to say, but about one 9% freight costs are fairly flattish year over year, but at a very elevated level.
<unk> cost increases.
There are some personal and some other countries, but those are the biggest elements.
Alright, that's helpful. And then in terms of the guidance I'm, assuming no real change in either of those in terms of your outlook or has there been a change built into that outlook of margins maintaining.
No significant change on the cost side, we've lowered our outlook for JV earnings, which is not what you're talking about but I'm just trying to triangulate back to the overall guidance, we've lowered JV earnings.
Slightly stronger aftermarket revenues, particularly in North America, which you balance those balance out but no significant changes on the other categories.
Okay. Thank you very much.
Thank you Jim.
Ladies and.
Gentlemen, we have reached the end of the question and answer session and I would now like to turn the call back over to Chris <unk> for closing remarks.
Great. Thanks, Maria that concludes our teleconference for today. Thank you all for participating and your continued interest as always the Investor relations team will be available for questions. After the call.
Yes.
You may disconnect your lines at this time, thank you for your participation.
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