Q2 2024 Cummins Inc Earnings Call
Greetings and welcome to the Cummins, Inc. second quarter 2024 earnings call.
Speaker Change: On our call today is Jen Rumsey, Chair and CEO , Mark Smith, Vice President and CFO , and Chris Clulow, Vice President of Investor Relations.
Speaker Change: At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad.
Speaker Change: As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Chris Clulow. Thank you. You may begin.
Chris Clulow: Thanks very much. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the second quarter of 2024. Participating with me today are Jennifer Rumsey, our Chair and Chief Executive Officer, and Mark Smith, our Chief Financial Officer. We will all be available to answer questions at the end of the teleconference.
Speaker Change: 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 and Exchange Act of 1934.
Speaker Change: Such statements express our forecasts, expectations, hopes, and beliefs and intentions on strategies regarding the future.
Speaker Change: Our actual future results could differ materially from those projected in such forward-looking statements because of a number of risks and uncertainties.
Speaker Change: More information regarding such risks and uncertainties is available in the forward-looking disclosure statement in the slide deck in our filings with the Securities and Exchange Commission, particularly the risk factors section of the most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q .
Speaker Change: During the course of this call, we will be discussing certain non-GAAP financial measures and will refer you to our website for the reconciliation of those measures to GAAP financial measures.
Speaker Change: Our press release with a copy of the financial statement and a copy of today's webcast presentation are available on our website within the Investor Relations section at Cummins.com. I will now turn you over to our Chair and CEO, Jennifer Rumsey, to kick us off.
Jennifer Rumsey: Thank you, Chris, and good morning. I'm excited to be with all of you today as I celebrate my two-year anniversary of becoming CEO of Cummins.
Jennifer Rumsey: I'll start with a summary of our second quarter financial results, then I will discuss our sales and end market trends by region. I will finish with a discussion of our outlook for 2024. Mark will then take you through more details of both our second quarter financial performance and our forecast for the year.
Mark: The strong partnerships that we have with our customers and stakeholders are key to driving our strategy and growth profile forward. In this quarter, we strengthen those partnerships even further.
Speaker Change: We also announced plans to launch a battery electric powertrain for Zuzu's F-Series in North America. Availability of the medium-duty truck is expected in 2026 and will include Accelera's next-generation lithium-ion phosphate, or LFP, battery technology.
Jennifer Rumsey: These advancements mark an important milestone for both Cummins and Isuzu as Cummins enters the Japan on-highway market for the first time in our history. We are proud of the partnership our two companies have built, and I'm excited to leverage our collective strength and scale to deliver profitable growth for both partners.
Jennifer Rumsey: Also this quarter we further progressed our partnership with Weimler Trucks and Buses and PACCAR as we completed the formation of our joint venture now known as Amplify Cell Technologies to localize battery cell production in the battery supply chain in the United States.
Unknown Executive: to localize battery cell production in the battery supply chain in the United States. This included naming the chief executive officer of the joint venture and breaking ground at a new manufacturing plant in Marshall County, Mississippi. And in July, Accelera was awarded $75 million from the Department of Energy to convert approximately 360,000 square feet of existing manufacturing space at its Columbus, Indiana, engine plant to zero emissions components, including battery packs and electric powertrain systems.
Jennifer Rumsey: The $75 million grant is the largest federal grant ever awarded solely to Cummins and is part of the appropriations related to the Inflation Reduction Act.
Unknown Executive: Now I will comment on the overall company performance for the second quarter of 2024 and cover some of our key markets, starting with North America before moving on to our largest international market. Demand for our products remains strong across many of our key markets and regions, resulting in record revenues in the second quarter of 2024. Revenues in North America power generation increased by 23%, driven by continued strong data center and mission critical power demand. Second Quarter revenues in China, including Joint Venture, were $1.6 billion, a decrease of 2% as weaker domestic volumes were partially offset by higher data center demand.
Jennifer Rumsey: Now, I will comment on the overall company performance for the second quarter of 2024 and cover some of our key markets, starting with North America, before moving on to our largest international markets.
Jennifer Rumsey: Demand for our products remains strong across many of our key markets and regions, resulting in record revenues in the second quarter of 2024.
Jennifer Rumsey: EBITDA and gross margin dollars improved compared to the second quarter of 2023 as the benefits of higher volume and pricing exceeded supply chain cost increases and offset the impact of the ATMAS separation.
Jennifer Rumsey: Industry production of medium-duty trucks was 41,000 units in the second quarter of 2024, an increase of 4% from 2023 levels, while our unit sales were 38,000, up 13%, and also outpacing the market growth.
Jennifer Rumsey: Our second quarter international revenues decreased 2% compared to last year.
Unknown Executive: Demand in the China truck market continues to run at low levels, with higher orders for natural gas engines and strong exports offsetting weak domestic diesel demand. Industry demand for excavators in China in the second quarter was 53,000 units, an increase of 4% from 2023 levels. Now, let me provide our outlook for 2024, including some comments on individual regions and end markets. We also expect stronger profitability in our engine and power system segments, driving most of the improvement in EBITDA.
Jennifer Rumsey: In light-duty markets in China, we were at 4% from 2023 levels at 480,000 units, while our units sold, including joint ventures, were 33,000, an increase of 18%.
Jennifer Rumsey: Industry demand for excavators in China in the second quarter was 53,000 units, an increase of 4% from 2023 levels.
Jennifer Rumsey: Our units sold were 10,000 units, an increase of 19% as a result of QSM-15 penetration at both new and existing OAM partners and export growth.
Jennifer Rumsey: Sales of power generation equipment in China increased 36% in the second quarter, primarily driven by accelerating demand in data centers.
Jennifer Rumsey: This helped drive impressive financial performance at our Cummins Chongqing Joint Venture within our power systems business.
Jennifer Rumsey: Industry truck production increased by 11%, while our shipments increased by 5%. Power generation's revenues decreased by 17% year-on-year as the second quarter of 2023 benefited from pre-buy demand ahead of emissions regulation changes.
Jennifer Rumsey: We are also increasing our EBITDA guide to be 15 to 15.5% compared to our prior guide of 14.5 to 15.5%.
Jennifer Rumsey: We are maintaining our forecast for heavy-duty trucks in North America to be 255,000 to 275,000 units in 2024, as we still expect softening in the second half of the year.
Jennifer Rumsey: In the North America medium-duty truck market, we are raising our forecast to be 150,000 to 160,000 units, flat to up 5% from 2023.
Unknown Executive: This is an increase from our previous guidance by 10,000 units as we continue to benefit from an elevated backlog and strength in vocational orders. Consistent with our prior guidance, our engine shipments for pickup trucks in North America are expected to be $135,000 to $145,000 in 2024, with a planned model year changeover likely to drive a temporary dip in production in the second half. For global construction, we project down 10% to flat year over year.
Jennifer Rumsey: In India, we project total revenue, including joint ventures, to increase 8% in 2024, primarily driven by strong power generation and on-highway demand.
Jennifer Rumsey: We expect industry demand for trucks to be flat to up 5% for the year.
Jennifer Rumsey: For global construction, we project down 10% to flat year-over-year, consistent with our prior guidance.
Jennifer Rumsey: We continue to expect slightly weaker property investment and slowing export demand in China.
Unknown Executive: For aftermarket, we have improved our guidance to flat to up 5% for 2024, raising the bottom end of our previous guidance of a decline of 5%, with demand holding up better than expected in on and off highway markets. For Acceler, we expect full year sales to be $400 to $450 million, a reduction of $50 million from the prior guidance.
Jennifer Rumsey: For aftermarket, we have improved our guidance to flat to up 5% for 2024, raising the bottom end of our previous guidance of a decline of 5%, with demand holding up better than expected in on and off-highway markets.
Jennifer Rumsey: As we noted at our Analyst Day, the energy transition is progressing more slowly, impacting both our e-mobility and electrolyzer revenues.
Unknown Executive: In July, we announced an 8.3% increase in the quarterly dividend from $1.68 to $1.82 per share, the 15th consecutive year in which we have increased the dividend. It is exciting to see our business grow with long-established customers and existing markets and to see newer partnerships yield additional opportunities in previously untapped markets for Cummins. Our results reflect our dedication to delivering strong financial performance while also investing in our future growth, bringing sustainable solutions to decarbonize our industry, and returning cash to our shareholders. Now, I turn it over to Mark.
Jennifer Rumsey: In summary, we had a strong performance in the first half of 2024 driven by record demand for Cummins products in our core markets.
Speaker Change: It is exciting to see our business grow with long-established customers and existing markets, and to see newer partnerships yield additional opportunities in previously untapped markets for comment.
Jennifer Rumsey: I am grateful for our employees who continue to execute on our strategy and deliver solutions that help our customers win wherever they operate.
Jennifer Rumsey: Our results reflect our dedication to delivering strong financial performance while also investing in our future growth, bringing sustainable solutions to decarbonize our industry, and returning cash to our shareholders.
Jennifer Rumsey: Now let me turn it over to Mark.
Unknown Executive: Given the strength of those results and our improved outlook, we've raised the midpoint of our full-year expectations for 2024. However, foreign currency fluctuations negatively impacted sales by 1%. Now we'll go into a little more detail by line item. Flat margins were primarily driven by favorable pricing and operational improvements offset by the removal of ATMAS and higher compensation expenses. Other income was negative $3 million, a decrease of $27 million a year ago. Interest expense was $109 million, an increase of $10 million from the prior year, primarily driven by higher weighted average interest rates in Q2 last year. They were completed in the first quarter.
Mark Smith: Second quarter revenues were $8.8 billion, up 2% from a year ago, as organic growth more than offset the reduction in sales driven by the separation of acts.
Mark Smith: Foreign currency fluctuations negatively impacted sales by 1%.
Mark Smith: EBITDA was $1.35 billion, or 15.3% of sales for the quarter, compared to $1.3 billion, or 15.1% a year ago. The year-ago numbers included $23 million of costs related to the separation of acts.
Mark Smith: The benefits of higher volumes and pricing, as well as the absence of separation costs, were the primary drivers behind the improved profitability.
Jennifer Rumsey: Gross margin for the quarter was $2.19 billion or 24.9% of sales compared to $2.15 billion or also 24.9% a year ago.
Jennifer Rumsey: Flat margins were primarily driven by favorable pricing and operational improvements offset by the removal of ATMAS and higher compensation expenses.
Jennifer Rumsey: Selling, admin, and research expenses were $1.21 billion, or 13.7% of sales, compared to $1.26 billion.
Mark Smith: Billion or 14.6% last year.
Jennifer Rumsey: The all-in effective tax rate in the quarter was 23%, including $9 million or $0.07 per diluted share of favorable discrete tax items.
Jennifer Rumsey: All in net earnings for the quarter was $726 million or $5.26 per diluted share compared to $720 million or $5.05 per diluted share.
Mark Smith: Q2 last year.
Mark Smith: The second quarter reflected the lower-weighted average share count as a result of the tax-free share exchange that was the final step of the separation of ATMAS that was completed in the first quarter.
Unknown Executive: I will now comment on segment performance and our guidance for 2024. For components, we expect 2024 revenues to decrease 9-14%, consistent with our prior projections, and EBITDA margins in the range of 13.7-14.2%, narrowing the range from our previous guidance of 13.5-14.5. We've revised our EBITDA margin expectations to be in the range of 11.3% to 11.8%. EBITDA is now projected to be approximately 17.5 to 18%, up from the previous projections of 16 to 17%.
Mark Smith: I will now comment on statement performance in our guidance for 2024. As a reminder, guidance for 2024 includes the operations of ATLAS in our consolidated results up until the full separation that occurred on March 18th.
Mark Smith: Components segment revenue was $3 billion, a decrease of 13% from the prior year, while EBITDA decreased from 14.2% of sales to 13.6%.
Mark Smith: We've both failed and EBITDA are primarily impacted by the ATMA separation.
Mark Smith: The benefit from pricing and record on-highway volumes in North America was offset by higher research costs and lower joint venture income, primarily in China.
Mark Smith: In 2024, we now project revenues for the engine business to be down 3% to up 2%, an increase of 2% from the prior midpoint, driven by a revised outlook in the North American medium duty truck market.
Mark Smith: Portfolio Engine EBITDA is projected to be in the range of 13.7 to 14.2, an increase of 75 basis points at the midpoint from our prior projections due to higher volumes and ongoing operational efficiencies.
Mark Smith: Primarily due to higher compensation expenses and a higher mix of power generation sales, which are positive for the company overall, but have a diluted impact on the distribution segment margins.
Mark Smith: Results for the Power Systems segment set a new quarterly record.
Mark Smith: Revenues were $1.6 billion, an increase of 9%, and EBITDA increased from 13.8% to 18.9%, driven by higher volumes, particularly in power generation markets, improved pricing, and other operational improvements and cost reduction.
Mark Smith: For 2024, we expect power systems revenues to be up 3-8%, an increase of 3% from the prior guide.
Mark Smith: EBITDA is now projected to be approximately 17.5-18% up from the previous projections of 16-17%.
Speaker Change: of 114 a year ago, as we continue to invest in the products and capabilities to support those parts of the business where strong growth is expected, whilst reducing costs in areas where we assess the prospects for growth have extended into the future.
Mark Smith: In 2024, we expect Accelera revenues to be in the range of $400 million to $450 million, down $50 million from our prior guide. Net losses are still expected to be in the range of $400 million to $430 million.
Unknown Executive: As Jen mentioned, given the strong performance in the second quarter and the revised outlook in our key region end markets, we have raised our full year company guidance. We now expect revenues to be down 3% to flat, which is better than our previous guidance of down 2% to down 5%. Our effective tax rate is expected to be approximately 24% in 2024, excluding the tax-free gain related to ATMAS and other discrete items. Capital investments will be in the range of $1.2 to $1.3 billion, unchanged from three months ago.
Speaker Change: excuse me
Speaker Change: As Jen mentioned, given the strong performance in the second quarter and the revised outlook in our key region end markets, we have raised our full year company guidance. We now expect revenues to be down 3% to flat, which is better than our previous guidance of down 2% to down 5%.
Speaker Change: EBITDA margins are now projected to be approximately 15 to 15.5%, narrowing the range and increasing the midpoint 25 basis points from our prior guide.
Speaker Change: Our effective tax rate is expected to be approximately 24% in 2024.
Mark Smith: excluding the tax-free gain related to ATMAS and other discrete items.
Mark Smith: As we continue to make critical investments in new products and capacity expansion to support future growth.
Mark Smith: We still do expect some moderation in some key markets in the second half of the year, especially North American heavy-duty truck, as we pointed out at our recent analyst day also.
Mark Smith: We've taken some costs to reduce.
Mark Smith: We took some steps to reduce costs in the fourth quarter of 2023 and the first quarter of 2024. Continue to identify ways to streamline our business going forward, leaving us well positioned to navigate any economic cyclicality that we may face.
Mark Smith: experience.
Mark Smith: We continue to deliver strong financial results, raising our performance cycle over cycle while still investing for future growth.
Unknown Executive: Overall, a very strong quarter. Thanks for your time today. Now, let me turn it back over to you.
Speaker Change: 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.
Speaker Change: Thanks. Good morning. Just on China truck, you didn't change your expectations there.
Mark Smith: Wondering how you're thinking about some of the new incentives that the government put in place there to support the second half of the year. Is that a potential point of conservatism in your outlook or do you think it may not materialize into anything much there?
Speaker Change: Yeah, thanks for the question, Steve. Good morning. We, you know, we've seen pretty consistent performance out of China and the economic conditions over the last
Speaker Change: 18 to 24 months, and there's been previous indications of actions the government may take, none of which is really translated into any meaningful change in our industry. So, really, we're seeing the strong performance still with natural gas product.
Speaker Change: and export in a relatively weak domestic diesel market and are not anticipating that changing in the near term.
Speaker Change: Thank you. Our next question comes from the line of Jamie Cook with Truist Securities. Please proceed with your question.
Jamie Cook: Hi, congratulations on a nice and clean quarter. I guess two questions. One, Mark, the margins in power systems are quite remarkable on a pretty muted
Jamie Cook: help us understand what's going on there, sort of what's structural, and do you see the opportunity for margins to improve?
Jen Rumsey: from these levels in the out years, given you're already assuming a close to 18% margin this year. And then my second question, Jen.
Jen Rumsey: I know you don't want to give a guide for 2025, but how you're thinking about the markets. As you think about the U.S. with the election and the overruling of Chevron, are you more confident that you're going to win the election? I'm not sure. I'm not sure. I'm not sure.
Jen Rumsey: Started with some cost reduction, reprioritizing where we're investing, where we're investing less.
Speaker Change: [inaudible]
Speaker Change: There's several strings to the bow in terms of what's been driving the results and still more to come. So we're really, really excited. Hopefully, you...
Jenny Bush: felt the confidence from Jenny Bush and her team from the analyst day and have continued to deliver here in the second quarter and yet were bullish on that segment. Those are really the main drivers.
Speaker Change: On Power Systems.
Speaker Change: Yeah, and on the market outlook, what I would say is in the power gen market, the continued growth that we see there, in particular in the data center, I don't see that.
Speaker Change: letting up anytime soon and we're you know we have strong demand high backlog and as you know we talked about in May making some capacity investments to take advantage of the
Speaker Change: In U.S. on highway, the medium-duty truck has continued to be strong. We see strong backlog and demand and don't see that letting up in the foreseeable future. In heavy-duty, we do see build rates coming down.
Speaker Change: projecting about 10% down in the third quarter and 20% overall for the second half of the year. And the question is what will happen next year with the broader economic environment because, well, stabilized spot rates and these check prices are, you know, at lower level than they've been.
Unknown Executive: Historically, that's impacted some of our customers.
Speaker Change: historically and that that's impacted some of our customers.
Speaker Change: Demand. And so how that comes together with a pre-buy that, you know, the Supreme Court overturning of the Chevron deference
Speaker Change: We don't anticipate any impacting regulations in the near term. We believe that 2027 regulations will
Speaker Change: Continue to move forward and probably the bigger question is what we see with phase three greenhouse gas in the 2030.
Speaker Change: timeframe, and so we still anticipate some amount of pre-buy.
Speaker Change: Thank you. Our next question comes from the line of Steve Volkman with Jeffries. Please proceed with your question.
Unknown Executive: Great
Steve Volkman: Great, thank you guys. Mark, I think you mentioned, maybe both of you, pricing being positive. It sounds like it was positive in trucks, it sounds like it was positive in PowerGen. Can you just, you know, double-click on that for us a little bit? I mean, how much pricing are you seeing and sort of how should we think about that for the rest of the year?
Mark Smith: Yeah, great question. So on average across the company, and it varies very much by segment, but two and a half percent for the year, and that really hasn't changed. That's not changed in the results, but it definitely has been an important driver of the power systems results.
Unknown Executive: That's not changed in the results, but it definitely has been an important driver of power systems.
Speaker Change: and don't don't think it's going to vary like that year-over-year increase should mostly hold across all the courts.
Operator: Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Speaker Change: Thank you. Our next question comes from the line of Jerry Revish with Goldman Sachs. Please proceed with your question.
Jerry Revich: Yes, hi. Good morning, everyone. And Jennifer, happy anniversary.
Jerry Revish: Yes, hi, good morning everyone and Jennifer, happy anniversary. I wanted to ask, on the medium duty engine platforms globally, right, so you folks are picking up Daimler's business, now you're picking up Isuzu's business in Japan, can you just expand and talk to us about how many more
Unknown Executive: I wanted to ask about medium duty engine platforms globally, right, so you folks are picking up Daimler's business, and now you're picking up Isuzu's business in Japan. Can you just expand and talk to us about how many more medium duty engines you expect to ship globally in 2026 versus, I don't know, call it two or three years ago, given the timing of the transition? And if you could just comment on, you know, Japan is a tough place to import products into given the currency. Can you just talk about how you folks are able to do that economically? Thank you.
Speaker Change: medium-duty engines you folks expect to ship, you know, globally 2026 versus, I don't know, call it two or three years ago, given the timing of the transition. And if you could just comment on.
Speaker Change: You know, Japan is a tough place to import product into given the currency. Can you just talk about how you folks are able to do that economically? Thank you.
Unknown Executive: Yeah, sure. So, you know, you've seen this trend and some of the announcements that we've made over the last few years playing out now as regulations. Transcripts provided by Transcription Outsourcing, LLC.
Speaker Change: Yeah, sure. So, you know, you've seen this trend and some of the announcements that we've made over the last few years playing out now as regulations.
Speaker Change: start to occur so we're seeing growing medium duty demand in the U.S. of course with with Daimler transitioning to us.
Speaker Change: and Isuzu, as well as some other, you know, other customers like Kino here in the U.S. So we're growing our position in the medium-duty market here. We've now launched the medium-duty product in India with Daimler, so we'll start to see some...
Speaker Change: Their strategy is really driven by regulation change. So when you see regulation change in Europe and Brazil, we'll continue to grow.
Speaker Change: volume with Daimler. On the Isuzu business, we are building that new B6.7 in their Tajiki plant in Japan, so we're not importing that engine, we're building it in the market. First time we've been in the on-highway market, we've been in the off-highway market there, of course, for many years.
Speaker Change: And so, we'll see some slow volume growth there in Japan, and then as I noted, they'll then launch that.
Speaker Change: Truck into other Asia-Pacific and global markets later this year. So you're just going to see steady growth I would say from Cummins year over year and the medium duty space as these new customer partnerships grow and emissions regulations change and add. India and Brazil to the later
Unknown Executive: 2027 through 2029.
Speaker Change: 2027. 2027 through 2029, yeah.
Speaker Change: [inaudible]
Speaker Change: Thank you. Our next question comes from the line of Angel Costillo with Morgan Stanley. Please proceed with your question.
Angel Costillo: Hi, thanks for taking my question and congrats on the strong quarter.
Angel Costillo: I was hoping we could just unpack a little bit more of the engine segment. You raised the outlook there on margins, and you've been talking about medium duty.
Speaker Change: Just as we think about a second half that is expected to decelerate on the heavy-duty side, can you talk about the components driving your margin improvement there and just helping us kind of quantify what's ultimately driving that and how are you thinking about 2025 margin improvement?
Unknown Executive: Yeah, so we've got a little bit of help. We've improved the parts outlook, so that certainly helps overall. We've been taking some, yeah, measured actions across the company since the second half of the fourth quarter of last year into the fourth quarter....into the first quarter of this year. Those should help with some lower costs in the second half of the year. And then we've got a stronger outlook on medium duty trucks. So, those are really... No real change in pricing in most of the segments.
Speaker Change: Yeah, so we've got a little bit of help. We've improved the parts outlook, so that certainly helps overall. We've been taking some, yeah, measured actions across the company since the second half of, well, fourth quarter of last year into the fourth quarter.
Operator: Thank you. Our next question comes from the line of David Raso with Evercore ISI. Please proceed with your question.
Speaker Change: Thank you. Our next question comes from the line of David Rasso with Evercore ISI. Please proceed with your question.
David Rasso: Hi, thank you. My question is on the guide. One area, I'm a little skeptical on one area where it seems like you have some upside. The engine business, the second half of the year, you're guiding the revenues down only 3% year over year?
Speaker Change: And I'm just trying to go through, you know, heavy truck builds down double digit, though the parts business, you know, mutes that. The light duty has the soft fourth quarter on the model change.
Speaker Change: off-highway, Comp C's, China a little better, but big declines in ag and some right in construction.
David Raso: So I'm trying to understand why the revenue had only gone down by three, or is it that there's enough new penetration of customers that can... on lower revs. Thanks, David. Good questions. I think on power systems, I don't think there's any fundamental change.
Speaker Change: So I'm trying to understand why the revenue had only gone down three or is it there's enough new penetration of customers that can
David Raso: They can push against all that, and at the same time, the engine margins only go down 30 bips sequentially.
Speaker Change: on lower revs. And then the upside is power gen, revenue growth, less than 5% year-over-year in the second half, you're up over 6% in the first half.
Speaker Change: and the margins are down sequentially.
Speaker Change: I mean, I understand the industrial piece within power can be down, but you know, at least they're compsies.
Speaker Change: So I'm just trying to understand, I assume Powergen has a little more focus, a little more capacity, right, being pushed at a minimum good pricing. So again, why the, or maybe it's just conservative, conservative on Powergen and if you can make us more comfortable on that engine guide.
Unknown Executive: Thanks David, good question. So I think about PowerSys, I don't think there's any fundamental changes, so it's really a key question of like how much...
Speaker Change: Thank you.
Speaker Change: Bye.
Speaker Change: Thanks David, good questions. I think on
Speaker Change: How much product do we deliver to our customers on the conversion? We've given a range of outcomes for the margin. The business is performing well.
Speaker Change: and quite frankly, you know, we're raising capacity. So I don't think the sales will go a lot above, but yet we're leaning on the profitability strongly, the business is really doing well. So I don't think there's much to be concerned about there and we've raised the outlook.
Speaker Change: On the engine business, I think what's helping mitigate the margins, which is, I guess, the most important part, is really some of the cost reduction actions that we've taken during the year. Slightly better outlook for parts.
Speaker Change: And then there's just some other puts and takes on the revenue. But those are the reasons why the margins at those revenue levels we expect to hold up. Sorry, I've got a little bit of a call here.
Operator: Our next question comes from the line of Tami Zakaria with J.P. Morgan. Please proceed with your question.
Speaker Change: Go ahead. Next question, please.
Speaker Change: Thank you. Our next question comes from the line of Tammy Zakaria with JP Morgan. Please proceed with your question.
Tammy Zakaria: Hi, good morning. Very nice quarter. I have two quick clarification questions. One is on the distribution segment. I think margins were lowered but sales were raised. So is that margin guide
Tammy Zakaria: Prudently conservative or it's just a function of the mixed headwind from power gen or is there anything I need to be aware of for that? And then the other question is price cost.
Tami Zakaria: I think you just said price. You still expect two and a half percent at the enterprise level. Since some of the raw materials prices are coming down, do you expect some improvement in price costs for the year?
Speaker Change: I think you just said price still you expect two and a half percent at the enterprise level. Since some of the raw materials prices are coming down, do you expect some improvement in price cost for the year?
Speaker Change: To the latter, not significantly. We've probably got about 50 basis points of cost headwind across all the different categories, varies by business and segment. And then on distribution, you're right to point out the margins. So there's really...
Speaker Change: Yes, for distribution PowerGen is a little bit diluted relative to the rest of the segment even though obviously within power systems it's...
Tammy Zakaria: very accretive. So that's true, we've called that out also.
Tammy Zakaria: In the first and the second quarter there were some modest individual charges that didn't merit to be called out in the overall results, they don't merit a lot of.
Tammy Zakaria: commentary, but just say they've trimmed the margins a little bit and therefore we're really just reflecting where we are for the year. We do believe distribution margins have still got significant potential to improve over time. So that's what's going on.
Speaker Change: Thank you. Our next question comes from the line of Tim Fine with Raymond James. Please proceed with your question.
Unknown Executive: Hi. Good morning. I'll just maybe combine these before I get the hooks. They're actually both pertaining to the North American heavy-duty segment. And the first part is just around market shares, Mark. Obviously, those can and do shift around quarter to quarter.
Tim Fine: Hi, good morning, I'll...
Tim Fine: I'll just maybe combine these before I get the hook. They're actually both pertaining to...
Tim Fine: to the North America heavy duty segment. And the first part is just around market shares, Mark. Obviously, those can and do shift around quarter to quarter. And I'm just thinking big picture as.
Unknown Executive: And, you know, I'm just thinking big picture as... specific OEM programs and other factors. So maybe just your thoughts on that. And then the second part, it's just on the parts business. Some of the dealers and OEMs that have reported recently have flagged softness there. So I'm just curious, is that just kind of an absence of customer destocking that you went through last year or, you know, better just fleet utilization? What's driving that? If you can comment on those two things, Thank you.
Tammy Zakaria: as we get in, you know, in a softer back half of the year where
Tim Fine: where this sleeper segment likely is disproportionately impacted from a production standpoint.
Mark Smith: at the expense of vocational, I would imagine that favors Cummins from a shared perspective, just absent any kind of...
Speaker Change: specific OEM programs and other factors. So maybe just your thoughts on that. And then the second part is just on the parts business. You know, obviously, it has been kind of a choppy past few quarters, but the commentary seems to be more positive, whereas
Speaker Change: Some of the dealers that are in OEMs that have reported recently the flag softness there, so I'm just curious is that
Speaker Change: It's just kind of an absence of customer destocking that you went through last year or, you know, better just fleet utilization. What's driving that? If you can comment on those two things. Thank you.
Speaker Change: Great, thanks for the question. As you noted, we work to create customer pull for the heavy-duty product across different segments, but generally, as you said, for the vocational segment, we have stronger
Mark Smith: customer pull compared to that the truckload and that's the portion of the market that's been stronger right now but of course our goal is always to have the best product and
Mark Smith: create demand for Cummins products. But as you see that shift between the different segments of the market and, you know, what OEMs are doing around incentives as well as capacity, that can shift around a little bit over time. On the parts,
Mark Smith: You know, it's somewhat demand-driven, and also this inventory destocking was a pretty big factor. There was a focused effort last year to reduce some of the inventory levels that.
Mark Smith: had been carried because of the disruptions that we were all seeing and coming back down to more.
Mark Smith: normal inventory levels, it was a little bit hard to separate between destocking and demand in the market. And so now you see us settling into what we see is, you know, pretty steady and solid demand and both are on and off highway markets.
Operator: Thank you. Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.
Operator: Our next question comes from the line of Noah Kaye with Op-Ed.
Speaker Change: Thank you. Our next question comes from the line of Noah Kay with Oppenheimer. Please proceed with your question.
Noah Kay: Thanks. Maybe hoping to get an update on demand and the order books for the X-15N. How is it looking for the back half? How is it tracking the expectations? And basically, what's the response so far from the OEs?
Unknown Executive: Yeah, great. Thanks for the question, Noah.
Unknown Executive: We are launching that product this month with PACCAR and are excited to get it out in the market. And then we'll launch it next year with DTNA.
Speaker Change: Thanks for the question, Noah. We are launching that product this month with PACCAR, excited to get it out in the market and then we'll launch it next year with DTNA, so have more offering there. We've got some early demand from some of the big fleet customers that have sustainability
Speaker Change: goals in the market, and we'll see how that develops over time, really, with this suite and other customers. And so we've projected we could get up to about 8% in the market, but I think it's going to take some time for us to get up to that.
Unknown Executive: So we have more offering there. We've got some, you know, early demand from some of the big fleet customers that have sustainability goals in the market. And we'll see how that develops over time, really, with this fleet and other customers. And so we've projected we could get up to about 8% in the market, but I think it's going to take some time for us to get there. To get up to that level and for that market to develop in these. Operating Costs and Sustainability Goals to Drive Demand Up
Mark Smith: that level and for that market to develop and these operating costs and sustainability goals to drive demand up.
Operator: Thank you. Our next question comes from the line of Jeff Kauffman with Vertical Research Partners. Please proceed with your question.
Operator: Thank you. Our next question comes from the line of Jeff Koffman with Vertical Research Partners. Please proceed with your question.
Jeff Koffman: Thank you very much. I just wanted to follow up on the engine slowdown that you're projecting for
Jeff Kauffman: The second half of the year and maybe try and carry this into early 2025 because I think there's a perception that
Jeff Koffman: You know, we're weak for a quarter or two, and then the pre-buy kicks in and we're off to the races. When do you believe we start to show positive comparisons potentially in North American?
Speaker Change: engines and then we have an election this November and I don't really know which way it's going but just any thoughts on how a Republican victory or a Democratic victory might change the outlook for for engines or new power
Speaker Change: Yeah, so, you know, in terms of the heavy-duty demand, you know, we all wish we had a crystal ball that could project how this is going to play out. This cycle's been very different than past cycles because of the pent-up demand that we had seen.
Speaker Change: and then, of course, getting into pre-buy expectations. So it's really difficult to predict at what point next year we'll start to see improvement and economic conditions will certainly.
Speaker Change: play a role in that. So I'm not going to project exactly when, but I think at some point next year we'll see recovery. And we've taken the steps to be prepared for that softening over the next few quarters.
Speaker Change: In terms of the election, again, not going to make a prediction on that one either. What I will say is, as always, you know, we worked in the past with the Trump administration, we worked with the Biden administration, we worked across.
Speaker Change: party lines to make sure that the
Speaker Change: The opportunities and the challenges in our industry are understood and that regulation and policy
Operator: reflects appropriately what those are. We will continue to do that in particular with with the regulations that are in front of us and and our destination zero strategy at its core is about recognizing the
Speaker Change: economic importance of commercial and industrial applications and the need to decarbonize that industry over time and how do you take the appropriate steps to regulation and incentives.
Operator: to do that. So we're going to continue to advocate for that and some of the money that has come out of the Inflation Reduction Act has been allocated and is, you know, flowing into the market and creating jobs across the United States.
Unknown Executive: I think Cummins is really well positioned regardless of how that plays out, but the industry, of course, is making investments and preparing for that, and so we want to make sure that we have stability and regulation.
Unknown Executive: [inaudible]
Unknown Executive: those points and the, you know, the opportunities and challenges that we're facing and how we navigate the energy transition. I think Cummins is really well positioned regardless of how that plays out, but the industry, of course, is making investments and preparing for that, and so we want to make sure that we have stability and regulation most importantly.
Unknown Executive: There are a lot of questions about heavy duty, but as we mentioned earlier, the demand for medium duty is getting stronger. We're actually investing to raise capacity over time, part because of the strength of the market, part because of the new business we've won. So right now, the expectation is that less volatility and sustained high demand is what we're being told right now. Things can change based on the economy, but there are more question marks about heavy, clearly it's going down in the near term, and a lot fewer questions about medium duty for now.
Unknown Executive: I know there's a lot of questions about heavy duty, but as we mentioned earlier, the demand for medium duty is getting stronger. We're actually investing to raise capacity over time, part because of the strength of the market, part because of the new business we've won.
Unknown Executive: So, right now the expectation is that less volatility and sustained high demand is what we're being told right now. Things can change based on the economy.
Unknown Executive: But there's more question marks about heavy. Clearly it's going down in the near term, and a lot less questions about medium duty for now.
Speaker Change: Thank you. Our final question comes from the line of Kyle Menges with Citigroup. Please proceed with your question.
Speaker Change: Thank you. I just wanted to dive a little bit deeper into the power systems and really focus on the unit outlook and how to think about capacity for the remainder of the year and then...
Speaker Change: and then how you think about, you could exit the year from a capacity standpoint, or just doing the math, it seems like, and assuming you're running pretty hot from a capacity standpoint, it seems like
Unknown Executive: Unit shipments capacity for the year would be around 20,000 or so units. I'm curious what that might look like, the capacity on an annualized basis exiting the year and looking into 2025 with some of the investments you're making.
Unknown Executive: unit shipments capacity for the year would be around 20,000 or so units. I'm curious what that might look like, the capacity on an annualized basis, exiting the year and looking into 2025 with some of the investments you're making.
Unknown Executive: Well, there's a lot of them there. Unfortunately, in that business, there's more variation, right? There's just such a wide range of engines and applications.
Unknown Executive: Well there's a lot of there unfortunately in that business there's more variation right there's just such a wide range of engines and applications and so it's not as fortunately it's not as simple explanation as it would be say for on highway markets where there's
Unknown Executive: And so it's not, fortunately, it's not as simple an explanation as it would be safer on highway markets, where there's a narrower range of products across the market. I don't think there's going to be dramatic capacity increases this year, but we're working towards obviously supporting the one key global secular theme, which is data center capacity, which Jenny Bush talked about at Analyst Day. That's the one.
Unknown Executive: a narrower range of products across the market.
Unknown Executive: I don't think there's going to be dramatic capacity increases this year,
Unknown Executive: One key global secular theme, which is The data center capacity which Jenny Bush talked about at Analyst Day. That's that's the one it varies by segment some of our
Unknown Executive: It varies by segment. For some of our more consumer-facing segments, demand has dropped over the last 18 months, so there's some more capacity there. So it very much depends on the end market. But the general theme is some investment in capacity, some reorganizing where we make products around the world. We feel confident about the revenue guide for this year. We feel confident we can support it through our production revenue going into next year. But unfortunately, because of the variation in the products, the pricing, the applications, a rule of thumb on the unit isn't quite as applicable in that sense.
Unknown Executive: More consumer-facing segments demand has dropped over the last 18 months, so there's some more capacity there So it very much depends by end market But the general theme is some investment and capacity some reorganizing where we make product around the world
Unknown Executive: We feel confident about the revenue guide for this year. We feel confident we can support, through our production, revenue going into next year. But unfortunately, I just...
Unknown Executive: Because of the variation in the products, the pricing, the applications, like a rule of thumb on the unit, isn't quite as applicable in that sense.
Speaker Change: Yeah, the only thing I'll add to Mark's comments, which are, you know, absolutely accurate, is in particular in the data center market, what you've seen happen in the first half of the year was we worked really hard on our supply base and
Unknown Executive: and the 95-liter, which is running now at capacity, and then we launched the Syntem product, which adds...
Unknown Executive: adds additional platforms, including a 78 liter that's able to run at this 3 megawatt key data center point. And so that's helped us. The supply chain improvement as well as the new product launch has helped us.
Unknown Executive: increased revenue and and what we're selling in the market but we are you know we're continuing to run into capacity constraints on some of the platforms in that data center market in particular.
Unknown Executive: The platforms in that data center market, in particular.
Unknown Executive: which is why we're making some modest investments to be able to take up capacity over the next couple of years.
Unknown Executive: Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to Mr. Clulow for any closing remarks.
Speaker Change: Thanks everybody for participating today. That concludes it for today. As always, the Investor Relations team will be available for questions further after the call and throughout the rest of the week. Thank you.
Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
Speaker Change: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.