Cummins Inc.

Greetings and welcome to the Cummins Second Quarter 2020 Earnings Conference Call. At this time, all participants are on listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star zero on your telephone keypad. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. James Hopkins, Executive Director of Investor Relations. Thank you, sir. You may begin.

Thank you. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the second quarter of 2020. Participating with me today are our Chairman and Chief Executive Officer, Tom Leinbarger, 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 on 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 statements in 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. During the course of the 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 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 Weinberger.

Thank you, James, and good morning, everybody. I will begin by providing some initial comments on our operating environment and then move to our second quarter results. Our company faced unprecedented volatility in demand this quarter. In April, over 70% of OEM sites that we shipped to experienced full shutdowns of their facilities. Many OEMs began the process of reopening facilities in May with increases in build rates constrained by supply chain challenges. Production rates further increased in June. The result of these shutdowns and managed reopenings was the largest decline in revenue in the company's history. Through a series of actions, including restructuring at the beginning of the year, temporary salary reductions, and other discretionary spending cuts, our company delivered reasonable profitability given the magnitude of the sales decline. Many of our cost-saving actions have led to sacrifices on the part of our employees. Reducing headcount and cutting pay are the last options that we use to manage expenses given the impact on our people. While the actions we have taken this year have been necessary, I want to take this opportunity to acknowledge and thank employees for the sacrifices they are making to support the company through this challenging time. Our employees have also worked tirelessly to navigate the unprecedented supply chain disruptions caused by the COVID-19 pandemic. Our supply chain organizations face some of the most significant demand fluctuations in the company's history, along with managing through the impacts of OEM and supplier shutdowns, many of which occurred with little or no notice. If this was not enough of a challenge, we've had to rethink how we work in manufacturing and distribution facilities, adjusting layouts, staffing patterns, instituting health checks, all to ensure employee safety and lower the risk of transmission. Outside of our manufacturing distribution locations, many of our engineers and office employees are still working all or part-time from home. This has presented its own set of challenges, from ensuring engineers can collaborate and maintain product development schedules to the rapid introduction and global rollout of new tools and network capacity by our RT and shared service organizations. We are continuing to manage our facilities and operations, putting the safety of our people first. These safety procedures often make it more uncomfortable for our people to work effectively, and nearly every one of our people has had to innovate and find new methods for tasks that used to be straightforward. Again, I can only say thank you and express my gratitude for the commitment and agility of Cummins people everywhere. Now I'll move to a summary of our second quarter results and a discussion of our major end markets. Mark will then take you through more details of our second quarter financial performance and update you on our balance sheet and liquidity. Revenues for the second quarter of 2020 were $3.9 billion. a decrease of 38% compared to the second quarter of 2019. EBITDA was $549 million, or 14.3%, compared to $1.1 billion, or 17% a year ago. The impact of lower volumes was partially offset by the benefits of restructuring, lower variable compensation, temporary salary reductions, reduced warranty costs, and higher joint venture income. the increase in joint venture income was primarily due to record levels of demand in China. All four of our mature operating segments remained solidly profitable in the second quarter with only the new power segment incurring operating losses as we continue to invest in new products and technologies ahead of broad market adoption. The engine business revenues declined by 47% in the second quarter compared to a year ago. Lower production in North America truck markets along with weaker demand from global construction customers, drove most of the revenue decline. EBITDA margin for the quarter was 10.5% compared to 15.4% for the same period in 2019. Cost savings related to restructuring activities and salary reductions, as well as increased joint venture income, partially offset the impact of lower volumes. Sales for our distribution segment declined by 21% year-over-year. with lower revenues in domestic and international markets. Second quarter EBITDA was $160 million, or 10% of sales, compared to 8.5% in the second quarter of 2019. EBITDA margins increased as we continue to realize the benefits of our transformation work in North America, as well as the impact of lower variable compensation expenses. Second quarter revenues for the component segment declined by 38%. Sales in North America declined 55%, driven by lower truck build rates, while revenues in international markets declined by 9%, as a result of lower truck demand in Europe and India. Revenues in China increased 63% and represented a new quarterly record for the components group. EBITDA for the second quarter was $141 million, or 12.3%, compared to 16.1% in the same quarter a year ago. EBITDA percent decreased as the impact of lower volumes was partially offset by the benefits of restructuring, temporary salary reductions, and reduced warranty costs. Power system sales in the second quarter declined 35% year over year. Industrial sales declined 33%, driven by continued weakness in oil and gas and mining markets. Power generation sales decreased by 37%. with lower revenues in both North America and international markets. EBITDA in the second quarter was 11.7%, compared to 14.4% a year ago. The impact of lower volumes, again, more than offset the benefits of cost reduction actions and lower warranty expense. In the new power business, EBITDA was a loss of $38 million in the second quarter, in line with our expectations. Now I will comment on some of our key markets, starting with North America, and then I'll cover some of our largest international markets. Our second quarter revenues in North America declined 48% to $2 billion. We experienced lower demand in all end markets, with OEM shutdowns impacting build rates of trucks and construction equipment. Power generation shipments declined due to project delays, and our parts and service business was negatively impacted by end users delaying vehicle maintenance. Industry production of heavy-duty trucks declined 71% in the second quarter compared to a year ago, and 54% sequentially. Year-to-date, our market share is 33%, an increase from the second half of 2019, even as industry production declined. We began shipments of our X-12 engine to Freightliner for use in their Cascadia Day and Sleeper Cab models this quarter. Our entry into the regional haul market with a low-weight X-12 will further support our leading share in this market. Production of medium duty trucks decreased by 61% in the second quarter. We continue to maintain our clear market share in the medium duty truck market with over 80% of new trucks powered by Cummins powertrains in 2020. Total shipments to our North American pickup truck customers decreased 71% compared to a year ago, and were impacted by OEM shutdowns during the second quarter. In domestic off-highway markets, engine sales for construction equipment decreased by 43% from the near-record levels experienced a year ago. Revenues for power generation equipment fell by 38%, with lower demand in RV and backup power markets. Demand for engines in oil and gas markets declined by 88%, due to a reduction in equipment purchases of new fracking equipment. Aftermarket sales in North America fell 25% compared to last year. and were negatively impacted by low truck utilization, especially in April and May, industry destocking activity, and customers delaying scheduled maintenance. Now I'll turn to our major international markets. International revenues decreased by 22% in the second quarter of 2020 compared to a year ago. Second quarter revenues in China, including joint ventures, were $1.9 billion, an increase of 30%, and a record for the company. Demonstrating the flexibility of our supply chain teams, our manufacturing facilities transitioned from full shutdown in March to making a record number of engines, turbochargers, and after-treatment systems in April and continued producing at those record levels in May and June. In the second quarter, industry demand for medium and heavy-duty trucks in China increased by 61% compared to a year ago. The record level of demand was driven by delayed purchases from the first quarter and government policy, which increased the scrapping of old NS3 trucks. Our market share was 15% up from the 13% in the second quarter of 2019 due to the strong performance of our X-12 engine with fleet customers. Fleet customers now represent 20% of the market in China. and may continue to transition to a total cost of ownership model, focusing on fuel economy and reliability. We expect this trend to continue, providing opportunities to increase our market share as we launch our NS6 products across the country next year. Industry interest in automated manual transmissions has also increased, and we currently expect to sell over 1,000 Endurance AMTs in China by the end of this year. Industry sales of light duty trucks increased by 43% in the second quarter, and our market share was 8%, flat with last year. In cities where MS6 regulations are already in place, we are seeing strong acceptance of our new engines, with market share above our current 8% level. Second quarter demand for excavators in China increased by 63% from a year ago. The central government is encouraging increased level of borrowing by local municipalities, to support investment infrastructure and housing projects, resulting in increased excavator demand. Our market share was 17% compared to 16% a year ago, driven by the strong performance of our domestic OEM customers. Demand for power generation equipment in China was flat compared to a year ago, with increased demand from data center customers offset by weaker demand for standby power. Second quarter revenues in India including joint ventures, were $106 million, a reduction of 77% from the second quarter a year ago. Industry's truck sales in India decreased 93%, while construction and power generation sales declined by more than 75%, all driven primarily by nationwide and regional shutdowns in response to COVID-19. The truck industry transitioned to BS-6 standards on April 1st, which will result in additional revenues for our components business. We've added Ashok Leyland as a new customer of our Emissions Solutions business. During the second quarter, we also finalized an agreement with Mahindra, an Indian truck and tractor company, to supply an on-highway four-cylinder BS6 compliant engine, further cementing our leading position in the India truck market. Outside of India and China, we saw year-over-year revenue declines of 29% in Europe and 59% in Latin America, primarily due to lower truck production driven by COVID-related OEM shutdowns. Global sales of mining engines declined 35% compared to a year ago. Demand remains stable among copper and iron ore miners, where commodity prices have risen by over 30% compared to their April lows. In contrast, coal prices remained below $50 per metric ton, resulting in lower demand for equipment by coal miners. While demand was weak across most of our markets during the second quarter, we continue to strengthen existing relationships with OEMs and developing new customers for our products. and partnering in new ways during this challenging period, enabling us to benefit when markets recover and driving improved market share in the future. While we continue to strengthen our position in diesel and natural gas markets, we are also focused on opportunities for our new power segment. We have 200 Cummins-powered battery electric buses in service throughout North America and will start selling electric powertrains to CalMar for use in the thermal tractor market in late 2021. We expect adoption of battery electric power chains to increase in bus and terminal tractor markets over the next several years, with adoption in segments of the medium-duty truck market occurring thereafter. Our products in the field are being supported by our wholly-owned distribution business, providing customers confidence in product uptime, as this technology is used for the first time in commercial applications. During the second quarter, two trains powered by Cummins Fuel Cells completed an 18-month trial in Europe, with over 180,000 kilometers traveled. By 2022, there will be 41 of these types of trains powered by Cummins fuel cells running in Europe, making Cummins the leading provider of fuel cells for trains globally. We are in active conversations with OEMs and end users about how to utilize both our PEM and solid oxide fuel cells in a variety of applications, including trains, shifts, data centers, and on-highway vehicles. We have fuel cell-powered trucks running today in both Europe and North America. In addition to the opportunities we see in fuel cells, we have a leading portfolio of both alkaline and PEM electrolyzers, which will be a critical part of the infrastructure to support the hydrogen economy. Our portfolio of electrolyzers are already being utilized in a variety of applications today, including on-site hydrogen production for fueling stations. industrial applications, and more recently, in larger scale, power to gas applications. In the second half of 2020, we will complete the largest PAM hydrogen electrolysis plant in the world with Arlequia. The 20 megawatt facility in Beconcourt, Canada will be capable of producing 3000 tons of hydrogen annually. With a leading product portfolio and a presence in Europe, North America and China, our hydrogen business is well positioned to grow as investments in hydrogen production and fuel cells increase around the world. To more fully discuss how we expect these markets to grow and how Cummins will participate in this rapidly developing industry, we will be holding Cummins Hydrogen Day for investors and analysts the morning of November 16th. We hope you will all be able to attend this virtual event. While we are excited about the opportunities ahead of us in advanced diesel, natural gas, and new power markets, we will continue to face uncertain market conditions in the second half of 2020. We expect consolidated company revenues in the third quarter to increase from second quarter levels in all regions except China, while we expect declines in the record levels we experienced in the second quarter. The pace of market recovery will differ, though, from region to region and may change based on government actions both to control the spread of COVID-19 and or to stimulate their economies and build business and consumer confidence. Our leadership team is very experienced in managing through periods of volatility and demand. We are prepared for a range of demand scenarios and know that these may differ by region and market as the full impact of COVID-19 becomes clearer. Due to the uncertainty that remains within our markets, we will remain focused on managing costs and cash flow in the second half of the year while continuing to invest in the products and technologies that will drive profitable growth for the company. 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. Now, let me turn it over to Mark.