Cummins Inc.

Greetings and welcome to the Cummins Inc. Second Quarter 2024 Earnings Call. On our call today is Jen Rumsey, Chair and CEO, Mark Smith, Vice President and CFO, and Chris Clulow, Vice President of Investor Relations. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1. If anyone should require operator assistance during the conference, please press star 2. star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Clulow. Thank you. You may begin.

Thanks very much. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the second quarter of 2024. Participating with me today are Jennifer Rumsey, our chair and chief executive officer, and Mark Smith, our chief financial officer. We'll 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, and 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 in our filings with the Securities and Exchange Commission, particularly the risk factors section of the 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. I will now turn you over to our chair and CEO, Jennifer Rumsey, to kick us off.

Thank you, Chris, and good morning. I'm excited to be with all of you today as I celebrate my two-year anniversary of becoming CEO of Cummins. I'll start with a summary of our second quarter financial results. 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 second quarter financial performance and our forecast for the year. Before getting into the details on our performance, I want to take a moment to highlight a few major accomplishments from the second quarter. At our recent analyst day, I shared that we are raising our long-term financial targets as a result of our strengthening portfolio and continued execution of our Destination Zero strategy. The strong partnerships that we have with our customers and stakeholders are key to driving our strategy and growth profile forward. And this quarter, we strengthen those partnerships even further. In May, we announced with Azuzu Motors Limited the launch of a new 6.7-liter engine designed for use in Azuzu's medium-duty truck lineup. This engine will power on-highway truck applications for the Japan market and will be available for Asia Pacific markets and other global markets later this year. We also announced plans to launch a battery electric powertrain for Azuzu's F-Series in North America. Availability of the medium duty truck is expected in 2026 and will include Accelera's next generation lithium ion phosphate or LFP battery technology. These advancements mark an important milestone for both Cummins and Isuzu as Cummins enters the Japan on highway market for the first time in our history. We are proud of the partnership our two companies have built and I'm excited to leverage our collective strength and scale to deliver profitable growth for both partners. Also this quarter, we further progressed our partnership with Daimler Trucks and Buses and PACCAR as we completed the formation of our joint venture now known as Amplify Cell Technologies to localize battery cell production in the battery supply chain in the United States. This included naming the chief executive officer of the joint venture and breaking ground at a new manufacturing plant in Marshall County, Mississippi. Amplify Cell Technologies will enable Accelera by Cummins and our partners to advance battery cells focused on commercial and industrial applications in North America and serve our customers' evolving needs. This is a significant step forward as we continue leading our industry into the next era of smarter, cleaner power. And in July, Accelera was awarded $75 million from the Department of Energy to convert approximately 360,000 square feet of existing manufacturing space at our Columbus, Indiana engine plant for zero-emissions components, including battery packs and electric powertrain systems. The $75 million grant is the largest federal grant ever awarded solely to Cummins and is part of the appropriations related to the Inflation Reduction Act. The Columbus engine plant is also where we manufacture blocks and heads for our current and next-generation engine-based solutions. further showcasing our Destination Zero strategy in action. Now I will comment on the overall company performance for the second quarter of 2024 and cover some of our key markets, starting with North America before moving on to our largest international markets. Demand for our products remains strong across many of our key markets and regions, resulting in record revenues in the second quarter of 2024. Sales for the quarter were $8.8 billion, an increase of 2% compared to the second quarter of 2023, driven by continued high demand and improved pricing. EBITDA was $1.35 billion, or 15.3%, compared to $1.3 billion, or 15.1% a year ago. Second quarter 2023 results included $23 million of costs related to the separation of Atmos. EBITDA and gross margin dollars improved compared to the second quarter of 2023 as the benefits of higher volume and pricing exceeded supply chain cost increases and offset the impact of the ATMOS separation. Our second quarter revenues in North America grew 4% to $5.5 billion, driven by the strong demand in our core markets more than offsetting the impact of the separation of ATMOS. Industry production of heavy duty trucks in the second quarter was 75,000 units, up 1% from 2023 levels. While our heavy duty unit sales were 31,000, up 7% from a year ago. The second quarter marked record production volume for our heavy duty engines at the Jamestown engine plant. Industry production of medium duty trucks was 41,000 units in the second quarter of 2024, an increase of 4% from 2023 levels. while our unit sales were 38,000, up 13%, and also outpacing the market growth. We shipped 41,000 engines to Stellantis for use in the RAM pickups in the second quarter of 2024, up 8% from 2023. Revenues in North America power generation increased by 23%, driven by continued strong data center and mission-critical power demand. The impressive power generation performance in North America and across the globe helped us achieve record sales and profitability in the power system segment. Our second quarter international revenues decreased 2% compared to last year. Second quarter revenues in China, including joint venture, were $1.6 billion, a decrease of 2% as weaker domestic volumes were partially offset with higher data center demand. Industry demand for medium and heavy duty trucks in China was 270,000 units, a decrease of 3% from last year. Demand in the China truck market continues to run at low levels, with higher orders for natural gas engines and strong exports offsetting weak domestic diesel demand. In light duty markets in China, we were at 4% from 2023 levels at 480,000 units, while our units sold, including joint ventures, were 33,000. an increase of 18%. Industry demand for excavators in China in the second quarter was 53,000 units, an increase of 4% from 2023 levels. Our units sold were 10,000 units, an increase of 19% as a result of QSM-15 penetration at both new and existing OEM partners and export growth. Sales of power generation equipment in China increased 36% in the second quarter, primarily driven by accelerating demand in data centers. This helped drive impressive financial performance at our Cummins-Chongqing joint venture within our power systems business. Second quarter revenues in India, including joint venture, were $649 million, a decrease of 10% from the second quarter a year ago. Industry truck production increased by 11%, while our shipments increased by 5%. Power generation's revenues decreased by 17% year on year as the second quarter of 2023 benefited from pre-buy demand ahead of emissions regulation changes. Now let me provide our outlook for 2024, including some comments on individual regions and end markets. We have raised our expectations for 2024 while still anticipating the second half to be weaker than the first half, primarily in the North America heavy duty truck market. We are increasing our revenue guidance to down 3% to flat compared to our prior guidance of down 2% to down 5%. We are also increasing our EBITDA guide to be 15% to 15.5% compared to our prior guide of 14.5% to 15.5%. We now expect higher revenue in our engine, power systems, and distribution segments, offsetting slightly lower revenue expectations for the Accelera business. We also expect stronger profitability in our engine and power system segments, driving most of the improvement in EBITDA. We are maintaining our forecast for heavy duty trucks in North America to be 255,000 to 275,000 units in 2024, as we still expect softening in the second half of the year. In the North America medium duty truck market, we are raising our forecast to be 150,000 to 160,000 units. flat to up 5% from 2023. This is an increase from our previous guidance by 10,000 units as we continue to benefit from an elevated backlog and strength in vocational orders. 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, with a planned model year changeover likely to drive a temporary dip in production in the second half. In China, we project total revenue, including joint ventures, to increase 3% in 2024, consistent with our prior guidance. In India, we project total revenue, including joint ventures, to increase 8% in 2024, primarily driven by strong power generation and on-highway demand. 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, consistent with our prior guidance. We continue to expect slightly weaker property investment and slowing export demand in China. We are raising our guidance for the global power generation market to be up 15 to 20% compared to our prior guidance of up 10 to 15% 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. For aftermarket, we have improved our guidance to flat to up 5% for 2024, raising the bottom end of our previous guidance of a decline of 5%, with demand holding up better than expected in on and off highway markets. In Accelera, we expect full year sales to be $400 to $450 million, a reduction of $50 million from the prior guide. As we noted at our analyst day, the energy transition is progressing more slowly, impacting both our e-mobility and electrolyzer revenues. In summary, coming off a strong first half of the year, we are raising our guidance on sales to down 3% to flat and raising our EBITDA guidance to 15% to 15.5%. While we anticipate softening in the North America heavy duty market in the second half of the year, demand in several of our core markets remains strong. Should economic momentum slow, Cummins is in a strong position to keep investing in future growth, bringing new technologies to customers, and returning cash to shareholders. In July, we announced an 8.3% increase in the quarterly dividend from $1.68 to $1.82 per share, the 15th consecutive year in which we have increased the dividend. During the quarter, we returned $230 million to shareholders in the form of dividends. consistent with our long-term plan to return approximately 50% of operating cash flow to our shareholders. Our diluted earnings per share benefited from a lower number of shares outstanding, with the impact of the Atmos split more fully reflected in the weighted average share count in the second quarter. In summary, we had a strong performance in the first half of 2024, driven by record demand for Cummins products in our core markets. It is exciting to see our business grow with long-established customers in existing markets and to see newer partnerships yield additional opportunities in previously untapped markets for Cummins. I'm grateful for our employees who continue to execute on our strategy and deliver solutions that help our customers win wherever they operate. Our results reflect our dedication to delivering strong financial performance while also investing in our future growth bringing sustainable solutions to decarbonize our industry and returning cash to our shareholders. As we discussed at Analyst Day, there is a lot to be excited about in our future. Now let me turn it over to Mark.

Thank you, Jen, and good morning, everyone. We delivered strong results in the second quarter. Given the strength of those results and our improved outlook, we've raised the midpoint of our full year expectations for 2024. Second quarter revenues were $8.8 billion, up 2% from a year ago, as organic growth more than offset the reduction in sales, driven by the separation of acts. Sales in North America increased 4%, while international revenues decreased 2%. Foreign currency fluctuations negatively impacted sales by 1%. EBITDA was $1.35 billion, or 15.3% of sales for the quarter. compared to $1.3 billion or 15.1% a year ago. The year ago numbers included $23 million of costs related to the separation of apps. Benefits of higher volumes and pricing, as well as the absence of the app separation costs, were the primary drivers behind the improved profitability. Now we'll go into a little more detail by line item. Gross margin for the quarter was $2.19 billion, or 24.9% of sales compared to $2.15 billion, also 24.9% a year ago. Flat margins were primarily driven by favorable pricing and operational improvements offset by the removal of ATMOS and higher compensation expenses. Selling, admin, and research expenses were $1.21 billion, or 13.7% of sales, compared to $1.26 billion, or 14.6% last year. Joint venture income of $103 million decreased $30 million from the prior year, primarily driven by lower technology fees and a weak domestic truck market in China. Other income was negative $3 million, a decrease of $27 million a year ago. Interest expense was $109 million, an increase of $10 million from the prior year, primarily driven by higher weighted average interest rates. The all-in effective tax rate in the quarter was 23%, including $9 million, or $0.07 per diluted share, of favorable discrete tax items. All-in net earnings for the quarter was $726 million, or $5.26 per diluted share, compared to $720 million, or $5.05 per diluted share in Q2 last year. Second quarter reflected the lower weighted average share count as a result of the tax-free share exchange that was the final step of the separation of ATMOS was completed in the first quarter. All-in operating cash flow was an outflow of $851 million compared to an inflow of $483 million in the second quarter last year. And the decrease was driven mainly by the $1.9 billion payment required by the previously disclosed settlement agreements with the regulatory agencies. Excluding the settlement, operating cash flow was an inflow of $1.1 billion, more than double the cash generated in the second quarter last year. I will now comment on segment performance in our guidance for 2024. As a reminder, guidance for 2024 includes the operations of ATLAS in our consolidated results up until the full separation that occurred on March 18. Component segment revenue was $3 billion, a decrease of 13% from the prior year, while EBITDA decreased from 14.2% of sales to 13.6%, with both sales and EBITDA primarily impacted by the Atmos separation. For components, we expect 2024 revenues to decrease 9% to 14.2%. percent, consistent with our prior projections, and EBITDA margins in the range of 13.7 to 14.2 percent, narrowing the range from our previous guidance of 13.5 to 14.5. For the engine segment, second quarter revenues were a record $3.2 billion, an increase of 5 percent from a year ago. EBITDA was 14.1 percent, a slight decrease from 14.2 percent a year ago. that the benefit from pricing and record on highway volumes in North America was offset by higher research costs and lower joint venture income, primarily in China. In 2024, we now project for the full year 2024, sorry, we now project revenues for the engine business to be down 3% to up 2%, an increase of 2% from the prior midpoint, driven by a revised outlook in the North American medium duty truck market. full-year engine EBITDA is projected to be in the range of 13.7 to 14.2, an increase of 75 basis points at the midpoint from our prior projections due to higher volumes and ongoing operational efficiencies. In the distribution segment, revenues increased 9% from a year ago to a record $2.8 billion. EBITDA as a percent of sales decreased to 11.1%, compared to 11.5 a year ago, primarily due to higher compensation expenses and a higher mix of power generation sales, which are positive for the company overall but have a diluted impact on the distribution segment margins. We now expect 2024 distribution revenues to be 5 to 10 percent, an increase of 5 percent from the prior midpoint, mainly due to stronger power generation markets. And we've revised our EBITDA margin expectations to be in the range of 11.3% to 11.8%, down a little from our prior range of 11.5% to 12.5%. Results for the power system segment set a new quarterly record. Revenues were $1.6 billion, an increase of 9%, and EBITDA increased from 13.8% to 18.9%, driven by higher volumes, particularly in power generation markets, improved pricing, and other operational improvements and cost reduction. For 2024, we expect power systems revenues to be up 3% to 8%, an increase of 3% from the prior guide. EBITDA is now projected to be approximately 17.5% to 18%, up from the previous projections of 16% to 17%. Accelera revenues increased 31% to $111 million, driven by increased electrolyzer installations. Our EBITDA loss was $117 million, compared to an EBITDA loss of $114 a year ago, as we continue to invest in the products and capabilities to support those parts of the business where strong growth is expected, whilst reducing costs in areas where we assess the prospects for growth have extended into the future. In 2024, we expect accelerated revenues to be in the range of $400 to $450 million, down $50 million from our prior guide. Net losses are still expected to be in the range of $400 to $430 million. Excuse me. As Jen mentioned, given the strong performance in the second quarter and the revised outlook in our key region end markets, we have raised our full-year company guidance. We now expect revenues to be down 3% to flat, which is better than our previous guidance of down 2% to down 5%. EBITDA margins are now projected to be approximately 15% to 15.5%, narrowing the range and increasing the midpoint 25 basis points from our prior guide. Our effective tax rate is expected to be approximately 24% in 2024, excluding the tax-free gain related to ATMOS and other discrete items. Capital investments will be in the range of $1.2 to $1.3 billion, unchanged from three months ago, as we continue to make critical investments in new products and capacity expansion to support future growth. In summary, we delivered record sales and solid profitability in the second quarter of 2024. We still do expect some moderation in some key markets in the second half of the year, especially North American heavy-duty truck, as we pointed out at our recent analyst day also. We've taken some steps to reduce costs in the fourth quarter of 2023 and the first quarter of 2024, continue to identify ways to streamline our business going forward, leaving us well-positioned to navigate any economic cyclicality that we may experience. We continue to deliver strong financial results, raising our performance cycle over cycle, while still investing for future growth. Our priorities for this year for capital allocation remain to reinvest for growth, increase the dividend, and reduce debt. Overall, a very strong quarter. Thanks for your time today. Now let me turn it back over to Chris.

Thanks, Mark. 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. Operator, we're ready for our first question.

Thank you. Our first question comes from the line of Stephen Fisher with UBS. Please proceed with your question.

Thanks. Good morning. Just on China truck, you didn't change your expectations there. Wondering how you're thinking about some of the new incentives that the government put in place there to supports it the second half of the year. Is that a potential point of conservatism in your outlook, or do you think it may not materialize into anything much there?

Yeah, thanks for the question, Stephen. Good morning. You know, we've seen pretty consistent performance out of China and the economic conditions over the last 18 to 24 months, and there's been previous indications of actions the government may take, none of which has really translated into any meaningful change in our industry. So really, we're seeing a strong performance still with natural gas product and export and a relatively weak domestic diesel market and are not anticipating that changing in the near term.

Thank you. Our next question comes from the line of Jamie Cook with Truist Securities. Please proceed with your question.

Hi, congratulations on a nice and clean quarter. I guess two questions. You know, one, Mark, the margins in power systems are quite remarkable on, you know, a pretty muted sales growth assumption for 2024. So if you could just help us understand what's going on there, sort of what's structural versus, you know, and do you see the opportunity for margins to improve from these levels in the out years, you know, given you're already assuming a, you know, close to 18% margin this year. And then my second question, Jen, just, I know you don't want to give a guide for 2025, but how you're thinking about the markets, is there, you know, as you think about the U.S. with a potential change with the election and the overruling of Chevron, are you more... you know, conservative about a potential pre-buy, do you think that gets pushed out? I guess the two positives would be China comes back and then the power system. So I'm wondering ultimately, you know, is the incremental margin potential better in 2025, you know, with those assumptions on a muted 2025 pre-buy with better mix from power systems in China? Thanks.

Okay, good questions. We'll try and fit in our answers with the time available. On power systems, there's really three elements to the margins. And to answer the last part of your question, yes, we do expect there's still more to come. So the team there is doing a fantastic job, started with some cost reduction, reprioritizing where we're investing, where we're investing less, strong pricing environment on the power system side. And then, yeah, there's more to do on the operational efficiency. So really, it's several strings to the bow in terms of what's been driving the results and still more to come. So we're really, really excited. Hopefully, you felt the confidence from Jenny Bush and her team from the analyst day, and they've continued to deliver here in the second quarter. And, yeah, we're bullish on that segment. Those are really the main drivers on power systems.

Yeah, and on the market outlook, what I would say is in the PowerGen market, the continued growth that we see there, in particular in the data center, I don't see that letting up anytime soon. And we have strong demand, high backlog. And as you know, we talked about in May, making some capacity investments to take advantage of the In U.S. on highway, the medium duty truck has continued to be strong. We see strong backlog and demand and don't see that letting up in the foreseeable future. In heavy duty, we do see build rates coming down, projecting about 10% down in the third quarter and 20% overall for the second half of the year. And the question is what will happen next year with the broader economic environment because, well, stabilized spot rates and these truck prices are, you know, at lower level than they've been historically, and that's impacted some of our customers' demand. And so how that comes together with a pre-buy, you know, the Supreme Court overturning of the Chevron deference policy We don't anticipate any impacting regulations in the near term. We believe the 2027 regulations will continue to move forward. And probably the bigger question is what we see with phase three greenhouse gas in the 2030 timeframe. And so we still anticipate some amount of pre-buy ahead of that emissions changeover. But the industry has also demonstrated there's capacity constraints that we've seen in the last couple of years. So how large that pre-buy will be I think is still Still a question, but we're preparing to have strong demand as we go into the 27 regulation change.

Thank you. Our next question comes from the line of Steve Volkman with Jefferies. Please proceed with your question.

Great. Thank you, guys. Mark, I think you mentioned maybe both of you pricing being positive. It sounds like it was positive in truck. It sounds like it was positive in power gen. Can you just, you know, double click on that for us a little bit? I mean, how much pricing are you seeing and sort of how should we think about that for the rest of the year?

Yeah, great question. So on average across the company, it varies very much by segment, but two and a half percent for the year. And that really hasn't changed. That's not changed in the results. But it definitely has been an important driver of the power systems results. And I don't think it's going to vary a lot. That year-over-year increase should mostly hold across all the courts.

Thank you. Our next question comes from the line of Jerry Revish with Goldman Sachs. Please proceed with your question.

Yes, hi. Good morning, everyone. And Jennifer, happy anniversary. I wanted to ask on... On the medium-duty engine platforms globally, right, so you folks are picking up Daimler's business now. You're picking up Isuzu's business in Japan. Can you just expand and talk to us about how many more medium-duty engines you folks expect to ship, you know, globally in 2026 versus, I don't know, call it two or three years ago, given the timing of the transition? And if you could just comment on, you know, Japan is a, tough place to import product into given the currency. Can you just talk about how you folks are able to do that economically? Thank you.

Yeah, sure. So, you know, you've seen this trend and some of the announcements that we've made over the last few years playing out now as regulations start to occur. So we're seeing growing medium-duty demand in the U.S., of course, with Daimler transitioning to us. and Azuzu as well as some other customers like Kino here in the US. So we're growing our position in the medium duty market here. We've now launched the medium duty product in India with Daimler, so we'll start to see some volume there. Their strategy is really driven by regulation change. So when you see regulation change in Europe and Brazil, we'll continue to grow volume with Daimler. On the Isuzu business, we are building that new B6.7 in their Tajiki plant in Japan. So we're not importing that engine. We're building it in the market. First time we've been in the on-highway market, we've been in the off-highway market there, of course, for many years. And so we'll see some slow volume growth there in Japan. And then, as I noted, they'll then launch that truck into other Asia Pacific and global markets later this year. So you're just going to see steady growth, I would say, from Cummins year over year in the medium duty space as these new customer partnerships grow and emissions regulations change and add.

And India and China, India and Brazil to the later, like 2027.

2027 through 2029, yeah.

Thank you. Our next question comes from the line of Angel Castillo with Morgan Stanley. Please proceed with your question.

Hi, thanks for taking my question, and congrats on the strong quarter. I was hoping we could just unpack a little bit more of the engine segment. You raised the outlook there on margins, and you've been talking about medium duty. But just as we think about a second half that is expected to decelerate on the heavy duty side, can you talk about the components driving your margin improvement there and just helping us quantify what's ultimately driving that, and how are you thinking about 2025 margin improvement?

Yeah, so we've got a little bit of help. We've improved the parts outlook, so that certainly helps overall. We've been taking some measured actions across the company since the second half of, well, fourth quarter of last year into the fourth quarter, into the first quarter of this year. Those should help with some lower costs in the second half of the year. And then we've got a stronger outlook in medium-duty trucks. So those are really the three key elements. We're not going to get into breaking down the profitability by subsegment. Those are really the three things that have helped improve. Yeah, and I think the conversion on the volume in the second quarter showed us there's still more room for improvement just in general operating efficiencies. No real change in pricing in most of the segments.

Thank you. Our next question comes from the line of David Rasso with Evercore ISI. Please proceed with your question.

Hi, thank you. My question is on the guide. One area, I'm a little skeptical on one area where it seems like you have some upside. The engine business, the second half of the year, you're guiding the revenues down only 3% year over year. And I'm trying to go through, you know, heavy truck builds down double digit, though the parts business, you know, mutes that. The light duty has the soft fourth quarter on the model change. Off-highway, comp Cs, China a little better, but big declines in ag and some in construction. So I'm trying to understand why the revenue would only be down three, or is it there's enough new penetration of customers that can push against all that? And at the same time, the engine margins only go down 30 bps sequentially on lower revs. And then the upside is power gen revenue growth, less than 5% year over year in the second half, you're up over six in the first half and the margins are down sequentially. I mean, I understand the industrial piece within power can be down, but you know, at least they're comp C's. So I'm just trying to understand, I assume power gen has a little more focus, a little more capacity, right? Being pushed at a minimum good pricing. So again, why the, or maybe it's just conservative, conservative on PowerGen, and if you can make us more comfortable on that engine guide. Thank you. Right.

Thanks, David. Good question. So I think on PowerSys, I don't think there's any fundamental changes, so it's really a key of how much product do we deliver to our customers and the conversion. We've given a range of outcomes for the margin. The business is performing well, and quite frankly, we're raising capacity. So I don't think the sales will go a lot above, but that's Yep, we're leaning on the profitability strongly. The business is really doing well. So I don't think there's much to be concerned about there. And we've raised the outlook. On the engine business, I think what's helping mitigate the margins, which is, I guess, the most important part, is really some of the cost reduction actions that we've taken during the year. Slightly better outlook for parts. And then there's just some other puts and takes on the revenue. But those are the reasons why. the margins at those revenue levels we expect to hold up. Sorry, I've got a little bit of a call here.

Go ahead. Next question, please.

Thank you. Our next question comes from the line of Tammy Zakaria with JP Morgan. Please proceed with your question.

Hi, good morning. Very nice quarter. I have two quick clarification questions. One is on the distribution segment. I think margins were lowered, but sales were raised. So is that margin guide prudently conservative, or is it just a function of the mixed headwind from PowerGen, or is there anything I need to be aware of for that? And then the other question is price cost. I think you just said price still you expect 2.5% at the enterprise level. Since some of the raw materials prices are coming down, do you expect some improvement in price cost for the year?

So to the latter, not significantly. We've probably got about 50 basis points of cost headwind across all the different categories, varies by business and segment. And then on distribution, you're right to point out the margins. So there's really, yes, for distribution, power gen is a little bit diluted relative to the rest of the segment, even though obviously within power systems it's very accretive. So that's true. We've called that out. Also, in the first and the second quarter, there was some modest individual charges that didn't merit to be called out in the overall results. They don't merit a lot of. commentary but just say they've trimmed the margins a little bit and therefore we're really just reflecting where we are for the year. We do believe distribution margins have still got significant potential to improve over time. So that's what's going on.

Thank you. Our next question comes from the line of Tim Stein with Raymond James. Please proceed with your question.

Hi. Good morning. I'll just maybe combine these before I get the hook. They're actually both pertaining to the North America heavy-duty segment. And the first part is just around market shares, Mark. Obviously, those can and do shift around quarter to quarter. And, you know, I'm just thinking big picture as we get in a softer back half of the year where – where this sleeper segment likely is disproportionately impacted from a production standpoint at the expense of vocational. I would imagine that favors Cummins from a share perspective, just absent any kind of specific OEM programs and other factors. So maybe just your thoughts on that. And then the second part is just on the parts business. Obviously, it's been kind of a choppy past few quarters, but the commentary seems to be more positive, whereas some of the dealers and OEMs that have reported recently have flagged softness there. So I'm just curious, is that just kind of an absence of customer destocking that you went through last year, or better just fleet utilization? What's driving that, if you can comment on those two things? Thank you.

Great. Thanks for the question. And, you know, as you noted, I mean, we work to create customer pull for the heavy-duty product across different segments. But generally, as you said, for the vocational segment, we have stronger customer pull compared to the truckload. And that's the portion of the market that's been stronger right now. But, of course, our goal is always to have the best product. create demand for Cummins products. But as you see that shift between the different segments of the market and what OEMs are doing around incentives, as well as capacity, that can shift around a little bit over time. On the parts, it's somewhat demand-driven, and also this inventory destocking was a pretty big factor. There was a focused effort last year to reduce some of the inventory levels that had been carried because of the disruptions that we were all seeing. And coming back down to more normal inventory levels, it was a little bit hard to separate between destocking and demand in the market. And so now you see us settling into what we see as pretty steady and solid demand in both our on and off highway markets.

Thank you. Our next question comes from the line of Noah Kay with Oppenheimer. Please proceed with your question.

Thanks. Maybe hoping to get an update on demand and the order books for the X15N. How is it looking for the back half? How is it tracking the expectations? And basically, what's the response so far from the OEs?

Yeah, great. Thanks for the question, Noah. We are launching that product this month with PACCAR. Excited to get it out in the market. And then we'll launch it next year with DTNA. So have more offering there. We've got some early demand from some of the big fleet customers that have sustainability goals in the market, and we'll see how that develops over time, really, with those fleet and other customers. And so we've projected we could get up to about 8% in the market, but I think it's going to take some time for us to get up to that level and for that market to develop in these operating costs and sustainability goals to drive demand up.

Thank you. Our next question comes from the line of Jeff Klossman with Vertical Research Partners. Please proceed with your question.

Thank you very much. I just wanted to follow up on the engine slowdown that you're projecting for the second half of the year and maybe try and carry this into early 2025 because I think there's a perception that, you know, we're weak for a quarter or two and then the pre-buy kicks in and we're off to the races. When do you believe we start to show positive comparisons potentially in North American engines? And then we have an election this November, and I don't really know which way it's going, but just any thoughts on how a Republican victory or a Democratic victory might change the outlook for engines or new power?

Yeah, so, you know, in terms of the... Heavy duty demand, you know, we all wish we had a crystal ball that could project how this is going to play out. This cycle's been very different than past cycles because of the pent up demand that we had seen. And then, of course, getting into pre-buy expectations, so it's really difficult to predict at what point next year we'll start to see improvement and economic conditions will certainly play a role in that. So I'm not going to project exactly when, but I think at some point in next year we'll see recovery. And we've taken the steps to be prepared for that softening over the next few quarters. In terms of the election, again, not going to make a prediction on that one either. What I will say is, as always, we worked in the past with the Trump administration, we worked with the Biden administration, we worked across party lines to make sure that the the opportunities and the challenges in our industry are understood and that regulation and policy reflects appropriately what those are. We will continue to do that in particular with the regulations that are in front of us. And our Destination Zero strategy at its core is about recognizing the economic importance of commercial and industrial applications and the need to decarbonize that industry over time and how do you take the appropriate steps to regulation and incentive to do that. So we're going to continue to advocate for that. And some of the money that has come out of the Inflation Reduction Act has been allocated and is flowing into the market and creating jobs across the United States. So we'll continue to emphasize those points and the opportunities and challenges that we're facing and how we navigate the energy I think Cummins is really well-positioned regardless of how that plays out, but the industry, of course, is making investments and preparing for that, and so we want to make sure that we have stability and regulation most importantly.

I know there's a lot of questions about heavy duty, but as we mentioned earlier, the demand for medium duty is getting stronger. We're actually investing to raise capacity over time, partly because of the strength of the market, partly because of the new business we've won. Right now, the expectation is less volatility and sustained high demand is what we're being told right now. Things can change based on the economy. But there's more question marks about heavy. Clearly, it's going down in the near term and a lot less questions about medium duty for now.

Thank you. Our final question comes from the line of Kyle Menges with Citigroup. Please proceed with your question.

Thank you. I just wanted to dive a little bit deeper into the power systems and really focus on the unit outlook and how to think about capacity for the remainder of the year and then how you think about you could exit the year from a capacity standpoint. Just doing the math, it seems like, and assuming you're running pretty hot from a capacity standpoint, it seems like unit shipments capacity for the year would be around 20,000 or so units. I'm curious to what that might look like, the capacity on an annualized basis exiting the year and looking into 2025 with some of the investments you're making.

Well, there's a lot of, unfortunately in that business there's more variation, right? There's just such a wide range of engines and applications and so it's not as, unfortunately it's not as simple explanation as it would be say for on highway markets where there's a narrower range of products across the market. I don't think there's going to be dramatic capacity increases this year, but we're working towards obviously supporting the one key global secular theme, which is the data center capacity, which Jenny Bush talked about at Analyst Day. That's the one. It varies by segment. Some of our more consumer-facing segments demand has dropped over the last 18 months, so there's some more capacity there. So it very much depends by end market. But the general theme is some investment in capacity, some reorganizing where we make product around the world. We feel confident about the revenue guide for this year. We feel confident we can support through our production revenue going into next year. But unfortunately, because of the variation, the products, the pricing, the applications, like a rule of thumb on the unit isn't quite as applicable in that sense.

Yeah, the only thing I'll add to Mark's comments, which are you know, absolutely accurate is, in particular in the data center market, what you've seen happen in the first half of the year was we worked really hard on our supply base and production in the 95 liter, which is running now at capacity, and then we launched the Centum product, which adds adds additional platforms, including a 78 liter that's able to run at this 3 megawatt key data center point. And so that's helped us. The supply chain improvement, as well as the new product launch, has helped us increase revenue and what we're selling in the market. But we're continuing to run into capacity constraints on some of the platforms in that data center market in particular, which is why we're making some modest investments to be able to take up capacity over the next couple of years.

Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to Mr. Clulow for any closing remarks.

Thanks, everybody, for participating today. That concludes it for today. As always, the investor relations team will be available for questions after the call and throughout the rest of the week. Thank you. Bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.