Cummins Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Cummins, Inc. First Quarter 2020 Earnings Release Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to first start and one on your telephone. We ask that you please limit yourself to one question and one follow-up. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker today, Shane Hopkins, Executive Director of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the first quarter of 2020. Participating with me today are Chairman and Chief Executive Officer Tom Weinberger, our Chief Financial Officer, Mark Smith, and our President and Chief Operating Officer, Tony Satterthwaite. We will all be available for your questions at the end of the teleconference. Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs, and intentions and strategies regarding the future. Our actual future results could differ materially from those projected in such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the forward-looking disclosure statement in the slide deck and our filings with the SEC, particularly the risk factor section of our most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During the course of this call, we will be discussing certain non-GAAP financial measures, and we will refer you to our website for the reconciliation of those measures to get financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website at www.cummins.com under the heading of Investors in Media. With that out of the way, we'll begin with our Chairman and CEO, Tom Leinbarger.

Thank you, James. Good morning, everybody. Thank you for being with us today. Today actually marks the first for us since Mark, Tony, James, and I are all doing this call from our respective homes, and I expect many of you are listening from your homes as well. I'm hopeful the technology will work well, but if we lose the line, the others are ready to step up. I want to start today by providing some initial comments on the environment in which we are operating and then move to our first quarter results. Amidst the unprecedented COVID-19 pandemic, the health and safety of our employees and the communities in which we operate is our first priority. Wherever possible, our employees are now working from home. And for those frontline workers who are keeping our plants in operation to support our customers and critical supply chains, we've introduced many additional safety measures in line with government and health authority guidelines. Across the communities where we operate, we are working through the Cummins Foundation to support families and children impacted by the COVID crisis. There were many challenges in these communities before COVID. There are many more now. We've also partnered with DuPont and 3M to address current shortages of personal protective equipment, particularly N95 respirator masks and powered air purifying respirators using our filtration technology. We are also deeply committed to meeting our customer needs. Our teams are working hard, leveraging both our internal capabilities and the capabilities of our global network of partners and suppliers to support our customers despite major challenges in the supply chain. During our 100-year history, we've encountered many unforeseen crises, and I'm confident that we will successfully navigate this one and emerge stronger than ever. Cummins enters this period of uncertainty in a position of strength, with a very strong balance sheet, leading products, technology, diversity, and strong relationships with the leading customers in our industry. We have also invested in sustained face-to-face leadership development with our top 200 leaders for over 10 years. providing us with a group of capable, collaborative, and resilient leaders who are ready to lead in this crisis. We enter the period from a position of financial strength as well, with $2 billion of cash in marketable securities and $1.9 billion of committed credit facilities at the end of March. This strength is due to the successful execution of our strategy over a number of years and more recent steps we took to prepare for a downturn in 2020. During the second half of 2019, we initiated a number of actions to reduce costs, addressing underperforming parts of our business and to drive performance improvement. These actions included the restructuring actions we announced in November. Taken together, these actions will save between $250 to $300 million in 2020 and were critical in supporting our strong performance this quarter, despite a 17% revenue decline. We have continued to prioritize investments in new products and technologies that will help us emerge stronger as we have in prior global downturns. As we entered March and the impact of COVID-19 expanded across the globe, we moved quickly to take additional actions to lower costs. In mid-April, we implemented temporary salary reductions that will save approximately $30 million per month. We have also lowered our projected capital outlays by 25% compared to 2019, and reduce discretionary spending across the company. These actions will help us maintain our strong financial position, while positioning us to deliver strong profitable growth when demand returns. While most of our manufacturing sites around the world are currently operating, they are doing so at reduced production levels, both due to changes in facilities, line layouts, and work practices to support social distancing and employee safety, and because customer demand is weaker in almost all markets. We are unable to project the full impact that the pandemic and the secondary effects will have on our demand for the remainder of the year, but we are planning for weak levels of demand for some time. Now I'll move to a summary of our strong first quarter results and a discussion of our major end markets. Mark will then take you through more details of our first quarter financial performance and update you on the balance sheet and liquidity. Revenues for the first quarter of 2020 were $5 billion, a decrease of 17% compared to the first quarter of 2019. EBITDA was $846 million, or 16.9%, compared to $1 billion, or 17.2% a year ago. The impact of lower volumes was partially offset by the benefits of restructuring, reduced warranty costs, material cost reductions, and higher joint venture incomes. The increase in joint venture income was primarily due to recently passed tax legislation in India and technology fees associated with the development of new products to meet lower emission standards. Engine business revenues declined by 19% in the first quarter compared to a year ago. Lower production in North American truck markets, along with weaker demand from global construction customers, drove most of the revenue decline. EBITDA margin for the quarter was 16.9%. compared to 16.5% for the same period in 2019. Cost savings related to restructuring activities and increased joint venture income more than offset the impact of lower volumes. Sales for our distribution segment declined by 9% year-over-year, with lower revenues in domestic and international markets. First quarter EBITDA was $158 million, or 8.7% of sales compared to 8.5% in the first quarter of 2019. EBITDA margins increased as we began to realize the benefits of our North American transformation work, as well as the impact of lower variable compensation expenses and higher joint venture income. First quarter revenues for the component segment declined 19%. Sales in North America declined 24%, driven by lower truck build rates, while revenues in international markets declined by 12%, as a result of lower truck demand in Europe and India. EBITDA for the first quarter was $279 million, or 18.6%, compared to 17.5% in the same quarter a year ago. EBITDA percent increased as lower warranty costs, higher joint venture income, and the benefits from restructuring offset the impact of lower volumes. Investment in research and development decreased by 9% from elevated levels a year ago, as our Global 6 products are now in full production in India, which transitioned to the new BF6 emissions regulations in April. And Global 6 products are also ramping up in China, where a phased adoption to the new regulations should be complete by next July. Power system sales in the first quarter declined 18% year over year. Industrial sales declined 30%, driven by continued weakness in oil and gas and mining markets. Power generation sales decreased by 8%. with lower revenues in both North America and international markets, with particular weakness in India, where the economy has slowed in recent quarters. EBITDA in the first quarter was 8.7%, compared to 12.8% a year ago. The impact of lower volumes, combined with lower joint venture income in China, more than offset the impact of cost reduction actions. In the new power business, EBITDA was a loss of $43 million in the first quarter, in line with our expectations. Costs associated with the development of new products and the expected slow ramp of new technology adoption are the two primary contributors to the EBITDA losses. Now I'll comment on some of our key markets, starting with North America, and then I'll cover some of our largest international markets. Our first quarter revenues in North America declined 16% to $3.1 billion. This reduction was driven by our lower industry build rates of medium and heavy-duty trucks, continued weakness in engine sales to construction and oil and gas markets, and lower demand for power generation equipment. Industry production costs declined 32% in the first quarter compared to a year ago, and 10% sequentially, with OEMs reducing build rates due to continued low order rates and shrinking industry backlogs. While OEM production was down 10% sequentially, our shipments of engines were flat. Our new X-15 efficiency series engine, which meets 2021 greenhouse gas standards and provides improved fuel economy, is being well received by customers. We also look forward to launching the low-weight X-12 platform on the Freightliner Cascadia day and sleeper cab chassis, which customers can order today for delivery later this year. Production of medium-duty trucks decreased by 38% in the first quarter and was impacted by OEM shutdowns at the end of March. We continue to maintain our clear market share leadership in the medium-duty truck market and will start supplying medium-duty truck engines to MAC for the first time later this year. Total shipments to our North American pickup truck customers decreased 1% compared to a year ago and were impacted by an unplanned OEM shutdown in the last week of March. In domestic off-highway markets, engine sales for construction equipment decreased by 39% from the near record levels experienced a year ago, but were consistent with levels of demand in the second half of 2019. Revenues for power generation equipment fell by 9%, with lower demand in RV and backup power markets. Demand for engines and oil and gas markets declined by 81% due to a reduction in equipment purchases of new fracking equipment. Now I will turn to our major international markets. International revenues decreased by 17% in the first quarter of 2020 compared to a year ago. First quarter revenues in China, including joint ventures, were $1.1 billion, a decrease of 19%, and were significantly impacted by COVID-19 related shutdown. The pandemic started to impact industry production of equipment in early February, and the majority of our facility experienced shutdowns of four to six weeks in length. All of our manufacturing facilities in China were fully operational by the end of the first quarter, and we have experienced high levels of demand since reopening, as OEMs prepare for a rebound in demand. In the first quarter, industry demand for medium and heavy-duty trucks in China decreased by 17% compared to a year ago. Our market share was 12.4%, up slightly from the first quarter of 2019. Our share was negatively impacted by lower sales of trucks by our partner Dongfeng, which is headquartered in Hubei Province. Industry sales of light-duty trucks declined by 32% in the first quarter, and our market share was 8% flat with last year. First quarter demand for excavators in China decreased 8% from a year ago. Our market share was 15% compared to 14% last year, driven by the strong performance of our domestic customers. While demand was lower compared to a year ago, it remains at near record levels. Demand for power generation in China declined by 12% in the first quarter. Sales were negatively impacted by COVID-19-related production and transportation disruptions. Demand from data center customers in China remains robust. First quarter revenues in India, including joint ventures, were $318 million. a reduction of 32% from the first quarter a year ago due to lower industry truck demand and weakness in power generation and construction markets. Industry truck sales in India decreased 57% compared to a very strong first quarter last year, while construction and power generation sales declined by more than 30%. Demand remains low in most end markets due to continued weak economic conditions and reduced access to credit. In addition, truck production was negatively impacted in the first quarter as a result of OEMs reducing inventory in preparation for a transition to the new BS6 emission standards. The transition to BS6 standards occurred on April 1st as scheduled, but the Indian government is allowing industry participants to sell BS4 trucks that were produced before April 1st for a limited period in recognition of the disruption caused by the national shutdown aimed at containing the coronavirus. The Indian government implemented some of the most stringent lockdown procedures in the world in response to COVID-19, which resulted in a closure of all of our manufacturing facilities in late March. Starting last week, a phased approach of reopening our facilities began with strict limitations on the number of employees allowed to return to work. Outside of China and India, we saw year-over-year revenue declines of 21% in Europe and 18% in Latin America, primarily due to lower truck production. Global sales of mining engines declined 48% compared to a year ago. Estimates for 2020 capital expenditures by miners continue to decline, with weaknesses especially pronounced in coal markets. Coal prices are now 50% below their late 2018 peak and near to trough prices reached in 2016. In China, the government-backed Coal Transportation and Distribution Association recently called for domestic coal producers to cut production to support prices. As you know, the headlines today are filled with negative reports about economic activity and rising unemployment in many countries. Data more specific to many of our end markets is not encouraging, and we are prepared for weak levels of demand until global economies stabilize and start to recover. Our leadership team is spending a lot of time planning ahead running a number of scenarios and responses, including identifying opportunities to strengthen our competitive position during this time. And, of course, we will continue to invest in the new products and technologies that are key to our future success. We were able to plan ahead with confidence because of the strong position we started in. Today, we have the highest credit ratings in our industry, fully funded pension plans, and robust liquidity. Tony, Mark, and I and all of our business unit leaders and many other members of my staff have been through several downturns while at Cummins, and all were in senior leadership positions during the 2008 financial crisis. While this pandemic is clearly different than 2008, we have all experienced leading through challenging times and understand the importance of paying close attention to economic conditions, preparing for the worst, and taking thoughtful and decisive actions in periods of uncertainty. And to be clear, our actions will not be aimed not only at reducing costs, but also continuing investment in our products and capabilities that will advance our competitive advantage. When demand returns, which it will, Cummins will be in a strong position to deliver the products and services that will drive our customer success and deliver even stronger financial performance for shareholders. Now let me turn it over to Mark.