Q1 2025 Cummins Inc Earnings Call
[laughter].
Greetings and welcome to Cummins incorporated first quarter earnings release at this time, all participants are on a listen only mode.
A question and answer session will follow the formal presentation. We ask that you. Please limit to one question and one follow up.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Alright.
Mind you This conference is being recorded.
Chris: I would now like to turn the call over to your host Mr. Chris <unk>, Vice President Investor Relations.
Speaker Change: Thank you, Rob and good morning, everyone and welcome to our teleconference. Today to discuss Cummins results for the first quarter of 2025 participating with me today are Jennifer Ramsey, 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 before we.
Speaker Change: 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, such statements Express our forecasts expectations hopes 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 statements in the slide deck.
Speaker Change: 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: During the course of this call we will be discussing certain non-GAAP financial measures and we refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation are available.
Speaker Change: On our website within the Investor Relations section at Cummins Dot Com.
Speaker Change: That another way I will turn you over to our chair and CEO, Jennifer Ramsey to kick us off.
Jennifer Ramsey: Thank you, Chris and good morning, everyone.
Jennifer Ramsey: You can see from our press release and the earnings material. We delivered very strong results in the first quarter led by record performance in our power systems segment.
Jennifer Ramsey: We are entering unchartered territory as the trade tariffs start to have a more significant impact beginning in the second quarter.
Jennifer Ramsey: Breath and changing nature of the tariffs have introduced a great degree of uncertainty and mean that at this time, we are unable to predict with confidence our expected performance for the year.
Jennifer Ramsey: It is important to note that we serve many different end markets, some with long backlogs and clear secular themes and our power systems business. Some less sensitive to short term economics that sentiment such as our aftermarket business.
Jennifer Ramsey: Other markets, where customers tend to flex the man more quickly when business confidence weekend.
Jennifer Ramsey: The duration of uncertainty and extent of tariffs will influence how much and for how long demand is impacted.
Jennifer Ramsey: Cummins is in a strong position strategically and financially with an experienced leadership team well versed in navigating through periods of uncertainty we look forward to restoring our guidance when we have more stability in the outlook.
Jennifer Ramsey: Now I will move onto some of our highlights from our first quarter, then I will discuss our sales and end market trends by region.
I will then provide an update on how uncertainties in our current environment may impact our end markets.
Jennifer Ramsey: Mark will then take you through more details of our first quarter financial performance.
Mark Smith: In the first quarter, we continued to make progress in the execution of our destinations Euro strategy in our engine segment. We introduced the much anticipated X 10, as a part of our Cummins Helms platforms. This enzyme replaces both the L. Nine X 12 N Gen platform and will deliver a new level of performance durability.
Mark Smith: Inefficiency for heavy and medium duty customers.
Mark Smith: Alongside the excess 10 M. B series. The X 10 provides customers with the power solution to meet their unique operational requirements, while maintaining the performance and reliability for which carbons is now.
Mark Smith: In addition, we unveiled the new Cummins B seven point to diesel engine that brings the latest technology and advancements to one of our most proven platforms.
Mark Smith: The new engine will feature a slightly higher displacement and is designed to be a global platform, which creates flexibility for different applications and duty cycles.
Mark Smith: Both the B seven point to an X 10 engines will be manufactured at Rocky Mount engine plant in North Carolina and will go into production in North America in 2027.
Mark Smith: And our power systems segment, we announced the acquisition of assets of first met with a leader and retrofit hybrid solutions for mining and rail operations.
Mark Smith: This technology represents the first commercially available retrofit hybrid system for mining equipment significantly reducing total cost of ownership, while advancing decarbonization in operation.
Mark Smith: This acquisition reinforces Cummins commitment to providing innovative and effective decarbonization solutions, while meeting the needs of our customers on their transition to wireless.
Yeah.
Mark Smith: Lastly, our accelerate by Cummins segment announced the supply of 100 megawatt proton exchange membrane, our patent electrolyze their system for Bp's Lincoln Green hydrogen projects in Germany the.
Mark Smith: The hydrogen generation system will be the largest electrolyze. There are system assembled accelerant to date and will be manufactured and accelerates new electrolyze their plant in Spain.
Mark Smith: Once fully commissioned in 2020 700 megawatt electrolyze their system will produce up to 11000 tonnes of greenhouse origin per year.
Yeah.
Mark Smith: Now I will comment on the overall company performance for the first quarter of 2025 and cover some of our key markets.
Mark Smith: Demand for our products remains strong across many of our key markets and regions offset by softening in the North America truck market.
Mark Smith: Revenues for the first quarter were $8 $2 billion, a decrease of 3% compared to the first quarter of 2020 for EBIT.
Mark Smith: EBITDA was $1 $5 billion, or 17, 9% compared with $2.6 billion or 36% a year ago.
Mark Smith: First quarter 'twenty 'twenty four results included a gain net of transaction costs and other expenses of $1 $3 billion related to the atmos divestiture and $29 million of restructuring expenses.
Mark Smith: Excluding the onetime gain and the costs related to the separation of Atmos as well as restructuring expenses EBITDA and gross merchant dollars improved compared to the first quarter of 2024.
Mark Smith: This improvement in profitability was driven by the benefit of higher power generation and aftermarket volumes pricing and operational efficiency, which more than exceeded the impact of lower North America truck volumes and the separation of Atlas.
Mark Smith: For our power systems business in particular, we had record performance in both EBIT dollars and percentage in the first quarter as we continue to benefit from operational improvements and strong end markets.
Mark Smith: Yeah.
Mark Smith: Our first quarter revenues in North America decreased by 1% compared to 2024 industry production of heavy duty trucks for the first quarter was 63000 units down 18% from 2024 levels, while our heavy duty unit sales were down 21000 or 21% from 2024.
Mark Smith: Industry production of medium duty trucks was 32000 units in the first quarter of 2025, a decrease of 21% while our unit sales were 31000 down 14% from 2024.
Mark Smith: We shipped 29000 engines, just still lantus for use in their vans pickups in the first quarter of 2025 down 25% from 2024 level.
Mark Smith: Revenues for North America power generation increased by 12% driven primarily by continued strong data center demand.
Our international revenues decreased by 5% in the first quarter of 2025 compared to a year ago.
Mark Smith: First quarter revenues in China, including joint ventures were $1 $8 billion, an increase of 9% as accelerating data center demand and high domestic infrastructure demand more than offset lower export demand.
Mark Smith: Industry demand for medium and heavy duty trucks in China with 294000 units a decrease of 4% from last year.
Mark Smith: Our sales and units, including joint ventures were 42000, an increase of 6%.
Mark Smith: Industry demand for excavators in China in the first quarter was 61000 units an increase of 23% from 2024 levels.
Mark Smith: Our units sold were 11000, an increase of 19% the increase in the China market size is primarily due to a domestic cyclical replacement demand world development and farmland renovation demand.
Mark Smith: Sales of power generation equipment in China increased 68% in the first quarter due to accelerated data center demand.
Mark Smith: First quarter revenues in India, including joint ventures were $725 million, a decrease of 14% from the first quarter a year ago.
Mark Smith: Industry truck production was flat with 2024.
Mark Smith: Our generation revenues decreased by 11% in the first quarter as the prior year included a pre buy ahead of emissions regulations change.
Mark Smith: To summarize we achieved impressive results in the first quarter with record financial performance in our power systems business.
Mark Smith: Looking ahead, there is heightened uncertainty about the pace of growth in the global economy, due to tariffs, which could negatively impact demand for capital goods.
Mark Smith: Absent more clarity about the likely duration of elevated tariffs, we are not able to provide a reliable forecast for the remainder of this year.
Mark Smith: As a large U S headquartered company with significant manufacturing in the U S. We appreciate the administration's support for American manufacturing.
Mark Smith: This support is crucial as we invest more than $1 billion in our engine and power systems manufacturing operations in the U S. Over the next few years.
Mark Smith: Employing people in nearly every state through our manufacturing plants and sales and service branches.
Mark Smith: As we evaluate our current manufacturing footprint and our exposure to tariff regulations. We believe we are well positioned because we primarily produce engines and gen sets in the markets, where we sell them.
Mark Smith: For instance, our medium duty heavy duty and high horsepower engines as well as power generation products for U S customers.
Mark Smith: Our manufactured in our plants located in Indiana, North Carolina, New York and Minnesota.
Mark Smith: However, much like much of our industry, our component and supplier manufacturing would be affected by current tariff regulations, which could disrupt the global economy, and ultimately lead to higher costs for consumers.
Mark Smith: In addition to trade and economic uncertainty. There's also uncertainty in North America emissions regulations for 2027.
Mark Smith: We continue to expect new Nox regulation to go in place in 2027 and are focused on launching our products on schedule. While also working with the administration as they explore options to lower the cost of existing regulations.
Mark Smith: Well, we believe our product plan is well positioned the uncertainty and regulation along with economic uncertainties have led to a weaker than anticipated recent order.
Mark Smith: And also has made pre buy for the second half of the year unlikely.
Mark Smith: In summary, we had a strong first quarter and continued our progress in improving EBITDA margins as we shared in our analyst day, almost a year ago.
Mark Smith: With tariffs not a significant factor in our results.
Mark Smith: Economic environment has changed significantly over the past three months, we have an experienced leadership team that has demonstrated capability in managing through periods of uncertainty.
Mark Smith: And we will maintain focus on our customers our employees and shareholders.
Mark Smith: We enter this period of heightened uncertainty in a position of strength and look forward to reinstating our guidance when some of the uncertainty has subsided.
Mark Smith: Now, let me turn it over to Mark.
Mark Smith: Thank you Jen and good morning, everyone, we delivered strong revenue and profitability in the first quarter.
Mark Smith: This quarter revenues were $8 $2 billion down 3% from a year ago sales in North America decreased 1% while international revenues.
Mark Smith: Declined 5%.
Mark Smith: Separation of Atmos in mid March in the prior year resulted in year over year sales decline of around 4% to the total consolidated sales, meaning that we were close to flat on an underlying basis.
Mark Smith: EBITDA was $1 $5 billion or 17, 9% of sales for the quarter.
Mark Smith: Compared to $2 $6 billion or 36% sales a year ago, which of course included a onetime gain.
Mark Smith: This is true of the <unk> business.
Mark Smith: $1.3 billion net of transaction costs also a year ago, we incurred $29 million of restructuring expenses.
Mark Smith: Yeah.
Mark Smith: To provide clarity on operational performance and allow comparison to the prior year, excluding the onetime gain.
Mark Smith: And the costs related to the separation of Atmos under restructuring expenses in my following comments.
Mark Smith: EBITDA was $1 $5 billion or 17.9 sales for the quarter compared to just $1 $3 billion 15, 5% of sales a year ago.
Mark Smith: How youre EBITDAR was driven by higher power generation aftermarket volumes.
Mark Smith: Positive price cost driven by operational improvements, partially offset by lower North America truck volumes and the separation of X.
Mark Smith: Now, let's look at each line item a little more.
Mark Smith: Gross margin for the quarter was $2 $2 billion or 26, 4% of sales.
Mark Smith: Up from $2 $1 billion or 24, 5% last year.
Mark Smith: The improved margins were driven by favorable pricing higher aftermarket.
Mark Smith: The ratio of improvements, especially in power systems.
Mark Smith: Selling administrative and research expenses were $1 $1 billion or 13, 6% of sales compared to $1 $2 billion or 13, 8% of sales a year ago.
Mark Smith: Joint venture income of $151 million increased $8 million from the prior year.
Mark Smith: I'm, not really driven by higher technology fees within our engine business.
Mark Smith: Your volumes in our Cummins Chongqing joint venture within power systems.
Mark Smith: Other income was $23 million compared to $21 million from the prior year U S.
Mark Smith: Gains on investments related to company owned life insurance more than offset the negative impact of foreign currency revaluation.
Mark Smith: Interest expense was $77 million a decrease of 12 million from the prior year, primarily driven by a lower average debt balance as a result of the separation of Atmos and lower weighted average interest rates.
Mark Smith: The all in effective tax rate in the first quarter was 23, 9%.
Mark Smith: Including 7 million or five cents per diluted share.
Mark Smith: Favorable discrete tax items.
Mark Smith: All in net earnings for the quarter were $824 million or $5 96 per diluted share compared to $2 billion or 14.3, $14 <unk> per diluted share a year ago.
Mark Smith: Which includes the net gain on the separation of box, which was $1 3 billion or $9.08 per diluted share.
Mark Smith: Restructuring expenses.
Mark Smith: $9 million.
Mark Smith: Zero point.
Speaker Change: 15 cents per diluted share hopefully, we've now lapped all of those exclusions and adjustments and look forward to having less words around those.
Mark Smith: Quarters.
Mark Smith: All in operating cash flow was an outflow of $3 million compared to an inflow of $276 million a year ago, primarily driven by your.
Mark Smith: We're working carefully.
Mark Smith: Now, let me comment a little more on segment performance for the engine segment first quarter revenues were $2 $8 billion, a decrease of 5% from a year ago.
Mark Smith: EBITDA was 16, 5%.
Mark Smith: From 14, 1%.
Mark Smith: Even on the lowered truck volumes.
Mark Smith: The engine business benefited from pricing related to the launch of updated products in our light duty segment stronger after market volumes.
Mark Smith: Operational efficiencies good cost control and a modest increase in joint venture income.
Mark Smith: Components segment revenue was $2 7 billion, a decrease of 20% while EBIT.
Mark Smith: Excluding costs related to the separation of Atmos decreased to 14, 3%.
Mark Smith: From 14.8, a year ago as lower on highway demand in North America, and Europe, and the diluted impact.
Mark Smith: Separation, partially offset by the benefit from operational efficiencies.
Mark Smith: In the distribution segment revenues increased 15% from a year ago to $2 $9 billion.
Mark Smith: EBIT also increased as a percent of sales to 12, 9% compared to 11, 6%.
Mark Smith: Sales a year ago, driven by higher power generation volumes.
Mark Smith: Sure.
Pricing.
Mark Smith: In the power systems segment revenues were $1 $6 billion, an increase of 19%.
Mark Smith: And EBITDA was a record increasing from 17, 1%.
Mark Smith: 23, 6% of sales driven by strong volume, particularly in data center applications rebuilds favorable pricing.
Mark Smith: <unk> focus on operational improvement.
Mark Smith: Accelerated revenues increased 11%.
Mark Smith: $203 million driven by increased E mobility sales in electro installations arising from prior year period oldest.
Our EBITDA loss was $86 million compared to an EBITDA loss of $101 million a year ago as we lowered costs in existing operations, partially offset by additional losses in the amplify sell joint venture.
As its operations.
Mark Smith: In summary, we delivered impressive profitability for the first quarter, even as demand in North America truck market has declined.
Mark Smith: Certainly has increased due to treat terrorists, resulting in a slowdown in the global movement of goods, particularly between China and the U S.
Mark Smith: It remains to be seen how long the tariffs remain in place and the impact that they have on business confidence and the demand for capital goods.
Speaker Change: Cummins is in a strong financial position to navigate through uncertainty with our industry, leading portfolio of products and our global network, we are well placed to support our customers.
Speaker Change: We look forward to reinstating our outlook.
Speaker Change: When the economic conditions become clearer.
Speaker Change: Along with hopefully a return to growth and greater prosperity here in the U S.
Speaker Change: And the global economy.
Speaker Change: In the meantime, we will continue to focus on areas, we can control and managing costs and optimizing working capital while meeting our customer commitments, we will stay focused on our strategic priorities in what is likely to be a more complex operating environment in the coming months.
Speaker Change: The full impact of the current tariff levels, there's not yet being felt in our opinion.
Speaker Change: I want to close my prepared remarks by thanking Chris Cleveland for his leadership and Investor Relations, He's moving to a new finance leadership roles in operations and supply chain.
We will remain a key adviser to me and our business leaders as we navigate through the current challenges.
Speaker Change: Congratulations to Nick Aaron's and assuming the Investor relations role, Nick and I look forward to meeting with investors and analysts in person in the coming weeks and months, we're very fortunate to have such a strong finance team.
Chris Cleveland: Now, let me turn it back over to Chris.
Speaker Change: Thank you Mark.
Speaker Change: 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.
Speaker Change: Operator, we're ready for our first question.
Speaker Change: Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys and again as a reminder, we ask that you. Please limit to one question and one follow up one moment. Please while we poll for questions.
Speaker Change: Our first question comes from Jamie Cook with Truth Securities. Please proceed with your question Hi.
Jamie Cook: Hi, good morning, a nice quarter I guess, just my first question understanding you're not providing guidance, but based on what's been announced so far is there any way you can sort of help us quantify the gross or net tariff costs, you know what I mean that would impact your business and in which segments are impacted the most.
Speaker Change: And then I guess my second question.
Speaker Change:
Speaker Change: Just trying to understand which businesses have the most visibility like where your backlog sits today and just how you're handling pricing you know just concerned with some of the businesses that have greater backlog, perhaps there's pricing risk associated with tariffs. Thank you.
Speaker Change: Thanks, Jamie.
Speaker Change: So the first question and pass it on to John.
Speaker Change: We're not.
Speaker Change: A very uncertain.
Speaker Change: Set of circumstances, given the changing and evolving nature of the tariff. So we're not going to quantify that today quite frankly.
Speaker Change: The bigger concern is the broader impact on the overall economic level environment, we've taken the steps without knowing what the tariffs were going to be taken what steps we could.
Speaker Change: Try and mitigate the impact.
Speaker Change:
Speaker Change: But beyond that to the extent that.
Speaker Change: We incurred tariffs, we're going to have to.
Speaker Change: Pass those on we will of course as we get into actual results show what the impact of tariffs is going to be there is inevitably going to be some lag between cost and recovery and we will provide more color going forwards.
Speaker Change: Yeah and in terms of what we're seeing in different markets. As I noted, we do have some different markets that we expect to be impacted in different ways by uncertainty.
Speaker Change: And the economy. So we have a multiyear order board and our power generation business and you know where there are customers that want to cancel that push out builds we're able to reallocate those to other customers. So you know for the foreseeable future. We're we're feeling pretty confident in that part of the business.
Speaker Change: Aftermarket of course as customers may delay.
Speaker Change: Purchase decisions that can drive aftermarket business.
Speaker Change: For us and a real real market that is very sensitive as in the engine business in components. Some of those on highway markets and we're seeing that right you saw that on Friday with the heavy duty truck orders for April where customers are waiting to see what happens and and pausing in many cases on placing an order for a new new trucks.
Speaker Change: And so it's a little bit varied in different parts of our business with the big question of what will happen over the next couple of.
Mark Smith: As Mark said, where we're looking at passing on tariff costs, where we can.
Mark Smith: Mitigate those and continuing to.
Mark Smith: Invest in our new products and price for value that we're able to offer three does it serve.
Mark Smith: Now the case that we're seeing a widespread change.
Mark Smith: Short term momentum the world sleep pockets, where it certainly seems to be more evidence.
Mark Smith: That lack of clarity.
Mark Smith: Let us to believe the right thing to do right now.
Mark Smith: Draw guidance cause is constantly tweaking it correctly.
Mark Smith: The latest change in momentum so we didn't do that lightly it's not.
Mark Smith: We're not trying to foreshadow anything other than that the uncertainty is high but it's pretty much varied.
Mark Smith: Hopefully this is going to be a change and we'll be happy to reinstate guidance as quickly as we can.
Speaker Change: Our next question comes from Jerry Revich with Goldman Sachs. Please proceed with your question.
Jerry Revich: Yes, hi, good morning, everyone and Chris Congratulations.
Chris Cleveland: Thanks Jerry.
Speaker Change: <unk> powers.
Speaker Change: I want to ask in power systems really fantastic performance from.
Speaker Change: Basis, and also relative to the analyst day targets sitting here today, obviously got some volatility on costs over the next year, but can you talk about where we should be thinking about margins moving forward.
Speaker Change: For this business is the level of performance that we saw in this quarter.
Speaker Change: Should we be thinking about that as the run rate going forward as we think about what incremental volumes could look like over the next couple of years. Once we do get through this low visibility spot Mark that you spoke to.
Jerry Revich: Yeah first thanks, and good morning, Gerry what I'd say is there are no significant one off items in those results. So those are pure operating results because they're gonna depend to some extent.
Jerry Revich: On the ebbs and flows of demand in individual segments. The only thing I would point to in those results.
Jerry Revich: The aftermarket sales were very high probably higher than we would have anticipated three months ago. So that right now that's the only thing that I would say.
Jerry Revich: Yes.
Jerry Revich: The higher than we expected.
Jerry Revich: Other than that the business has made tremendous improvement in its you know continue to prove quarter on quarter I would say the results were a little bit better than we expected, but mostly down to the strength in aftermarket not the underlying performance of the business. So again as long as the demand trends continue then it will be continuing to push.
Jerry Revich: Yes.
Jerry Revich: Maintain very strong margins and improve where we can.
Speaker Change: Super and then separately you mentioned Jennifer in the prepared remarks was the uncertainty around E.
Speaker Change: <unk> 27 in the scenario that EPA 2007 doesn't move forward can you just talk about Cummins response in that environment, because obviously you folks have.
Speaker Change: A lot of the next engine family and how should we think about potential contract renegotiations.
Speaker Change: 27, plus if we don't get any changeover with with your large customers in on highway.
Speaker Change: Yeah, great. Thanks, Thanks, Gerry R R.
Speaker Change: Current view is that likely we'll see a revision in the rulemaking process.
Speaker Change: Ross asked around greenhouse gas phase three.
Speaker Change: And so those regulations will change from what we have.
Speaker Change: Currently on the books and those go into effect of course, starting in 2030.
Speaker Change: We still anticipate a nox regulation in 2027, and we're actively working with EPA on there their work to look at opportunities to lower cost and impact of those and probably one one likely thing that will be looked at as this requirement for a longer emissions warranty.
Speaker Change: That customers purchase so today customers have the option when they buy a new vehicle to purchase the extended warranty and some of them do in particular in heavy duty, but the regulations as they are today would require everybody.
Speaker Change: To purchase that so we're continuing to to invest in and bringing these new platforms to market with that twenty-seven regulation, it's difficult for me to speculate beyond that on.
Speaker Change: On other changes but of course, if there are further changes well, we'll look at revisiting what we're launching that we intend to continue to.
Speaker Change: Launch is planned for early.
Speaker Change: And that's the same question for all engine manufacturers like the whole industry has been investing in new products at all.
Speaker Change: I wouldn't dream.
The clarity here.
Speaker Change: Our next question comes from Angel Castillo with Morgan Stanley. Please proceed with your question.
Angel Castillo: Hi, good morning, everyone and thanks for taking my question.
Angel Castillo: Listen I know, it's a incredibly a lot of them are a lot of uncertainty out there and kind of the amount of uncertainty and just you know a very wide range of outcomes, but I was wondering if you could perhaps talk a little bit more you know about one specific scenario for <unk>.
Angel Castillo: And you know there is tariffs are already in place today that.
Angel Castillo:
Angel Castillo: A little bit more visibility to so if we just kind of put aside and maybe some of the reciprocal or areas that are paused can you just talk to you know what what is the impact or kind of margin and sales volume that you kind of see based on orders backlog.
Angel Castillo: Japan today for <unk> I, just want to get a better sense of kind of directionally and what that implies very near term.
Angel Castillo: Yeah, So what I'll term there might be let's say more.
Angel Castillo: What I will say is the the impact of tariffs on our financial results in Q1 was immaterial. So those results that you saw which was very strong.
Angel Castillo: Essentially close to zero financial impact.
Angel Castillo: That's going to church right, what's going to change and it's probably it's going to change month to month as we certainly as we start to go through the second quarter.
Angel Castillo: Probably the it's contributing to the biggest degree of uncertainty for the second half of the year.
Angel Castillo: In terms of the demand.
Angel Castillo: <unk> now right.
Angel Castillo: Alright, the visibility to the second half.
Angel Castillo:
Angel Castillo: We're not going we will give the impacts of the tariffs as we go along in our financial results.
Angel Castillo: Needless to say I would say it was going to build over the next few months there will be some lag inevitably between bordering incurring mitigating and recovering all of those costs.
Angel Castillo: So I would say the second half.
Angel Castillo: It we're going to see the fullest impact.
Angel Castillo: Assuming the tariffs remain as they are which is a big assumption hopefully it's not a good assumption, but if we make it as an assumption.
Angel Castillo: Then you're going to start to see the Fuller impact.
Angel Castillo: On consumers of equipment.
Angel Castillo: Right and supply is in the second half of the year. So we will use will go along.
Angel Castillo: There's a lot of work going on a lot of moving parts I know everyone wants to do these calculations.
Angel Castillo: I would just step back and say our broader concern is on the demand.
Economic on the economic environment and the overall level of demand the tariffs will be significant for Cummins from a cost basis based on where they are right now we've got plans to manage through that.
Angel Castillo: Provide a factor.
Angel Castillo: Going forward as we said at the start we've taken steps to mitigate where we incur them, but we'll be looking to pass them on so there'll be some lagging effect.
Understood. That's very helpful and maybe just a little bit of a bigger picture question. Just the power systems, you talked about some of the if I heard correctly. It was some of the aftermarket strength and particularly on the data center side I tend to think about this kind of large backup generators is not really having a lot of aftermarket in the first place.
Angel Castillo: And again in the data center piece.
Angel Castillo: Could you just talk about what youre seeing in terms of what's driving the aftermarket parts demand growth in power systems and to the extent that youre seeing maybe more purchases of aftermarket related to maybe the data centers. What does that tell you about how your assets are being run.
Angel Castillo: Is there some kind of a maybe substitute for prime power wherever there is a little bit more of a shortage or any other factors that might impact how your assets are being used.
Angel Castillo: Yeah I appreciate the question I think what's happening with power systems, which is are you understand why I'm not being critical like the lens is old zoned in on data centers, what you see in aftermarket parts.
Angel Castillo: Is the use of all of the applications mining oil and gas Marine engine power Gen for the broader economy rebuild activity all of those things are contributing and in fact, some price increases in aftermarket are all contributing to the strong revenue is not.
Angel Castillo: Data center driven phenomenon in the moment eventually there will be some parts consumption on this but it will be nothing like it.
Angel Castillo: Mining engine or a frac rig them. So I just wanted to clear that and I would just.
Angel Castillo: Take this opportunity to remind people the performance improvement in the power systems business.
Angel Castillo: Is not driven by fair winds in the data center right. There's been a broad based improvement we're very appreciative of the opportunity to serve the data center customers and that's positive for our business.
Angel Castillo: The power systems leadership team has done a great job in driving our margins in most parts of what they do below the surface. So I just wanted to make sure.
Angel Castillo: We are enthusiastic about data center demand, we're not changing that infuses, but this is a much bigger story is the improvement in the aftermarket really relates to what's going on and use before I hope that helped them.
Angel Castillo: And then.
Angel Castillo: Maybe just one other reminder, when you think about the power systems business in those markets is there's a strong partnership between power systems and our distribution business. So just in power Gen and about half of the revenue shows up in power systems. The other half in the distribution business similar on aftermarket the distribution business plays an important role in the service.
Angel Castillo: It's provided to those customers.
Angel Castillo: Okay.
Speaker Change: Our next question comes from Tim Tim Thein with Raymond James. Please proceed with your question.
Speaker Change: Oh. Thank you. Good morning end market was it was nice and Chris to Cook up these new snazzy slides on its way.
Speaker Change: That's good.
Speaker Change: So they told me I'm very old fashioned.
Speaker Change: Yeah, not Houston you look.
Speaker Change: Just on the Mark on that business.
Speaker Change: Maybe we can dig a bit more on that in the margin performance there in.
Speaker Change: Specifically on you mentioned aftermarket.
Speaker Change: Being a contributor or is it maybe just a comment in terms of.
Speaker Change: Your expectations for parts as we look forward and then I guess related to that on the JV income I know that those technology fees can move around a bit but.
Speaker Change: That was a nice tailwind with it.
Speaker Change: You think about kind of the balance of the year.
Speaker Change: Are you still expecting this is you know not just the engine business, but.
Speaker Change: The JV income to be a headwind to profits for the year is that still the expectation just given some of the uptick in China. Thank you. Those are my two part question engine business, Yes. So engine business margins were up right. We've been of course.
Speaker Change: I was told for improving margins in the current quarter.
Speaker Change: Relative to the prior year.
Speaker Change: Jay Z income as you said from some of the tactics, they're going to be lumpy, probably won't continue at that rate China.
Speaker Change: I haven't been seeing any dramatic changes in demand for some time.
Speaker Change: Yeah.
Speaker Change: Perhaps looking another forward looking it's been pretty steady.
Speaker Change: So, yes, probably a little could be a little bit lower going forwards.
Speaker Change: Coverage or warranty as many people refer to it there's been an enormous success story over multiple years in which the engine business is the biggest driver of that that really helped in the second quarter for the company our product coverage costs were one 9% in the quarter.
Speaker Change: Normally we'd be looking in the.
Speaker Change: Two to two and a half cent range. So that was a real positive so strong parts demand it remains to be we hope.
Speaker Change: Demand will remain resilient as we work through this.
Speaker Change: A period of uncertainty, but we don't know.
Speaker Change: We got some additional pricing, where we launch products in the light duty part of the business. So there are many ingredients.
Speaker Change: For the engine business improvement.
Speaker Change: But of course, the full year. So we can say we are off to a good start we of course, we're expecting like causes some accelerating demand in the second half of the either right now.
Speaker Change: The momentum you've seen the truck orders you don't need me to tell you the momentum going in the wrong way.
Speaker Change: So we'll have to see but overall, it's a good start there are a number of factors some of which may continue some of which.
Speaker Change: They feed.
Speaker Change: <unk> is going to be the big question I think from here.
Speaker Change: And I just want to remind you. If you look at overall really strong performance in Q1, even with softening in North America truck, we remain focused on the key areas. We've been talking to you about including in our last analyst day, even as we manage through uncertainty and tariffs and work to mitigate tariffs L improving gross.
Uh huh.
Speaker Change: In the business, we have growing aftermarket population that allows that after market revenue to continue to grow over time, and we're still investing in it.
Speaker Change: In critical areas, we continue to invest in capacity expansion in the power systems business and these next generation engine platforms. While also monitoring pace of de carbonization of regulation on pacing investment net.
Speaker Change: Other areas and so we continue to be focused on that even as we navigate through this uncertain time.
Speaker Change: Our next question comes from David Raso with Evercore ISI. Please proceed with your question.
David Raso: Hi, Thank you the comment earlier about more worried about demand destruction. Just curious very understandable view just from a from a broad macro view I can I can appreciate that but I'm just curious.
Speaker Change: Or are these comments based off of.
Speaker Change: Already communicating maybe what your cost increases would need to be in and pushed back from your your truck customers or is it even the end user of the truck, saying hey at that price increase will cancel backlog I'm. Just curious how much is this a ready sort of floated price increase that would be needed to cover your cost that's getting that react.
Speaker Change: Or again is it more just abroad and again understandable just a broad macro view of course, these tariffs and her with yes, yes, David what I'd say, it's really it's really uncertainty and a broader thing I was at Act Expo. We go today I talked to many both OEM and fleet customers. They just don't know right. There just waiting because there's a huge amount of uncertainty on what's going to happen does.
Speaker Change: Economically.
Speaker Change: And with with with tariffs and so that's that's really yet the wait and see.
And that's what I know you don't want to go into a real exact quantification, but just to level set everybody can you help us with your greatest exposures to costs be it you know six seven.
Speaker Change: Percent of global Cogs as you know.
Speaker Change: Mexico, and China, something like that so we can quantify and then at the same time hopefully if the tariffs come down quantify in a positive way and also what mitigating factors have already been put in place or or at least are imminent based off the tariffs today. Thank you yeah, I'm, just going to be honest and say I'm not going to answer all of those questions for <unk>.
Speaker Change: The reasons I said earlier, what I can say is.
Speaker Change: Our in our U S on highway engines months.
Speaker Change: Our MCA.
Speaker Change: Compliant right. So in the terms of the operations that we do for our on highway markets, which is.
Speaker Change: The largest proportion of our business where in many markets, but that's the largest propulsion we are MCA component for all of those large engine plants.
Speaker Change:
Speaker Change: It's really.
Speaker Change: What happens to you from the tariffs, yes, there's some exposure to China, yes, there's some exposure to Mexico, yes, there's some exposure to some of the other countries as well.
Speaker Change: Well, we're going to quantify that on a quarter by quarter basis, working through all of that with suppliers with customers and will provide an update as we go forwards.
Speaker Change: Our next question comes from Rob Wertheimer with Melius Research. Please proceed with your question.
Rob Wertheimer: Hi, good morning.
Rob Wertheimer: Was a remarkable quarter on margin a lot of fronts and I understand the comments within power system on all the work you've done Nonetheless, I do you have a data center question you mentioned China.
Rob Wertheimer: Wonder if you'd be willing to sort of talk about for one.
Rob Wertheimer: 100% sure how you serve data centers there whether it's.
Rob Wertheimer: Director through JV, and two I wonder if you could provide any context or color around size geographically in the data center market or momentum et cetera is this largely a U S phenomenon or are there other areas that are.
Rob Wertheimer: Importantly, big Thank you.
Speaker Change: Oh well.
Speaker Change: The trends that are driving data center growth, our global travel right, increasing use of AI data storage going into cloud digitization and so those underlying trends are global.
Speaker Change: And our market you know, we have global markets, but in particular U S and China have been areas, where we've seen a lot of growth and likely serve the U S market.
Speaker Change: Through our U S plants, we primarily serve the China market two plants in China, including joint venture plants that we have there.
Yes, just to just to add on that Rob the primary backup Gen sets in China are run with a 60 liter engines, which are made at <unk>.
Speaker Change: Come in Chongqing engine plant there so.
Speaker Change: That's the primary source.
Speaker Change: And like all of the major markets. We are one of the very leading players where its a very select group of companies.
Relied upon in this industry by bucket.
Speaker Change: Okay.
Kyle: Our next question comes from Kyle <unk> with Citigroup. Please proceed with your question.
Speaker Change: Thank you Jan I wanted to touch on the comment you made just about the power Gen business and you just mentioned about cancellations and push outs and being able to reallocate those orders.
Kyle: Or is that more of a hypothetical or is that something that you're seeing today.
Kyle: We're not seeing significant changes, but you know it's not atypical for some of that to happen, which we which we have seen in and as I said, we have when that happens I expect that we continue to be able to reallocate we have a lot of customers that would like us to deliver some of these products sooner.
Kyle: And then it's currently scheduled and so.
Kyle: Wouldn't describe it as a broad trend, but a limited one that we're seeing.
Okay got it it's the business is the business with the least visibility to any changing economic sentiment overall so far.
Kyle: Yeah.
Kyle: Right makes sense and then could you guys just touch on a little bit any sort of tariff mitigation actions you've taken already and then just any any mitigation steps you're exploring.
And can you remind us is there any sort of tariff pass through baked into any of your contract I would also be helpful. Thank you.
Kyle: Yes so.
Kyle: Of course mitigating when there's a high degree of uncertainty is a little bit tricky, because we're waiting to have a little bit more clarity on what tariffs will.
Kyle: So over time, what I would say as we have done some mitigation through inventory strategies, where we anticipated we would see higher tariffs and we have dual sourcing and some of our supply base. So that you know there's some no regrets moves that we're taking now and then as we continue to have more clarity on.
Kyle: Well, what tariffs will look like we may make changes in.
Kyle: And the dual sourcing there's places where there's you know that there are other options, but it will take time to develop I'll turn it up so it's really a bit of a next but as you can imagine we have an extensive strategy.
Kyle: And work underway looking at options in determining when we when we actually announced.
Kyle: And as we said we're working through all of this which.
Kyle: I think if you know and that this will be a hard to appreciate how much work. It is the supply chain.
Kyle: Groups that we're working through all of that with supply as some customers right now so we're not going to comment anymore.
Speaker Change: Our next question comes from Tami Zakaria with Jpmorgan. Please proceed with your question.
Tami Zakaria: Hey, good morning. Thank you. So much my first question is on price cost are you able to share what price cost was in in the first quarter.
Tami Zakaria: Yes, so we had about.
Tami Zakaria: About to persuade them to almost exactly 2% gross margin improvement.
Tami Zakaria:
Tami Zakaria: Year over year of which we had about 3% of price cost improvement and 1% of negative volume impacts.
Tami Zakaria: This cost impact there is quite a lot between segment and you can figure that out from some of the improvements we've driven over time.
Cost includes many things, including the improved warranty cost over time, but that's that's the macro picture.
Tami Zakaria: Understood. That's very helpful. And then the second question is I understand Cummins engines are primarily made in the U S for the U S, which is great news long time, given all that's going on.
Tami Zakaria: But for the distribution and components segments are those primarily made in the U S as well or what's the mix of imports that serve the market for those two segments.
Tami Zakaria: Well.
Tami Zakaria: The distribution business is really just reselling parts from the rest of the company. So it depends on the different applications.
Tami Zakaria: Components.
Tami Zakaria: Got manufacturing facilities in the after treatment systems in Wisconsin, Turbocharges, our made in Charleston, but it's the supply base in some of the suppliers that we use to bring more of that exposure. If we want to use that would.
Tami Zakaria: So that's the that's where the complexity comes in from the tariffs it's not.
Tami Zakaria: I mean, that's.
Tami Zakaria: That's what I would say.
Speaker Change: Our next question comes from Steven Fisher with UBS. Please proceed with your question.
Steven Fisher: Thanks, good morning, and impressive quarter.
Steven Fisher: I think you said that you are on track with the timing of your product launches can you just clarify kind of some of the timing of those launches that you had in mind.
Steven Fisher: Particularly around the 2027 engine and how the outcome of these Nox rules may impact the timing there.
Steven Fisher: Yeah as I said right now we have not changed our launch plans on any of those.
Steven Fisher: <unk>, we are planning to launch the new 10 later and the B 7.2.
Steven Fisher: In 27 as those regulations go in place.
Steven Fisher: And we plan to launch the X 15 diesel version in the 26 timeframe will have a kind of a split strategy across the year with the current X 15, and the new one remember we already have launch the natural gas variant of that new platform and the diesel version, that's going to bring significant fuel efficiency improvement so valued.
Steven Fisher: The customer that we believe is worth bringing into the market early so that's our plan.
Speaker Change: Terrific and then just in terms of the guidance I'm curious kind of what do you think you need to see in order to actually.
Steven Fisher: Reinstate the guidance is it actual.
Steven Fisher: <unk> signed trade agreements or what degree of uncertainty do you think you need to be able to bring that guidance back.
Steven Fisher: What I would say is a few more data points would be helpful. Right. I mean, the April truckload as I would describe as disappointing.
Steven Fisher: So is that is.
Steven Fisher: That something that can move back to a normal trend level.
Steven Fisher: What do we see I mean, there's tariffs are designed to be disruptive Detroit right I mean, thats, what they're designed for them.
Steven Fisher: We've seen that.
Steven Fisher: Significant slowing certainly.
Steven Fisher: Activity into the West coast.
Steven Fisher: Directly impacts ultimately.
Steven Fisher: Road freight here in the U S and then what.
Steven Fisher: Even as things hopefully stabilize improve with Coles, the slowing of the global supply chain, that's what happens things accumulate ports and then.
Steven Fisher: It just takes a long time to write.
Steven Fisher: That momentum and I think if you're not in the industry that may be underappreciated.
Steven Fisher: And so.
Steven Fisher: Good.
Steven Fisher: Last time, the uncertainties in place.
Steven Fisher:
Steven Fisher: Then more quickly I think we will have.
Steven Fisher: We have greater clarity and confidence in the longer.
Steven Fisher: It's in place then it would just make it more difficult ultimately you know, we're not going to continue forever without guns, but we will get a sense of.
Steven Fisher: What where.
Steven Fisher: So it uses of capital goods, whether their confidence is shaken.
Steven Fisher: Or whether it's a temporary pools when we get back home, we actually start to see more.
Steven Fisher: Economic activity right right now there's not.
Steven Fisher: Okay.
Steven Fisher: Trying to comment on the whole of the global economy or even the whole of the U S. We're just commenting on the slices that we see.
Steven Fisher: Certainties gone to them. So we won't see a few more data points on the broader economy specific.
Yes, certainly to on highway.
Steven Fisher: Ranking.
Steven Fisher: But those would be helpful.
Steven Fisher: Okay.
Speaker Change: Our next question comes from Chad Dillard with Bernstein. Please proceed with your question.
Chad Dillard: Hey, good morning, guys. So totally appreciate that.
Chad Dillard: Difficult to quantify the impact of tariffs, but I was hoping you can lay out a timeline for that impact on the P&L also you know how much component inventory did you pull forward when does it run out.
Chad Dillard: When will you need to raise price to offset the costs and then if you could share.
Chad Dillard: The percentage of U S.
Chad Dillard: <unk> that are important.
Chad Dillard:
Chad Dillard: Yes way too many things to give because there's way too many variables what I'll say is.
Chad Dillard: No impact really in the first quarter.
Chad Dillard: Given the pause in some of the tenants and the escalation and some mitigation actions, we're going to start to see.
Chad Dillard: Creeping in growing impact even yet as the second quarter unfolds here does inevitably going to be some lags between.
Chad Dillard: What we see what actually what we anticipate what actually happens and then all the work that's going on with customers and suppliers. So that's the reason why but we will when we get to the second quarter results and going forward <unk> told you what the impact is.
Chad Dillard: Hopefully we've got.
Chad Dillard: More clarity.
Chad Dillard: Hmm.
Chad Dillard: And then but we will certainly tell you what the impact was in the second quarter and what we think is going to happen to that run rate as we go through the rest of it for you, but I think what nobody has absolute certainty on the direct flow of every single widget.
Chad Dillard: Right through the supply chain, so that's still level.
Chad Dillard: And we're not alone right.
The only manufacturer.
Chad Dillard: Engines powertrains in power systems in them.
Chad Dillard: And our markets.
Speaker Change: Got it okay. So just one more so just on section 232, assuming that does eventually get applied.
Speaker Change: That impact your relative positioning and you know from your perspective like what would you consider it.
Speaker Change: Good bad or neutral versus the status quo of what we are right now.
Speaker Change: So for those that maybe haven't been paying attention maybe evolved and paying attention to three to the U S. Commerce Department launched in Q3 two investigation.
Speaker Change: Two weeks ago on foreign production of medium and heavy duty trucks and parts.
And so that.
Speaker Change: Has the potential to result in additional tariffs on trucks and parts that come from outside the U S of course, it Didnt announcement of we're in the middle of the public comment period.
Speaker Change: We will be providing comments of course as a part of that and just emphasizing that.
Speaker Change: Our U S manufacturing that we make in and advocating for exemptions on imports to the U S manufacturing to a robust exception processes and ensuring that we.
Speaker Change: It looks like the impact that any tariffs could have on the underlying U S economy. So stay tuned there, but that's the potential with 232 investigation.
Speaker Change: Our next question is from Jeff Kaufman with vertical Research partners. Please proceed with your question.
Jeff Kaufman: Thank you and thank you for sliding in here and Chris It's been great working with you next look forward to getting to know you.
Mark Smith: Mark Thank you for all the detail.
Speaker Change: You were able to give I have one on currency.
Given that so much of your business occurs outside the U S.
Speaker Change: Was currency translation a good guy.
Speaker Change: Bad Guy can you give us an idea of magnitude and then you explain the price increase on the light duty engines, well with the new product. That's Atlantis can we talk a little bit more about the ASP increase on the power system side was that also new products product mix larger products you did mentioned aftermarket.
Speaker Change: Just kind of understand what's driving that increase as well.
Speaker Change: Sure you caught my attention to the pricing repeat the first part southern country based currency.
Speaker Change: Yes, yes, courtesy currency, yes, so that the.
The answer is.
Speaker Change: Generally if we could choose and we didn't deploy hedging techniques than a weaker dollar.
Speaker Change: Except against the pound would be a perfect choice of combinations, but we do.
Speaker Change: Deployed we have natural hedges from the way well globally organized and then we do use some.
Speaker Change: Very simple then the derivatives. So the net impact is no. If you ask any individual business leader distribution in particular.
Speaker Change: More exposed.
Speaker Change: To a strengthening dollar.
Speaker Change:
Speaker Change: But the net result is very very modest stood up picking up like less than $10 million. When you look at all of the impacts of hedges and that's generally been the case.
Speaker Change: For a long time shop shifts, where we get cold is when there's like.
Speaker Change: Capital constraints and currency revaluations like Nigeria, Argentina is a common topic of conversation about what to do there.
Speaker Change: But net net just for the company.
Speaker Change: We're fortunate that we're close to neutral.
Speaker Change: Yeah and on your second question, Jeff on the ASP for the power systems power generation product.
Speaker Change: It's a tough one to gauge that it really kind of a bit of a red herring because the size is so different across that portfolio you could we have lower demand in the small stuff.
Speaker Change: Rvs are powered or backup gen sets.
Speaker Change: At home versus <unk>.
Speaker Change: Strong growth in data center and that can flex quite a bit and it's usually not a really great indicator, but we continue to see strength.
Speaker Change: I guess through the first quarter in that big stuff.
Speaker Change: I was at a higher ASP.
Speaker Change: Yeah.
Speaker Change: We have reached the end of the question and answer session I'd now like to turn the call back over to Chris Caldwell for closing comments.
Chris Caldwell: Great. Thank you everybody for joining and thanks, it's been a pleasure working with you all over the last couple of years that concludes our teleconference for the day.
Chris Caldwell: He will be available as an investor relations team for the remainder of the day. It should you have any follow ups. Thank you.
Chris Caldwell: Yeah.
Speaker Change: This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.