The operator welcomes participants to the Q1 2024 Cummins Inc. Earnings Conference Call and introduces the speakers, Chris Clulow, Jennifer Rumsey, and Mark Smith. Clulow mentions that some of the information shared will be forward-looking statements and refers to the company's website for more information. He also mentions that they will be discussing non-GAAP financial measures and directs listeners to the company's website for the reconciliation of those measures. The press release, financial statements, and webcast presentation are available on the company's website.

In the second paragraph, Jennifer Rumsey, the Chair and CEO of Cummins, discusses the company's first quarter financial results and sales trends by region. She also highlights major events, such as the successful separation of the Filtration business and the introduction of the Cummins HELM platform. The separation resulted in a reduction of common shares and the company also announced the launch of a new diesel engine and four new generator sets.

The company has introduced new models specifically designed for critical applications and there has been a high demand for these products. In the first quarter of 2024, the company's revenues decreased by 1%, but EBITDA increased due to a gain from divestiture and restructuring expenses. Excluding these factors, EBITDA percentage decreased slightly due to lower volumes and higher research and development expenses. Gross margin improved due to pricing benefits. Revenues in North America remained flat compared to the previous year.

In the first quarter of 2024, the industry production of heavy-duty trucks and medium-duty trucks saw a decrease and increase, respectively. The company's unit sales for both types of trucks also saw a decline and increase, respectively. The company also shipped fewer engines to Stellantis compared to the previous year. North America power generation revenues increased, while international revenues decreased slightly. In China, revenues decreased due to weaker domestic volumes, but there was an increase in demand for medium and heavy-duty trucks. The light-duty market in China saw a small increase, while excavator demand decreased. The company's units sold in China increased due to QSM15 penetration and export growth. In India, revenues increased slightly compared to the previous year.

In the first quarter, industry truck production and shipments decreased, while Power Generation revenues increased. The company's outlook for 2024 has improved, with total revenue expected to be down 2% to 5%. Heavy-duty truck demand in North America is projected to increase, while medium-duty truck demand is expected to remain flat. In China, total revenue is projected to increase by 3%, with a range of down 5% to up 10% in heavy- and medium-duty truck demand and down 5% to up 5% in light-duty truck demand. Replacement demand will be the main driver, but may be impacted by a sluggish economy and slower export demand.

The market share shifts seen in the short-term are expected to balance out over the rest of the year. In India, revenue is projected to increase by 9% due to strong power generation and on-highway demand. Truck demand is expected to be flat to up 5%, while global construction is projected to be down 10% to flat. High horsepower markets are expected to remain strong, and the power generation market is expected to see an increase of 10% to 15%. Mining engine sales are expected to be down 5% to up 5%, while oil and gas engine demand is expected to decrease by 40% to 50%. Aftermarket sales are expected to be down 5% to up 5%, and Accelera is expected to see sales of $450 million to $500 million. Overall, the company is maintaining its sales growth outlook of down 2% to 5% for the year.

The company has revised its forecast for EBITDA and is now expecting stronger profitability due to the North America heavy-duty truck and power generation markets. They are also taking steps to reduce costs and optimize their business. In the first quarter, they returned cash to shareholders and reduced the overall share count. The company is impressed with the commitment of their employees and leaders and is looking forward to discussing their long-term strategy at an upcoming Analyst Day. The first quarter revenues were $8.4 billion, a 1% decline from the previous year due to the separation of Atmus.

The company's underlying revenues increased in North America and Latin America, but were offset by weaker demand in China and Europe. EBITDA was $2.6 billion or 30.6% of sales for the quarter, but this included a one-time gain on the divestiture of Atmus and restructuring expenses. Excluding these, EBITDA was $1.3 billion or 15.5% of sales, lower than the previous year due to investments in new products and lower sales volumes. Gross margin improved due to favorable pricing and operational improvements, while selling, administrative, and research expenses increased due to higher research costs. Joint venture income increased slightly, but other income decreased significantly.

In the first quarter, the company saw a decrease in other income due to negative impact of foreign currency revaluation and lower gains on investments. Interest expense increased due to higher outstanding borrowings. The effective tax rate was lower due to a tax-free gain from the separation of Atmus. Net earnings for the quarter were $2 billion, including a gain from the separation of Atmus and restructuring expenses. Operating cash flow decreased compared to the previous year. The Components segment saw a decrease in revenue but an increase in EBITDA margins, while the Engine segment saw a 2% decrease in revenue. The company has updated its guidance for 2024, taking into account the separation of Atmus.

The company's EBITDA decreased from the previous year due to lower volumes and higher research costs, but is expected to improve in 2024. Revenues in the Engine business are projected to be down 5% to flat, while the Distribution segment saw a 5% increase in revenues. Power Systems segment revenues increased by 3% and EBITDA improved due to higher volumes and improved pricing. Accelera revenues increased by 9%, but the company still experienced an EBITDA loss due to investments for future growth. Overall, the company's guidance for 2024 remains unchanged.

The company expects revenues to be between $450 million and $500 million and net losses to be between $400 million and $433 million, consistent with previous guidance. However, due to strong performance in the first quarter, the company is adjusting its full year guidance, projecting a 2-5% decrease in consolidated revenues and a 14.5-15.5% EBITDA margin. The effective tax rate is expected to be 24% and capital investments will remain unchanged at $1.2-1.3 billion. Despite anticipated market moderation in the second half of 2024, the company is confident in its ability to navigate economic cyclicality and continue delivering strong financial performance. The company's priorities for capital allocation in 2024 include reinvesting for growth, increasing the dividend, and reducing debt.

The speaker is responding to a question about the company's Power Gen business. They mention that the business is projected to grow by 10-15% due to strong demand from data centers. The company is currently sold out on their 95-liter engine and has launched a new product to meet demand. They are also considering increasing capacity for the 95-liter engine in the future.

Mark Smith, the CEO of Cummins, responded to a question about the company's plans to increase capacity for their 95-liter engine. He mentioned that there were a lot of moving parts with the separation of Atmus, but overall, the company's performance was in line with their expectations. Smith also noted that they saw a pullback in parts sales, particularly in industrial off-highway applications, which affected their distribution business margins. However, they are expecting distribution margins to improve going forward and are looking for ways to streamline their organization.

In the third quarter, the company expects a decline in heavy-duty truck production, which may affect the engine business and components. However, they anticipate no significant impact on power systems and distribution. Going forward, there is positive momentum for power systems and distribution, and the company is confident that a temporary mix shift in lower parts will not affect their reliability. With the new regulations in 2027, which require longer emissions warranty for heavy-duty vehicles, the company sees an opportunity for increased market share in engine parts due to the embedded warranty in pricing.

The speaker is asking about the company's upcoming meeting on May 16 and what can be expected in terms of margins and operating leverage. They note that the power gen margin has increased but overall, the increase in earnings is not significant compared to the increase in sales. They ask for more information on what can be expected at the meeting.

Jennifer Rumsey discusses the upcoming Analyst Day meeting and mentions that they will be talking about overall strategy, revenue, and margin expectations. David Raso asks about the decrease in JV income for the year, and Mark Smith explains that it is due to lower tech fees from the joint venture, primarily in the engine business. Chris Clulow adds that there were some truck OEM build increases in Q1, but they are still waiting for clearer signs of momentum in China, the biggest driver of earnings for the joint venture.

The company has built a plan to launch a battery joint venture later this year, which will result in some losses in the second half. This is included in their Accelera project. They have received final regulatory approval for the joint venture and expect it to start generating revenue in Q2. In the Power Generation segment, they have raised their guidance to 10-15% growth compared to the previous 5-10%. This is due to a long order book, improved pricing leverage, and efficiency improvements. The company has also designed new products, such as the X15 diesel engine, to comply with emissions regulations.

The speaker is asked about the expected guardrails around pricing and margin improvement, and they respond by discussing the goal of delivering incremental value to customers and increasing margin through added content and warranty dynamics. They also mention that specific numbers have not yet been shared for pricing. Another question is asked about the margin guide, and the speaker explains that the full year guide has been raised by 10 basis points due to expected improvements in Engines and Power Systems, possibly driven by higher volumes, cost savings, and price cost.

The speaker discusses the company's competitive positioning in the 2027 EPA regulations and the investments they are making in new engine platforms. They believe their scale and market-leading solutions will give them an advantage. There may be a dynamic in the 2025 and 2026 period as customers anticipate the regulation change, but they are confident in their position for 2027.

The speaker discusses the company's strengthening position in medium duty and their upcoming 15-liter natural gas engine. They also mention their focus on developing and launching new high-efficiency engines. The speaker then addresses the EPA's Phase 3 greenhouse gas regulation and notes that it recognizes hydrogen engines as a zero-emission solution, creating a space for hydrogen fuel cells in the market. However, the adoption rate for hydrogen fuel cells is expected to take some time.

The Environmental Protection Agency has committed to streamlining the certification process for hybrid powertrains, which may be a more viable solution due to challenges with infrastructure availability. While there has been an increase in battery electric powertrains, fuel cells are still at a low level. The company has received regulatory approval for their joint venture and will begin preparing for supply chain and building the plant. The investment will be phased and production is expected to start in 2027. The partners will share the investment and have a design that allows for scaling up production based on market demand. The plant will produce LFP cells specifically for the commercial vehicle market and can utilize incentives to promote adoption in that market.

The operator introduces Jamie Cook from Truist Securities who has questions about Cummins' upcoming Analyst Day and the potential for improved margins. Cook also asks about the visibility of backlog in the engine and Power Systems segments. Mark Smith and Jennifer Rumsey hint at addressing these topics during the Analyst Day, with Rumsey mentioning continued solid demand in the heavy-duty market and anticipation of weakening in the second half.

The company is optimistic about its Power Gen and medium-duty and vocational on-highway markets, but is closely monitoring the heavy-duty truckload fleet market, which is expected to soften before an uptick in the cycle. The company's baseline assumption is that the downturn in 2024 will not be as steep as previously feared, but it is unclear if this is related to a potential prebuy in 2026. The company is monitoring production rates, backlog, and spot rates in the market to inform its outlook.

The speaker is discussing the supply chain dynamics that have made the current cycle unpredictable. They mention that the cycle has held up longer than expected, but they still anticipate some softening in the second half. They also mention that they have increased their R&D investments for new engine platforms and the Accelera business, which will launch in 2026 and 2027. The call is now concluded, but the Investor Relations team is available for questions. The speaker looks forward to meeting attendees in person in a couple of weeks.

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This summary was generated with AI and may contain some inaccuracies.