Q4 2024 Cummins Inc Earnings Call
Okay, identify yourself. BYE
Speaker Change: Greetings, and welcome to the Cummins Inc. Q4 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad.
A question and answer session will follow the formal presentation.
Speaker Change: We ask that you please ask one question, one follow-up, and return to the queue.
Speaker Change: You may be placed into question queue at any time by pressing star 1 on your telephone keypad.
As a reminder, this conference is being recorded.
Speaker Change: Joining us today are Chair and CEO Jennifer Rumsey, Vice President and CFO Mark Smith, and Chris Clulow, Vice President, Investor Relations.
Speaker Change: It's now my pleasure to introduce your host Chris Clulow. Please go ahead sir
Chris Clulow: Thank you, Kevin. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the fourth quarter and full year of 2024. Participating with me today are Jennifer Rumsey, our chair and chief executive officer, and Mark Smith, our chief financial officer.
Speaker Change: 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: 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 statements on the slide deck and our filings with the Securities and Exchange Commission, particularly the risk factors section of our most recently filed annual report on Form 10-K.
and any subsequently filed quarterly reports on Form 10-Q.
Speaker Change: With that out of the way, I'll turn you over to our Chair and CEO, Jennifer Rumsey, to start us off. Thank you, Chris. Good morning. I'll start with a summary of 2024, discuss our fourth quarter and full year results, and finish with a discussion of our outlook for 2025.
Speaker Change: Mark will then take you through more details of our fourth quarter and full year financial performance and our forecast for this year.
Speaker Change: As I reflect back on 2024, I am pleased to share that we delivered strong financial results with records in several parts of the business.
Speaker Change: while also making significant progress in the execution of our Destination Zero strategy.
Speaker Change: I am incredibly proud of what Cummins and our employees accomplished for our stakeholders, and I feel energized about the opportunities ahead for us as we continue to demonstrate our relentless focus on advancing our strategy and executing our financial commitments as we lead the energy transition.
Speaker Change: It continues to be clear that our multi-solution, destination-zero strategy that leverages advancements and solutions from both our core and Accelera by Cummins businesses
Speaker Change: will continue to position us to succeed. We demonstrated this in 2024 as we further strengthen our position through evolving our portfolio and expanding and establishing relationships with new and long-standing key stakeholders and partners.
Speaker Change: Most notably, for our core business in 2024, we introduced the Cummins Helm engine platform.
Speaker Change: Applied across Cummins' legendary B, X-10, and X-15 series engine portfolios, the Helm platforms provide customers with the option to choose the fuel type, either advanced diesel or alternate fuels like natural gas and hydrogen.
Speaker Change: that best suits their business needs and offers the power and performance customers expect while also reducing emissions.
Speaker Change: Cummins began full production of the X-15N natural gas engine at the Jamestown Engine Plant earlier this year and we are actively engaged with some of North America's largest and most demanding heavy-duty fleets as they look to reduce their carbon footprint.
Speaker Change: Additionally, in our core business, we introduced four new generator sets to the award-winning Sentum series, two each powered by Cummins QSK-50 and QSK-78 engines.
Speaker Change: In response to high market demand, these new models have been engineered specifically for the most critical applications, such as data centers.
Speaker Change: In order to further raise our capacity to meet rising power generation demand, we also intend to invest $200 million across our U.S., England, and India manufacturing sites.
Speaker Change: As you will see in our full year financial performance details and 2025 guidance,
Speaker Change: We are excited about the continued impressive performance and growth potential for our power systems business.
Speaker Change: Cummins also successfully completed the separation of our filtration business Atmos Filtration Technologies.
Speaker Change: Cummins will continue its focus on advancing innovative power solutions while Atmos is now well positioned to pursue its own plans for profitable growth.
Speaker Change: The separation of APMETS resulted in the tax-free exchange of shares, which reduced Cummins' shares outstanding by approximately $5.6 million in the first quarter.
Speaker Change: In our Accelera business, we completed the formation of our joint venture Amplify Cell Technologies with Daimler Trucks and Buses, PACCAR, and EVE Energy to localize battery cell production and the battery cell supply chain in the United States.
Speaker Change: This strategic collaboration will advance zero-emissions technology for electric commercial vehicles and industrial applications.
Speaker Change: Amplify began construction this year of a 21 gigawatt hour factory in Mississippi with potential for future expansion as demand grows and is targeting start of production in 2027.
Speaker Change: Lastly, as we navigate this long and messy transition for our customers, we remain committed to pacing and refocusing our investments on the most promising paths as the adoption of zero-emissions solutions flows in some regions around the world.
Speaker Change: As you can see in our fourth quarter results, we recorded charges related to the reorganization of our Accelera business segment as we underwent a strategic review to streamline the business while also ensuring we are set up for long-term success.
Speaker Change: We remain committed to Accelera and its mission, and this business continues to play an important role in our Destination Zero strategy.
Thank you. Bye.
Speaker Change: Now I will comment on overall company performance for the fourth quarter of 2024 and cover some of our key markets.
Speaker Change: Demand for our products remains strong across many of our key markets and regions, offsetting the softening in the North America heavy-duty truck market.
Speaker Change: Revenues for the quarter totaled $8.4 billion, a decrease of 1% compared to 2023, as lower North America heavy-duty and pickup truck volumes
Speaker Change: And the reduction in sales from the separation of Atmos were partially offset by continued high demand in our global power generation markets.
Speaker Change: Stronger aftermarket and North America medium-duty truck volumes, as well as improved pricing.
Speaker Change: EBITDA was $1 billion or 12.1% compared to a loss of $878 million or negative 10.3% a year ago.
Speaker Change: Fourth quarter 2024 results included 312 million of charters related to the strategic reorganization of our Accelera business segment.
Speaker Change: This compares to the fourth quarter 2023 results, which included $2 billion of costs related to the agreement to resolve U.S. regulatory claims, $42 million of costs related to our voluntary retirement and separation programs, and $33 million of costs related to the separation of the AMIS business.
Speaker Change: Excluding those items, EBITDA was $1.3 billion or 15.8% compared to $1.2 billion or 14.4% a year ago.
Speaker Change: EBITDA and gross margin dollars improved compared to the fourth quarter of 2023 as the benefits of higher power generation volume, pricing, and operational efficiency more than exceeded lower North America truck volumes and the separation of Atmos.
Thank you.
Speaker Change: 2024 revenues were a record $34.1 billion, essentially flat with 2023 despite the decline in North America heavy-duty truck demand in the second half of the year and reduction of sales from the ATMAS separation.
Speaker Change: EBITDA was a record $6.3 billion or 18.6% of sales compared to $3 billion or 8.9% of sales in 2023.
Speaker Change: 2024 results include a gain net of transaction costs and other expenses of 1.3 billion dollars related to the ATMAS divestiture.
Speaker Change: $312 million of charges related to the Accelera reorganization and $29 million of first quarter restructuring expenses.
Speaker Change: This compares to the 2023 results that included $2 billion of costs related to the agreement to resolve U.S. regulatory claims, $100 million of costs related to the separation of ATMAS, and $42 million of costs related to the Voluntary Retirement and Separation Program.
Thank you.
Speaker Change: Including those items EBITDA was a record $5.4 billion or 15.7% of sales for 2024 compared to $5.2 billion or 15.3% of sales for 2023.
Speaker Change: As the benefits of higher power generation volumes, pricing, and operational efficiency more than exceeded lower second half North America truck volumes and the reduction of margin from the APMA separation.
Speaker Change: EBITDA dollars were a record in power systems, distribution, and engine segment.
Speaker Change: Our power systems business in particular finished 2024 with a record full-year EBITDA of 18.4% of sales, up from 14.7% in 2023.
Speaker Change: I am very pleased with the performance across the core business segment, and you will see from our guidance that we are excited to continue to build on this momentum.
Speaker Change: Now let me provide our overall outlook for 2025 and then comment on individual regions and end markets.
Speaker Change: We are forecasting total company revenues for 2025 to be down 2 to up 3% compared to 2024 and EBITDA to be 16.2 to 17.2% of sales up from 15.7% in 2024.
Speaker Change: Well, we expect weaker first half demand in our North America on-highway truck markets. We expect many of our markets, particularly power generation, to remain strong throughout the year.
Speaker Change: Flat to down 10% year over year. We anticipate weaker first half demand, and while we do expect a pre-buy in the second half of the year, the uncertainty on the exact timing and extent is driving our wider guidance range.
Speaker Change: In the medium-duty truck market, we expect the market size to be 140,000 to 155,000 units, down 5% to 15% compared to 2024, primarily driven by weaker-than-expected recent net orders and a depleting backlog.
Speaker Change: Our engine shipments for pickup trucks in North America are expected to be $130,000 to $140,000 in 2025, flat to up 5% year over year.
Speaker Change: In China, we project total revenue, including joint ventures, to increase 5% in 2025.
Speaker Change: We are projecting a range of down 5% to up 10% in heavy and medium-duty truck demand in China.
Speaker Change: While export demand is expected to decline slightly, we are hopeful that the recent NS4 scrapping policy and other stimulus actions may lead to domestic demand growth.
Speaker Change: We have not, however, seen a meaningful recovery thus far. While there is still uncertainty around the China truck market for 2025, we expect strength in other markets, particularly power generation, where demand is expected to remain high as data center momentum continues.
Speaker Change: In NDO, we project total revenue, including joint venture, to increase 10% in 2024, primarily driven by stronger power generation demand.
Speaker Change: We expect industry demand for trucks to be down 5% to up 5% for the year.
Speaker Change: For global construction, we expect flat to down 10% year-over-year, primarily driven by weak property investment and shrinking export demand in China.
Speaker Change: We project our major global high-worth power markets to remain strong in 2025. Revenues in global power generation markets are expected to increase 5 to 15 percent, driven by continued high demand in the data center market.
Speaker Change: Sales of mining engines are expected to be down 5% to up 5%.
Speaker Change: For aftermarket, we expect revenue improvement with a range of flat to an increase of 5% for 2025.
Speaker Change: In Accelera, we expect full year sales to be $400 to $450 million compared to $414 million in 2024.
Speaker Change: In summary, 2024 was a record year for revenues, net income, EBITDA, and earnings per share.
Speaker Change: In 2025, we anticipate that demand will be slightly weaker in the North America on-highway truck markets, particularly in the first half of the year, but offset by continued strength in the power generation market and resiliency in our distribution business, given our strong aftermarket presence.
Speaker Change: Despite our relatively flat revenue forecast, we are expecting to improve profitability and cash flow. We remain committed to our multi-solution approach that is proving to be the right strategy for our customers, for the environment, and for the continued growth of Cummins while also returning cash to investors.
Mark Smith: Now let me turn it over to Mark who will discuss our financial results in more detail.
Mark Smith: Thank you Jen and good morning everyone. We delivered strong operational results in the fourth quarter which resulted in revenue achieving the top end of our prior guidance and EBITDA margins exceeding our projections.
Mark Smith: 2024 was a record year for revenues, EBITDA, and earnings per share.
Mark Smith: reflecting the strong demand for our products and the strong hard work of our employees.
Mark Smith: Now let me go into more details on Q4 and the full year performance. There were some notable non-routine transactions in 24 and 2023 and I'll quantify those and describe our underlying results to give a better understanding of the performance from regular operations.
Mark Smith: Fourth quarter reported revenues were $8.4 billion and EBITDA was $1 billion or 12.1% of sales. As Jen mentioned, we underwent a strategic review of our Accelera segment which resulted in charges of $312 million.
of which 305 million were non-cash.
Mark Smith: Excluding this charge we delivered EBITDA of 1.3 billion or 15.8% of sales.
Mark Smith: In the fourth quarter of 2023, we reported sales of $8.4 billion and an EBITDA loss of $878 million.
Excluding the regulatory settlement,
and Voluntary Retirement and Separation Program costs in Q4 2023.
Mark Smith: EBITDA was positive 1.2 billion dollars or 14.4 percent. I know that's a lot to digest. In summary, on an underlying basis EBITDA improved by 140 basis points on slightly lower sales, excluding those charges I just described.
Mark Smith: Fourth quarter revenues decreased by 1% from a year ago, as organic growth was more than offset by the reduction in sales driven by the separation of Atmos.
Mark Smith: The EBITDA improvement of 140 basis points was primarily due to higher power generation volumes, pricing, and operational efficiency partially offset by lower North America truck volumes and the separation of Atlas.
Mark Smith: Now, let me summarize some of the impacts by line item in the income state.
Mark Smith: Gross margin was $2.1 billion, or 25.4% of sales, compared to $2 billion, or 23.7% last year.
Mark Smith: The improved margins were driven by stronger power generation and aftermarket demand, favorable pricing, particularly in power systems and distribution, and improved operational efficiency.
Mark Smith: Selling, administrative and research expenses were $1.1 billion or 13.6% of sales compared to $1.2 billion or 14.2% last year due to lower research and development costs.
Thank you. Thank you.
Mark Smith: Joint venture income of 87 million dollars, decreased 26 million, primarily driven by lower technology fees from some of our international partnerships.
Mark Smith: and Koss incurred in the ramp-up of the Amplify cell technology battery joint venture here in the US, which was formed in the second quarter of 2014.
Mark Smith: Other income was negative $25 million, a decrease of $75 million from a year ago, primarily driven by mark-to-market losses on investments related to company-owned life insurance.
Mark Smith: Interest expense was $89 million, a decrease of $3 million from a prior year driven by lower weighted average interest rates.
Mark Smith: The all-ineffective tax rate in the fourth quarter was 32.8%, principally due to non-deductible costs related to the Accelera reorganization.
Mark Smith: All in net earnings for the quarter were $418 million or $3.02 per diluted share, which includes $312 million or $2.14 per diluted share of Accelera reorganization charges.
Excluding the accelerator charges, EPS was $5.16 per diluted share.
Mark Smith: Operating cash flow was an inflow of 1.4 billion dollars just 37 million lower than the level we saw in the first quarter last year.
Mark Smith: For the full year 2024, revenues were a record $34.1 billion slightly above a year ago and reflecting 4% growth if we exclude ATMOS from both 2023 and 2024.
Mark Smith: operation of Atmos, the Accelera charge in the fourth quarter and first quarter restructuring expenses, EBITDA in 2024 was 5.4 billion or 15.7 percent.
2023 EBITDA was $3 billion.
Mark Smith: of 5.2 billion and 15.3 percent excluding the regulatory settlement, ATMAS separation costs and voluntary retirement separation programs.
Mark Smith: The increase in EBITDA percent was primarily driven by higher power generation volumes, pricing and operational efficiencies more than offsetting the impact of lower North American heavy duty truck volumes and the reduction in margin from the atlas separation.
Thank you.
Mark Smith: All in net earnings were $3.9 billion or $28.37 per diluted share compared to $735 million or $5.15 per diluted share a year ago.
Great.
Mark Smith: 2024 results included the gain related to the separation of ATMOS, net of transaction costs and other expenses of $1.3 billion or $9.28 per diluted share.
Mark Smith: Charges related to accelerator reorganization of $2.12 per diluted share and first quarter restructuring costs of $0.16 per diluted share.
Mark Smith: Capital expenditures in 2024 were 1.2 billion dollars, flat compared to 2023, as we continue to invest in the new products and capabilities to drive growth, particularly related to the Helm platforms within our core business in North America.
Mark Smith: Our long-term goal is to deliver at least 50% of operating cash flow to shareholders over the next five years.
Mark Smith: And over the past five years, we've returned 54% in the form of share repurchase and dividends, even while we absorbed the significant acquisition in the form of Meriton.
Mark Smith: In 2024, we focused our capital allocation on organic investments, dividend growth, and returning $969 million to shareholders via the cash dividend.
Mark Smith: and debt reduction. We also reduced our shares outstanding by approximately 5.6 million shares from the tax-free Atmos Separation Share Exchange.
Mark Smith: I will now summarize the 2024 results for the operating segments and provide guidance for 2025.
Mark Smith: And thankfully for you and for me, I'm going to exclude all those non-routine items in the following pages, and thanks for staying with me as I work through that. For the engine segment, 2024 revenues were a record $11.7 billion, or $28 million compared to last year.
Mark Smith: EBITDA was 14.1% of sales, flat compared to a year ago.
Mark Smith: In 2025, we project revenues for the engine business will be down 2% to up 3% due to expected weakness in North American truck market, particularly in the first half of the year, slightly offset by improved demand in pickup and some international markets.
Mark Smith: 2024 eBitDAR is expected to improve with projections in the range of 14.2% to 15.2%.
Mark Smith: Component segment revenues were $11.7 billion in 2024, 13% lower than the prior year, and EBITDA was 13.8% of sales compared to 14.4% in 2023.
Mark Smith: A lot of work done to improve existing operations, but that was offset in the year-over-year comparisons due to the separation of Atlas.
Mark Smith: For 2025 we expect total revenue for the components business to range from down 5% to flat.
EBITDA margins are expected to be between 13.8% and 14.8%.
Mark Smith: In the distribution segment, revenues increased 11% in 2024 compared to 2023 and were at a record $11.4 billion.
Mark Smith: EBITDA was 12.1% compared to 11.8% a year ago, driven by higher power generation volumes and pricing. We expect 2025 distribution revenues to increase 2-7% and EBITDA margins to be in the range of 12-13%.
Mark Smith: In the power system segment, revenues were a record $6.4 billion, up 13% over 2023, driven primarily by power generation demand, especially data center applications.
Mark Smith: EBITDA was 18.4% or 370 basis points higher than 2023, driven by stronger volume, favorable pricing and a continued focus on operational performance and cost reduction.
Mark Smith: In 2025, we expect power systems revenues to be at 2 to 7 percent and EBITDA to approve again and be in the range of 19 to 20 percent.
Mark Smith: Accelera revenues increased to $414 million in 2024, with a net operating loss of $452 million.
Mark Smith: As we lower costs in existing operations, partially offset by additional losses in the Amplify Cell joint venture as it advances its operations.
Mark Smith: In 2025, we anticipate revenues to be in the range of $400 to $450 million, and net losses to reduce to $385 to $415 million.
Mark Smith: as we continue to make targeted investments aligned with market demand whilst reducing cost.
Mark Smith: Our effective tax rate this year is expected to be 24.5% excluding any discrete items.
Mark Smith: Capital investments will be in the range of 1.4 to 1.5 billion dollars as we continue to make critical investments to support future growth.
Mark Smith: Cash generation has been and will continue to be a focus as we enter 2025, enabling us to continue investing in new products for new and existing markets, returning cash to shareholders, and maintaining a strong balance sheet.
Mark Smith: Our strong performance in 2024 represented encouraging progress towards those targets.
Mark Smith: and despite a relatively flat revenue forecast and expected weakness in North American heavy-duty truck, we expect to further improve profitability and cash flow in 2025. Thanks for joining us today and let me turn it back over to Chris.
Chris Clulow: 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: Thank you. As a reminder, that's star 1 to be placed into question Q and star 2 if you'd like to remove yourself from the queue. And as a reminder, that's one question, one follow-up, then return to the queue. Our first question today is coming from Angel Castillo for Morgan Stanley. Your line is now live.
Angel Castillo: Hi, thanks for taking my question and congrats on another strong quarter here.
Speaker Change: Just wanted to unpack the power generation guide of 5-15% a little bit more.
Speaker Change: Split that out between price and volume, and maybe just tying into that, I think you mentioned a new investment of $200 million in PowerGen, can you just talk about maybe what's entailed in that? I thought, I guess, there was already an expansion or doubling capacity, so what is the incremental being done?
Speaker Change: Yeah, so as you said, we're currently in the midst of a $200 million investment across our plants in Seymour and Minnesota, UK, and India to ramp up capacity to meet what is a growing demand for a power generation.
Speaker Change: products. And so you're seeing in that guide an expectation that we have been able to take up capacity. We're continuing to look at strategic pricing and where we can bring value to the customer so you've got some price.
Speaker Change: And there's, well, but really it's about capacity ramp up and continued sales of larger engines in the power generation and data center market. It's really the 50, the 60 liter, the 78 and 95 liters. So these are large engines as we're able to.
Speaker Change: Bring more capacity online in our supply chain and our plants. You see that flowing through in revenue. We expect that trend to continue over time. And so, we're tracking on-plan, or even slightly ahead of plan to double our capacity by ...
Speaker Change: end of this year, and looking forward to being able to meet what is a really strong demand from those customers.
Speaker Change: That's very helpful and then maybe as a follow-up just on separate on the trucks
Speaker Change: Can you just give us your latest thoughts on EPA 27? It sounds like you're still assuming some pre-buy in the second half, but just given, I guess, what we've seen from the administration so far, any thoughts on the likelihood of any kind of challenges to the EPA 27 rule?
Speaker Change: both economic recovery and pre-buy happening and the North America trucking market that helps bring higher revenue in the second half this year and you know into next year.
Speaker Change: We do anticipate there will be more discussion and potential challenge over the greenhouse gas regulations that we see out into the 2030 and beyond timeframe.
Speaker Change: Thank you. Next question is coming from Stephen Volkman from Jefferies Airline who's not live.
Speaker Change: Great, good morning everyone. Maybe starting off can you just talk a little bit more about the Accelera restructuring and you know how have you changed the focus of that business and what are you doing less of or more of or just some color around that?
Speaker Change: Yeah, I'll start and then, you know, Mark can add if he wants to share more detail. But really, you know, this business has all along been about remaining agile and investing as we see technology advancing and markets starting to move in these zero emissions technologies. And we formed it through a number of acquisitions as well. So what that meant was we had kind of a distributed
Speaker Change: footprint and investment coming from those different acquisitions. And so we really looked at where we see a market moving. We expect that battery electric vehicles will be important in some of our commercial vehicle and industrial applications, and we feel well positioned with
Speaker Change: The Battery Cell Joint Venture and some of the wins that we have with customers as that market.
Speaker Change: developed, so we're continuing to invest there. We're continuing to invest, but pace investment in electrolyzers as we've seen some slowing and customer demand and uncertainty around incentives there.
Speaker Change: But we think we're well-positioned. Frankly, the slower and messier this goes, my view is, the better it is strategically for our commons. And so we're positioning ourselves in the places where we see that market and technology beginning to increase.
Thank you.
Speaker Change: Okay, good. Sorry, I thought Mark was going to add something.
Can I ask
Speaker Change: Well, you've been talking a lot, as it is. Hopefully, you'll be doing less of that this year on all these adjustments. Can I just follow up?
Speaker Change: Can I follow up on the Helm platform? Do you have targets relative to, you know, the types of unit volumes you might expect either on the NatGas side or on any of the other fuel options that you can use with that platform?
Speaker Change: The beauty of the Helm platform is it's got that fuel flexibility and so you know the reality is we're still going to sell a lot of the diesel version of that and it'll be a higher efficiency version which means lower CO2 and lower fuel costs for our customers.
Speaker Change: We've set a goal of getting to 8% on the natural gas.
Speaker Change: We're starting to see customers adopt PACCARs launched at Daimler. Trucks will launch that 15 liter natural gas this year.
Speaker Change: are testing it. I was with a big customer last week, they've you know they're finishing their field testing. They feel good about the product and they're looking to start to increase penetration, but it really depends on diesel fuel prices and regulation and customer CO2.
Speaker Change: goals, and so it's hard to give specific numbers on the rate of natural gas or hydrogen and adoption because of that dependency on infrastructure, you know, cost and regulation.
Speaker Change: Thank you. Next question today is coming from Terry Revitch from Goldman Sachs. Your line is now live.
Yes, hi. Good morning, everyone.
Speaker Change: In power systems, you had really excellent 30% year-over-year growth in revenue per unit.
Speaker Change: In a quarter so the ramp in the supply base is progressing nicely. I'm wondering if you just update us on how much more throughput you expect to get out of the supply base in 2025 for those large products, and I appreciate there could be a wide range of outcomes, but would love to get your updated views on that.
Speaker Change: I think it's important to remember that the revenue growth in particular for 2024 was also about launching those new Centum products. So we're seeing new products coming online that serve the market.
Speaker Change: in addition to ramping up capacity. And for this year, it really is focused on continuing to max out our capacity capability that we have while we're making the investment in more capacity across that range of
Speaker Change: products, and the team has done a really phenomenal job of
of doing that, improving operating efficiency, working with.
Speaker Change: by the end of this year to really get to the full doubling of capacity.
Unfortunately, those units...
Speaker Change: I say unfortunately Jerry units are not a great indicators just because the size of the generator set we've been selling is
Thank you.
Speaker Change: Gone up a lot over and above pricing just the size of the set that we're selling so the revenues outgrown the units significant
Nice problem, Pam.
Speaker Change: And separately, you know, on the China truck market, as you mentioned in a pair of remarks, there's some optimism in the market about potentially strong demand. Can you just calibrate us? I believe including the JV and wholly owned business, China truck profits are maybe 10% of total company profits at this point. And given we're at the trough of the cycle, is it fair to think about...
Speaker Change: Pretty attractive incremental margins if demand does indeed surprise the upside.
Thank you.
Speaker Change: Yes, on the latter. I mean, China in total, maybe on a more normal run rate, would be in the range of 15 to 20 percent of our earnings, and yes, on highway would typically be more than half of that, so you're in the ballpark, Jerry. Yes, and there's no...
Speaker Change: massive structural investments going on there in the current year. So if we get more volume, we'd expect to convert that into more profits. There's also just some lumpiness around tech fees and other things, but I think the underlying operational
Speaker Change: business is well set as it's done in prior cycles when demand improves. We see that and I think that just reinforces.
Thank you.
Speaker Change: Confident China is going to turn. We don't have a lot of visibility into that right now Hopefully that's another leg to come
Thank you. Thank you. Thank you.
Speaker Change: Thank you. Next question today is coming from Tim Fine from Raymond James. Your line is now live.
Tim Fine: Thank you. Good morning. Maybe I'll ask one to start on components, Mark, just as you think about the margin outlook for 25 on kind of flat to down revenues. Pretty nice improvement. I'm wondering how much of that is?
Tim Fine: Is there maybe a benefit from kind of lapping the atmos spin or separation or is there Obviously, there's more to it than that. So maybe just a line or two in terms of what you're projecting there for components
Speaker Change: We did a lot of work internally during 2024 to look at how we...
Speaker Change: and a lot of this work, you know, has paid off in terms of improving our cost structure and focus. So yeah, the components business is going to benefit from some of that.
Speaker Change: drive train and braking systems business. Results have continued to improve there underlying. So I think there are a number of things we're working incredibly hard on. Yeah, flattish revenue environment, drive cost and efficiency where we can.
Speaker Change: Okay, and then, Mark, on the Accelerate, just in light of the restructuring and given what's, how the global backdrop is changing or has changed, the expectation to get that business to get EBITDA break-even by 27, is that...
Speaker Change: Is that still in the cards or are we thinking that maybe is a tougher one to hit?
Speaker Change: Yes, I think overall, relative to our 2030 targets for the total company, we feel
Speaker Change: like we've had a really good start in 2024 and on track.
and we're doing a bit better on the core business.
and headwinds have come more frequently and more severely.
Speaker Change: So we are committed to significant loss reduction, but right now we are not on track towards that break even, but we do feel we're very much on track for the overall company targets. And that's really the reason why we took more.
Speaker Change: pronounced actions or that the Accelera team did in the fourth quarter.
Speaker Change: recognizing that we're not going to get enormous help from demand.
Speaker Change: here in the near term, Tim. So we're managing what we can, and in the context of overall company results, we feel confident.
Speaker Change: But we are not, right now, on track to get them.
to break even as we sit here today.
Speaker Change: Thank you. Next question is coming from Kyle Menjez from Citi, your line is now live.
Kyle Menjez: Thank you. I was hoping if you could just comment on how you're thinking about R&D spend in 2025 versus 2024, maybe more specifically within engine and components, and then just beyond 2025, how you're kind of thinking about that, how we should be thinking. Thank you.
Kyle Menjez: Good question. I think beyond 2025 is where we should see more momentum to the downside on engineering expense.
Kyle Menjez: We did see some improvement through the year in the engine business. We've got a lot of new product launches both in engines and components in 2025 but we have to we get through those launches and through 2027 that's definitely part of our margin expansion story.
Kyle Menjez: in those two businesses, but not a dramatic shift this year, some puts and takes between engines and components.
Thank you for joining us. Thank you.
Speaker Change: Thanks, that's helpful. And then just could you comment a little bit on how you're thinking about the parts outlook for 2025?
Thank you.
Speaker Change: economy, I would say at least on par with the economy, with what we know today.
Speaker Change: Thank you. Next question is coming from Jamie Cook from Truist Securities. Your line is now live.
Jamie Cook: Hi, good morning, nice quarter. I guess a similar question that Tim asked on, I think it was the components business, just the margins mark in power systems are very good, despite sort of what I would call a muted top line forecast, so is that just...
Jamie Cook: pricing in some of the new products? And then, I guess, how do you think about margin targets, you know, relative to the ones you just gave us, I guess, last year? Is it looking conservative? And then my second question, obviously, lots of puts and takes around tariffs and who knows what happens. But, you know, are there any changes?
Jamie Cook: in your, you know, how your terms and conditions or contracts with your customers that if we do get into an environment where tariffs and that causes price increases that we're able to absorb costs or increase price more frequently relative to last time. Thank you. Within engines, I guess.
Thank you.
Speaker Change: Great. So yes, power system's doing well. I think continuing to focus on supply chain.
Speaker Change: efficient output, they did a great job last year so I don't want to sound like we're dissatisfied, quite the opposite, very impressed but still think there's more to come on.
Speaker Change: Raising volume, raising productivity, and a little bit on price in power systems. So all of those things contribute to us raising the margin guidance for the year and quite a bit above
Speaker Change: The fourth quarter levels and I guess if we really had a robust US economy We could see growth in some of the smaller generator sets. We have high market share in some of the consumer segments that aren't
Speaker Change: particularly robust. So I guess that we don't see signs of that, but if we wanted to get onto the bullish side and saw more strength in the US economy, that could be that could be another leg to help.
On tariffs,
Speaker Change: By and large, our strategy is to make most of our products in the market in which they're sold. But of course, we do have a global supply chain. And of course, nobody knows exactly what the tariff situation is going to be, but to the extent.
Speaker Change: that we do incur them then we think it's important that the market feels those and we'll look to pass those on. Let's hope that's not significant for everybody involved.
Speaker Change: But really, we're just focused on controlling what we can control. And I think, yes, we've got secular tailwinds in power systems, but...
The biggest driver is being able to scale growth effectively.
Speaker Change: and pushing out cost and then you don't see it on the inside but the work we've done inside.
Speaker Change: to try and simplify our structure, improve the speed of decision-making. All of those things help and have helped kind of raise the bar in 2024.
Speaker Change: Thank you. Next question is coming from David Razzo from Evercore Carolina's Night Live.
David Razzo: Hi, thank you. I'm trying to better understand the margin expansion in engines and really for that matter components.
David Razzo: It's just the margin improvements impressive. I'm just wondering, you know, do I have to go to town a little bit because it's more DNA than it is operational, but
David Razzo: Well, there is an increase in data because that's where we're investing most of the capital in North America, particularly in the engine business over the last...
So of the 100 DNA increase, is it...
You know, 50 engines.
David Razzo: and I'm going to be talking about the the the the the the the the the the the the the the
David Razzo: 25 components, just some cents so I can get a better
Speaker Change: of Annapolis, North Carolina. It's still modest relative to those two segments.
Speaker Change: And so on an incremental basis, most of it's gonna go through engines and components, a little bit in corporate, which ends up mostly in engines and components, yeah.
Speaker Change: Okay, that's helpful and then even with even with that it looks like there still is some slight
Speaker Change: operating, let's say, non-DNA margin improvement in engines. What's driving that? Is it a little bit of mix?
Speaker Change: I'm just trying to think about maybe the new medium engines, you're outperforming the market, how to think about those margins versus heavy, because it's all wrapped in the idea of trying to figure out where do you think engine margins are as we sort of move out of 25 and people start to pontificate about.
Earnings power in 26 with a pre-buy.
and the
Yep, so far so good.
Speaker Change: Those are all really important questions and will be big contributors to the long-term performance. In the near term, David, I think we continue to expect to do well in the aftermarket side of which the engine business is our biggest single driver. So that's probably where there's still some pricing opportunity into 2025.
Speaker Change: And then, yes, the engineering is coming down enormously, but I think we've come down off the peak there. Components probably going up a little bit.
Speaker Change: But those would be the main drivers, and as you can see, we haven't factored a lot in from China yet. So really, it's cost control and aftermarket in the near term.
Speaker Change: Thank you. Next question is coming from Avi Drazovic from UBS, your line is now live.
Thank you.
All right. Good morning, guys.
Thanks for listening. We'll see you next time.
Speaker Change: I guess, you know, in terms of your guidance for the Market Outlook for North America heavy-duty trucks this year, sounds like if, for whatever reason, you don't see it through Biomaterialize this year, that you'd expect retail demand to maybe still be negative in the second half. So, I guess, one, am I interpreting that correctly? And two, can you just discuss how you're thinking about it?
Speaker Change: I think there's a very real chance that we'll see improvement in that over the course of this year, just depending on what's the underlying economy.
Speaker Change: and interest rates do. So there's some potential upside in the second half for that, in addition to this pre-buy phenomenon that we would anticipate would would would lead to a stronger second half versus first half.
Speaker Change: The range is quite wide because how high that goes is really dependent on the pre-buy and when that starts.
got it okay and then in terms of medium duty
Speaker Change: just breaking down kind of market share gains versus market growth for 2024. How did those...
Speaker Change: NetAgainst each other and then in terms of your sales guidance for this year within engines
Speaker Change: Are we thinking about further share gains this year, or not as much?
Speaker Change: I think really, I think we're talking about following the market in 2025. There's been a long track record of significant market share gains in that market. Our engines clearly are the leader in that market and there were some share gains, but going forwards
Speaker Change: It's very much primarily going to be track in the market, but can be.
The modest changes around that from where we are now.
Speaker Change: Thank you. So the guide down for the year is reflective of what we've seen in order and backlogs. The industry orders, we will feel that, yeah. From a product perspective, we continue to feel really positive about how our products are performing in the market and our position across medium and heavy duty.
Thank you.
Speaker Change: Thank you. Our next question is coming from Rob Wertheimer from Milius Research. Your line is now live.
Rob Wertheimer: Thank you. I had two questions around power systems, if I may. And one is, as this, you know, data center market continues to develop,
Rob Wertheimer: historically at least I suppose you know selling an engine is one thing and then servicing is another and if you have backup power it doesn't get turned on that much and it's not as profitable but obviously there's a high uptime high-criticality kind of operations
Rob Wertheimer: Do you see any opportunity to change that profit algorithm such that you'll be, you know, making more recurring revenue or otherwise on on that massive build out of engines that you're going to do and then secondly if I can just wrap it in
Rob Wertheimer: You've had excellent results in power systems. I'm not sure if all of it's really this Surgeon Data Center or maybe the stuff you've touched on a couple times in the call already, operational improvements. I wonder if you could just expand on how you've made that business better. Thank you.
Rob Wertheimer: We look at shortage of power availability and how do you meet power demand in the U.S. and around the world. There's potential for some shift in that. And so strategically, we're considering how we think about our role in that, which was part of the.
Rob Wertheimer: for those applications. In terms of the power systems performance, we undertook now two years ago focused effort to really look at operating performance
Rob Wertheimer: structure, how we made sure we were investing in the right products and getting returns on the investments we were making for our customers.
Rob Wertheimer: and working through some of the supply challenges that have built up through the pandemic and then the rebound and the market after that. And so that really has come together.
Rob Wertheimer: at exactly the time when this data center trend has also happened. And so we really had strong underlying operating structure and performance in the business that we continue to drive improvement in as we're also taking up volumes. And so both of those are...
Rob Wertheimer: contributing to really the remarkable profitability improvement that you've seen in power systems.
Rob Wertheimer: Just to add, Rob, the distribution, of course, adds that extra slice of revenue on data sense and in fact is fundamental.
Rob Wertheimer: to winning and support in this data center business around the world. I think that's one of the...
Rob Wertheimer: strengths we have and few others have and that's why you see that the market demand is concentrated amongst.
a couple of large engine manufacturers like us.
because of that service capability.
Rob Wertheimer: But just to underline what you said, Rob, and your intuition, it would be very wrong to attribute power systems improvement just to data centers. That's a journey that's...
Rob Wertheimer: Still got legs left, but the tide, you know, the performance level has been elevated across that segment Including in the alternator business which supplies across really across that supply chain So we're incredibly pleased with the way that business has improved
Speaker Change: Thank you. Our final question is coming from Temi Zakaria from JP Morgan. Your line is now live.
Hi, good morning. Thank you so much
Speaker Change: So the distribution segment guide, two to seven percent, it seems quite healthy given the underlying truck market outlook.
Speaker Change: Are you able to comment on the core distribution outlook versus the power generation related services?
Speaker Change: The reason I ask, if power generation demand holds at these levels, it seems like distribution could see another double-digit growth year in 2025. So any comments there would be helpful.
Speaker Change: Yeah, I think you're typically seeing, you know, parts growth, maybe slightly above the rate of economic growth. And then in this cycle, you're right, the power generation demand in data centers and in some other applications has really provided that extra leg. So I would say in the short run,
Speaker Change: Power gen will be the main swing factor. I would say that some of the other segments, mining, oil and gas,
Speaker Change: If we look beyond this year, we'd expect to see more growth in the future. There's not enormous momentum in those businesses, but they're also important in markets.
Speaker Change: the distribution. Um, but yet one of the reasons that we like distribution, it generates a lot of cash.
Speaker Change: It's less volatile than other parts of the business and has that really strong aftermarket piece, which doesn't get the same extraordinary growth rates, but underpins the kind of year-to-year level of performance. So yeah, distribution's doing well, and hopefully the global economy.
strengthens and then all of our
Speaker Change: that you expect some pre-buy in the back half, but the timing is uncertain. I'm curious what pre-buy lift is embedded in the current heavy-duty and medium-duty outlook for North America. I'm just trying to understand what the market could look like, let's say if there's no pre-buy.
Speaker Change: Well, there's so many factors at play, but that's one of the factors we believe can help. We're going to start off at a fairly modest level in the first quarter, although orders here yet in the fourth quarter of 24 were a little better than expected, I would say. But it's really, we're anticipating that strengthen in the second half.
Speaker Change: Again, I think we've all got fairly consistent views of the market at this point and we'll see how it plays out. A big factor, of course, is going to be the strength of the U.S. economy, spot rates and freight activity. All these factors weigh in.
Speaker Change: The main thing to know is we've got a stronger second half in heavy-duty truck built into our forecasts. Q1 is going to probably be the low point of the year with what we expect right now. The question is will we get the improvement in the second half.
Thank you.
Speaker Change: Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.
Speaker Change: Thank you everyone for joining our teleconference today. That concludes the question and answer session. As always, the Investor Relations team will be available for questions after the call. Thank you.
Thank you.
Speaker Change: Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.