Cummins Inc.

Greetings and welcome to the Q1 2024 Cummings, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. To ask a question, press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Kulow, Vice President of Investor Relations. Thank you, Chris. You may begin.

Thanks very much. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the first quarter of 2024. Participating with me today are Jennifer Rumsey, 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 start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities and Exchange Act of 1934. 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 statement in the slide deck and our filings with the Security 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 this call, we will be discussing certain non-GAAP financial measures and will 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 within the investor relations section at Cummins.com. With that out of the way, I will turn you over to our chair and CEO, Jennifer Rumsey, to kick us off.

Thank you, Chris, and good morning, everyone. I'll start with a summary of our first quarter financial results, and then I will discuss our sales and end market trends by region. I will finish with a discussion of our outlook for 2024. Mark will then take you through more details of both our first quarter financial performance and our forecast for this year. Before getting into the details on our performance, I want to take a moment to highlight a few major events from the first quarter. In March, Cummins successfully completed the separation of our filtration business, Atmos Filtration Technologies. Cummins will continue its focus on advancing innovative power solutions, while Atmos is now well positioned to pursue its own plans for profitable growth. We are proud of our employees' hard work and all who were involved to ensure successful separation, and we are excited to see what the future holds for both Cummins and Atmos. The final step in the separation of Atmos resulted in a tax-free exchange of shares, which reduced Cummins shares outstanding by $5.6 million. In addition, we reintroduced our fuel agnostic platforms with a name that captures the innovation that powers us forward, Cummins Helm Platforms. With higher efficiency, lower emissions, and multiple fuels, the Cummins Helm platforms give our customers control of how they navigate their own journeys as part of the energy transition. As the next product in the Cummins Helm 15-liter platform, we announced we will launch the next generation diesel X15 in North America for the heavy-duty on-highway market, which will be compliant with the U.S. EPA and CARB 2027 aligned regulations at launch. Lastly, in April, Cummins Power Generation introduced four new generator sets to the award-winning Sensum series, powered by Cummins QSK50 and QSK78 engines. These new models have been engineered specifically for the most critical applications, such as data centers, healthcare facilities, and wastewater treatment plants. I was excited to attend the launch event with our customers and hear about the growing demands for these critical applications and high interest in our Genset products. which build on decades of experience meeting our customers' needs and deliver a step change improvement in power density, assured reliability, sustainability, and low emissions. Now I will comment on the overall company performance for the first quarter of 2024 and cover some of our key markets. Demand for our products remains strong across many of our key markets and regions. Revenues for the first quarter were $8.4 billion, a decrease of 1% compared to the first quarter of 2023. EBITDA was $2.6 billion or 30.6% compared to $1.4 billion or 16.1% a year ago. First quarter 2024 results include a gain net of transaction costs and other expenses of $1.3 billion related to the ATMIS divestiture. and $29 million of restructuring expenses as we continue to work to simplify our operating structure and improve the efficiency of our business for the long term. This compares to the first quarter 2023 results, which included $18 million of costs related to the separation of the Atmos business. Excluding the one-time gain and the costs related to the separation of Atmos, as well as the restructuring expenses, EBITDA percentage decreased by 80 basis points as improved pricing partially offset lower volumes and higher research and development expenses as we continue to invest in the products and technologies that will create advantages in the future. Gross margin dollars improved compared to the first quarter of 2023 as the benefits of pricing more than offset the impact of lower volumes and supply chain cost increases. Our first quarter revenues in North America were flat with 2023. Industry production of heavy-duty trucks in the first quarter was 73,000 units, down 5% from 2023 levels, while our heavy-duty unit sales were 26,000, down 7% from 2023. Industry production of medium-duty trucks was 41,000 units in the first quarter of 2024, an increase of 8%. while our unit sales were 36,000, up 22% from 2023. We shipped 38,000 engines to Stellantis for use in their RAM pickups in the first quarter of 2024, down 2% from the 2023 levels. Revenues for North America power generation increased by 21%, driven by continued strong data center and mission-critical power demand. Our international revenues decreased by 1% in the first quarter of 2024 compared to a year ago. First quarter revenues in China, including joint ventures, were $1.6 billion, a decrease of 5% as weaker domestic volumes were partially offset with the accelerating data center demand. Industry demand for medium and heavy-duty trucks in China was 305,000 units, an increase of 14% from last year. However, shifts in the market share during the first quarter led to a decline in our volumes year over year. The light duty market in China was up 2% from 2023 levels at 486,000 units, while our units sold, including joint ventures, were 37,000, an increase of 3%. Industry demand for excavators in the first quarter was 50,000 units, a decrease of 13% from 2023 levels. The decrease in the market size is due to weak property investment, high equipment population, and slowing export demand. Our units sold were 9,000 units, an increase of 10% as a result of the QSM-15 penetration and export growth. Sales of power generation equipment in China decreased 7% in the first quarter as accelerating data center demand was offset by softening in other markets. First quarter revenues in India, including joint ventures, were $758 million, an increase of 1% from the first quarter a year ago. Industry truck production decreased by 7%, while our shipments decreased by 5% as the market slowed ahead of elections in April. Power generation revenues increased by 37% in the first quarter as economic activity remained strong. Now let me provide an outlook for 2024, including some comments on individual regions and end markets. Our full year guidance now excludes ATMIS from the March 18th separation date onwards, and also excludes the first quarter gain related to the divestiture. The guidance provided previously included ATMIS for the full year as it proceeded the transaction announcement. We're happy to share that our expectations for 2024 have improved from our initial guidance issued in February. Our forecast for total company revenue in 2024 remains the same at down 2 to 5%, which implies higher base business revenues of approximately $1.3 billion compared to our prior guidance as ATMIS is now excluded from future quarters. We are increasing our forecast for heavy-duty trucks in North America to 255,000 to 275,000 units in 2024, compared to our prior guide of 245,000 to 265,000 units, though we do still expect softening in the second half of the year. In North America medium-duty truck market, we maintain our prior guidance of 140,000 to 150,000 units, down 5% to flat from 2023. Consistent with our prior guidance, our engine shipments for pickup trucks in North America are expected to be 135,000 to 145,000 in 2024, down 5% to 10% from 2023 as we prepare to launch our model year 2025 in the fourth quarter. In China, we project total revenue, including joint ventures, to increase 3% in 2024, consistent with our prior guidance. We project a range of down 5% to up 10% in heavy and medium-duty truck demand and expect a range of down 5% to up 5% in demand in the light-duty truck market. We expect replacement demand to be the biggest driver, but the effect may be weakened by a sluggish economy and potentially slower export demand. The short-term shifts in the market share that I noted earlier are expected to normalize as we progress through the remainder of the year. In India, we project total revenue, including joint ventures, to increase 9% in 2024, primarily driven by strong power generation and on-highway demand, consistent with our prior guidance. We expect industry demand for trucks to be flat to up 5% for the year. For global construction, we project down 10% to flat year-over-year, up from our previous guidance of down 5% to 15%. We continue to expect weak property investment and slowing export demand in China. We project our major global high horsepower markets to remain strong in 2024. We are raising our guidance for global power generation markets to be up 10 to 15 percent, compared to our prior guidance of up 5 to 10 percent, driven by continued increases in the data center and mission critical markets. Sales of mining engines are expected to be down 5 to up 5%, consistent with our prior guidance. While a smaller market for us, we continue to anticipate demand for oil and gas engines to decrease by 40 to 50% in 2024, primarily driven by decreased demand in North America. For aftermarket, we maintain our guidance of down 5% to up 5% for 2024, as we are through the inventory management efforts and destocking that happened throughout the industry in the second half of 2023. In Accelera, we expect full-year sales to be $450 to $500 million, compared to $354 million in 2023, consistent with our prior guidance. We are ramping up electrolyzer manufacturing capacity and capability to deliver orders to our customers, as well as expect continued growth in electrified components. In summary, coming off a strong first quarter, we are maintaining our sales growth outlook for the year of down 2% to 5%, as stronger demand in our base business has offset the removal of Atmos for future quarters from our guidance. We have also revised our forecast for EBITDA to be in the range of 14.5% to 15.5% compared to our previous guidance of 14.4% to 15.4%, reflecting stronger North America heavy-duty truck and power generations markets, which more than offsets the loss of profitability of Atmos. In addition, we are taking steps to reduce costs, optimize our business, and position Cummins for continued success in 2024. We are in a strong position to keep investing in the future, bringing new technologies to customers and returning cash to our investors. During the quarter, we returned $239 million to shareholders in the form of dividends, consistent with our long-term plan to return approximately 50% of operating cash flow to shareholders. In addition, we reduced the overall Cummins share count by 5.6 million as we completed the Atmos share exchange, which will be more fully reflected in the average share count in the second quarter and beyond. I am impressed and grateful for the commitment of our employees and leaders around the world who are delivering for our customers and generating strong financial performance at the same time. Our results further enhance Cummins' ability to keep investing in the future growth, bringing sustainable solutions that will protect our planet for future generations and returning cash to our shareholders. I look forward to discussing our long-term strategy further in our upcoming analyst day on May 16th. And now, let me turn it over to Mark.