Cummins Inc.

Greetings and welcome to the Cummins Inc. Q4 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. We ask that you please ask one question, one follow-up, and return to the queue. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. Joining us today are Chair and CEO, Jennifer Rumsey, Vice President and CFO, Mark Smith, and Chris Clulow, Vice President, Investor Relations. It's now my pleasure to introduce your host, Chris Clulow. Please go ahead, sir.

Thank you, Kevin. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the fourth quarter and full year 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 futures. Our actual future results could differ materially from those projected in such forward-looking statements because of the 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 Commissions, 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 we 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. That out of the way, I'll turn you over to our chair and CEO, Jennifer Rumsey, to start us off.

Thank you, Chris. Good morning. I'll start with a summary of 2024, discuss our fourth quarter and full year results, and finish with a discussion of our outlook for 2025. Mark will then take you through more details of our fourth quarter and full year financial performance and our forecast for this year. As I reflect back on 2024, I am pleased to share that we delivered strong financial results with records in several parts of the business, while also making significant progress in the execution of our Destination Zero strategy. I am incredibly proud of what Cummins and our employees accomplished for our stakeholders, and I feel energized about the opportunities ahead for us as we continue to demonstrate our relentless focus on advancing our strategy and executing our financial commitments as we lead the energy transition. It continues to be clear that our multi-solution Destination Zero strategy that leverages advancements and solutions from both our core and Accelera by Cummins businesses will continue to position us to succeed. We demonstrated this in 2024 as we further strengthened our position through evolving our portfolio and expanding and establishing relationships with new and long-standing key stakeholders and partners. Most notably, for our core business in 2024, we introduced the Cummins Helm engine platform. Applied across Cummins' legendary BX10 and X15 series engine portfolios, The HELM platforms provide customers with the option to choose the fuel type, either advanced diesel or alternate fuels like natural gas and hydrogen, that best suits their business needs and offers the power and performance customers expect, while also reducing emissions. Cummins began full production of the X15N natural gas engine at the Jamestown engine plant earlier this year. and we are actively engaged with some of North America's largest and most demanding heavy-duty fleets as they look to reduce their carbon footprint. Additionally, in our core business, we introduced four new generator sets to the award-winning Centum series, two each powered by Cummins QSK50 and QSK78 engines. In response to high market demand, these new models have been engineered specifically for the most critical applications, such as data centers. In order to further raise our capacity to meet rising power generation demand, we also intend to invest $200 million across our U.S., England, and India manufacturing sites. As you will see in our full year financial performance details and 2025 guidance, we are excited about the continued impressive performance and growth potential for our power systems business. Cummins also 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. The separation of Atmos resulted in the tax-free exchange of shares, which reduced Cummins' shares outstanding by approximately $5.6 million in the first quarter. In our Accelera business, we completed the formation of our joint venture, Amplify Cell Technologies, with Daimler Trucks & Buses, PACCAR, and EVE Energy to localize battery cell production and the battery cell supply chain in the United States. This strategic collaboration will advance zero-emissions technology for electric commercial vehicles and industrial applications. Amplify began construction this year of a 21-gigawatt-hour factory in Mississippi with potential for future expansion as demand grows and is targeting start of production in 2027. Lastly, as we navigate this long and messy transition for our customers, we remain committed to pacing and refocusing our investments on the most promising paths as the adoption of zero-emission solutions slows in some regions around the world. As you can see in our fourth quarter results, we recorded charges related to the reorganization of our Accelera business segment as we underwent a strategic review to streamline the business while also ensuring we are set up for long-term success. We remain committed to Accelera and its mission and this business continues to play an important role in our Destination Zero strategy. Now I will comment on overall company performance for the fourth quarter of 2024 and cover some of our key markets. Demand for our products remains strong across many of our key markets and regions, offsetting the softening in the North America heavy-duty truck market. Revenues for the quarter totaled $8.4 billion, a decrease of 1% compared to 2023, as lower North America heavy-duty and pickup truck volumes and a reduction in sales from the separation of Atmos were partially offset by continued high demand in our global power generation markets, stronger aftermarket and North America medium-duty truck volumes, as well as improved pricing. EBITDA was $1 billion, or 12.1%, compared to a loss of $878 million, or negative 10.3%, a year ago. Fourth quarter 2024 results included $312 million of charters related to the strategic reorganization of our Accelera business segment. This compares to the fourth quarter 2023 results, which included $2 billion of costs related to the agreement to resolve U.S. regulatory claims. $42 million of costs related to our voluntary retirement and separation programs, and $33 million of costs related to the separation of the Atmos business. Excluding those items, EBITDA was $1.3 billion, or 15.8%, compared to $1.2 billion, or 14.4%, a year ago. EBITDA and gross margin dollars improved compared to the fourth quarter of 2023 as the benefits of higher power generation volume, pricing, and operational efficiency more than exceeded lower North America truck volumes and the separation of Atmos. 2024 revenues were a record $34.1 billion, essentially flat with 2023 despite the decline in North America heavy-duty truck demand in the second half of the year and reduction of sales from the Atmos separation. EBITDA was a record $6.3 billion or 18.6% of sales compared to $3 billion or 8.9% of sales in 2023. 2024 results include a gain net of transaction costs and other expenses of $1.3 billion related to the ATMIS divestiture, $312 million of charges related to the Accelera reorganization, and $29 million of first quarter restructuring expenses. This compares to the 2023 results that included $2 billion of costs related to the agreement to resolve U.S. regulatory claims, $100 million of costs related to the separation of ATMIS, and $42 million of costs related to the Voluntary Retirement and Separation Program. Including those items, EBITDA was a record $5.4 billion, or 15.7% of sales, for 2024. compared to $5.2 billion or 15.3% of sales for 2023, as the benefits of higher power generation volumes, pricing, and operational efficiency more than exceeded lower second half North America truck volumes and the reduction of margin from the APMA separation. EBITDA dollars were a record in power systems, distribution, and engine segments. Our power systems business in particular finished 2024 with a record full-year EBITDA of 18.4% of sales, up from 14.7% in 2023. I am very pleased with the performance across our core business segments, and you will see from our guidance that we are excited to continue to build on this momentum. Now let me provide our overall outlook for 2025 and then comment on individual regions and end markets. We are forecasting total company revenues for 2025 to be down 2 to up 3% compared to 2024, and EBITDA to be 16.2 to 17.2% of sales, up from 15.7% in 2024. While we expect weaker first half demand in our North America on-highway truck markets, we expect many of our markets, particularly power generation, to remain strong throughout the year. Industry production for heavy-duty trucks in North America is projected to be 260,000 to 290,000 units in 2025, flat to down 10% year over year. We anticipate weaker first half demand, and while we do expect a pre-buy in the second half of the year, the uncertainty on the exact timing and extent is driving our wider guidance range. In the medium-duty truck market, we expect the market size to be 140,000 to 155,000 units, down 5% to 15% compared to 2024, primarily driven by weaker-than-expected recent net orders and a depleting backlog. Our engine shipments for pickup trucks in North America are expected to be 130,000 to 140,000 in 2025, flat to up 5% year over year. In China, we project total revenue, including joint ventures, to increase 5% in 2025. We are projecting a range of down 5% to up 10% in heavy and medium duty truck demand in China. While export demand is expected to decline slightly, we are hopeful that the recent NS4 scrapping policy and other stimulus actions may lead to domestic demand growth. We have not, however, seen a meaningful recovery thus far. While there's still uncertainty around the China truck market for 2025, we expect strength in other markets, particularly power generation, where demand is expected to remain high as data center momentum continues. In India, we project total revenue, including joint venture, to increase 10% in 2024, primarily driven by stronger power generation demand. We expect industry demand for trucks to be down 5% to up 5% for the year. For global construction, we expect flat to down 10% year over year, primarily driven by weak property investment and shrinking export demand in China. We project our major global high horsepower markets to remain strong in 2025. Revenues in global power generation markets are expected to increase five to 15% driven by continued high demand in the data center market. Sales of mining engines are expected to be down 5% to up 5%. For aftermarket, we expect revenue improvement with a range of flat to an increase of 5% for 2025. In Accelera, we expect full year sales to be $400 to $450 million compared to $414 million in 2024. In summary, 2024 was a record year for revenues, net income, EBITDA, and earnings per share. In 2025, we anticipate that demand will be slightly weaker in the North America on highway truck markets particularly in the first half of the year, but offset by continued strength in the power generation market and resiliency in our distribution business, given our strong aftermarket presence. Despite our relatively flat revenue forecast, we are expecting to improve profitability and cash flow. We remain committed to our multi-solution approach that is proving to be the right strategy for our customers, for the environment, and for the continued growth of Cummins, while also returning cash to investors. Now let me turn it over to Mark, who will discuss our financial results.

Thank you, Jen. Good morning, everyone. We delivered strong operational results in the fourth quarter, which resulted in revenue achieving the top end of our prior guidance and EBITDA margins exceeding our projections. 2024 was a record year for revenues, EBITDA, and earnings per share, reflecting the strong demand for our products and the strong hard work of our employees. Now let me go into more details on Q4 and the full year performance. There were some notable non-routine transactions in 24 and 2023, and I'll quantify those and describe our underlying results to give a better understanding of the performance from regular operations. Fourth quarter reported revenues were 8.4 billion and EBITDA was 1 billion or 12.1% of sales. As Jen mentioned, we underwent a strategic review of our Accelera segment which resulted in charges of $312 million, of which $305 million were non-cash. Excluding this charge, we delivered EBITDA of $1.3 billion, or 15.8% of sales. In the fourth quarter of 23, we reported sales of $8.4 billion and an EBITDA loss of $878 million. Excluding the regulatory settlement, ATMOS separation costs And voluntary retirement and separation program costs in Q4 2023, EBITDA was positive $1.2 billion or 14.4%. I know that's a lot to digest. In summary, on an underlying basis, EBITDA improved by 140 basis points on slightly lower sales, excluding those charges I just described. Fourth quarter revenues decreased by 1% from a year ago as organic growth was more than offset by the reduction in sales driven by the separation of Atmos. Sales in North America were flat while international revenues decreased 3%. Foreign currency movements negatively impacted sales by less than 1%. The EBITDA improvement of 140 basis points was primarily due to higher power generation volumes, pricing and operational efficiency partially offset by lower North America truck volumes and the separation of apps. Now let me summarize some of the impacts by line item in the income statement. Gross margin was $2.1 billion or 25.4% of sales compared to $2 billion or 23.7% last year. The improved margins were driven by stronger power generation and aftermarket demand, favorable pricing, particularly in power systems and distribution, and improved operational efficiency. Selling, administrative and research expenses were $1.1 billion or 13.6% of sales compared to $1.2 billion or 14.2% last year due to lower research and development costs. Joint venture income of $87 million decreased $26 million primarily driven by lower technology fees from some of our international partnerships and costs incurred in the ramp-up of the Amplify Cell Technology Battery Venture here in the U.S., which was formed in the second quarter of 24. Other income was negative $25 million, a decrease of $75 million from a year ago, primarily driven by mark-to-market losses on investments related to company-owned life insurance. Interest expense was $89 million, a decrease of $3 million from a prior year driven by lower weighted average interest rates. The all-in effective tax rate in the fourth quarter was 32.8%, principally due to non-deductible costs related to the Accelera reorganization. All-in net earnings for the quarter were $418 million, or $3.02 per diluted share, which includes $312 million or $2.14 per diluted share of Accelera reorganization charges. Excluding the Accelera charges, EPS was $5.16 per diluted share. Operating cash flow was an inflow of $1.4 billion, just $37 million lower than the level we saw in the first quarter last year. For the full year 2024, revenues were a record $34.1 billion, slightly above a year ago and reflecting 4% growth if we exclude Atmos from both 2023 and 2024. EBITDA in 2024 was $6.3 billion or 18.6%, excluding the gain in costs associated with the separation of Atmos, the Accelera charge in the fourth quarter and first quarter restructuring expenses EBITDA in 2024 was 5.4 billion or 15.7%. 2023 EBITDA was 3 billion or 5.2 billion and 15.3% excluding the regulatory settlement, ATMOS separation costs and voluntary retirement separation programs. The increase in EBITDA percent was primarily driven by higher power generation volumes pricing and operational efficiencies more than offsetting the impact of lower North American heavy-duty truck volumes and the reduction in margin from the Atlas separation. All in net earnings were $3.9 billion or $28.37 per diluted share compared to $735 million or $5.15 per diluted share a year ago. 2024 results included the gain related to the separation of ATMOS, net of transaction costs and other expenses of $1.3 billion or $9.28 per diluted share, charges related to accelerated reorganization of $2.12 per diluted share, and first quarter restructuring costs of $0.16 per diluted share. Capital expenditures in 2024 were $1.2 billion flat compared to 2023, as we continue to invest in the new products and capabilities to drive growth, particularly related to the Helm platforms within our core business in North America. Our long-term goal is to deliver at least 50% of operating cash flow to shareholders, and over the past five years, we've returned 54% in the form of share repurchase and dividends, even while we absorb the significant acquisition in the form of Meritor. In 2024, we focused our capital allocation on organic investments, dividend growth and returning $969 million to shareholders via the cash dividend and debt reduction. We also reduced our shares outstanding by approximately 5.6 million shares from the tax-free Atmos separation share exchange. I will now summarize the 2024 results for the operating segments and provide guidance for 2025. And thankfully for you and for me, I'm going to exclude all those non-routine items in the following pages, and thanks for staying with me as I work through that. For the engine segment, 2024 revenues were a record $11.7 billion, or up $28 million compared to last year. EBITDA was 14.1% of sales, flat compared to a year ago. In 2025, we project revenues for the engine business will be down 2% to up 3% due to expected weakness in North American truck market, particularly in the first half of the year, slightly offset by improved demand in pickup and some international markets. 2024 EBITDA is expected to improve with projections in the range of 14.2%. to 15.2%. Component segment revenues were $11.7 billion in 2024, 13% lower than the prior year, and EBITDA was 13.8% of sales compared to 14.4% in 23. A lot of work done to improve existing operations, but that was offset in the year-over-year comparisons due to the separation of Atmos. For 2025, we expect total revenue for the components business to range from down 5% to flat, as 2024 included ATMOS in the first quarter through March 18th. EBITDA margins are expected to be between 13.8% and 14.8%. In the distribution segment, revenues increased 11% in 2024 compared to 2023, were a record $11.4 billion. EBITDA was 12.1% compared to 11.8% a year ago, driven by higher power generation volumes and pricing. We expect 2025 distribution revenues to increase 2% to 7%, and EBITDA margins to be in the range of 12% to 13%. In the power system segment, revenues were a record $6.4 billion, up 13% over 2023, driven primarily by power generation demand, especially data center applications. EBITDA was 18.4%, or $370,000 cost reduction. In 2025, we expect power systems revenues to be up 2% to 7%, and EBITDA to improve again and be in the range of 19% to 20%. Accelera revenues increased to $414 million in 2024, with a net operating loss of $452 million, as we lower costs in existing operations, partially offset by additional losses in the Amplify cell joint venture as it advances its operations. In 2025, we anticipate revenues to be in the range of $400 to $450 million, and net losses to reduce to $385 to $415 million as we continue to make targeted investments aligned with market demand whilst reducing cost. We currently project 2025 company revenues to be down two to three percent. Company EBITDA margins are projected to be approximately 16.2 to 17.2 percent compared to an equivalent 15.7 percent in 2024. Our effective tax rate this year is expected to be 24.5% excluding any discrete items. Capital investments will be in the range of $1.4 to $1.5 billion as we continue to make critical investments to support future growth. To summarize, we delivered record sales and profitability in 2024, including strong results in the second half of the year, even as demand in the North American heavy-duty truck market declined. Cash generation has been and will continue to be a focus as we enter 2025, enabling us to continue investing in new products for new and existing markets, returning cash to shareholders, and maintaining a strong balance sheet. Last May, we laid out our updated financial targets through 2030. Our strong performance in 2024 represented encouraging progress towards those targets and despite a relatively flat revenue forecast and expected weakness in North American heavy duty truck, we expect to further improve profitability and cash flow in 2025. Thanks for joining us today, and let me turn it back over to Chris.

Thank you, 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. As a reminder, that's star 1 to be placed in the question queue, and star 2 if you'd like to move yourself from the queue. And as a reminder, that's one question, one follow-up, then return to the queue. Our first question today is coming from Angel Castillo from Morgan Stanley. Your line is now live.

Hi. Thanks for taking my question, and congrats on another strong quarter here. Just wanted to unpack the power generation guide of 5% to 15% a little bit more. Could you just split that out between kind of price and volume, and then maybe just tying into that,

I think you mentioned a new investment of $200 million in Minnesota, UK and India to ramp up capacity to meet what is a growing demand for a power generation. products. And so you're seeing in that guide an expectation that we have been able to take up capacity. We're continuing to look at strategic pricing and where we can bring value to the customer. So you've got some price in there as well. But really, it's about capacity ramp up and continued sales of larger engines in the power generation and data center market. It's really the 50, the 60 liter, the 78 and 95 liters. So these are large engines as we're able to bring more capacity online in our supply chain and our plants, you see that flowing through in revenue. And we expect that trend to continue over time. And so we're tracking on plan or even slightly ahead of plan to double our capacity by end of this year and looking forward to being able to meet what is a really strong demand from those customers.

That's very helpful. And then maybe as a follow-up, just on separate on the trucks, Can you just give us your latest thoughts on EPA 27? It sounds like you're still assuming some pre-buy in the second half, but just given, I guess, what we've seen from the administration so far, any thoughts on the likelihood of any kind of challenges to the EPA 27 rule?

Yeah. You know, our current view is that we expect the EPA 27 regulations will stay in place, and many companies, including us, have been investing in over multiple years in those products to bring those products to market. And we're looking forward to having a nationwide standard again in 27. And with that, we are still anticipating some both economic recovery and pre-buy happening in the North America trucking market that helps bring higher revenue in the second half this year and, you know, into next year. We do anticipate there will be more discussion and potential challenge over the greenhouse gas regulations that we see out into the 2030 and beyond timeframe.

Thank you. Next question is coming from Stephen Volkman from Jefferies. Your line is now live.

Great. Good morning, everyone. Maybe starting off, can you just talk a little bit more about the Accelera restructuring and how have you changed the focus of that business and What are you doing less of or more of or just some color around that?

Yeah, I'll start and then Mark can add if he wants to share more detail. But really, this business has all along been about remaining agile and investing as we see technology advancing and markets starting to move in these zero emissions technologies. And we formed it through a number of acquisitions as well. So what that meant was we had kind of a distributed footprint and investment platform. coming from those different acquisitions. And so we really looked at where we see a market moving. We expect that battery electric vehicles will be important in some of our commercial vehicle and industrial applications. And we feel well positioned with the battery cell joint venture and some of the wins that we have with customers as that market develops. So we're continuing to invest there. being selective in fuel cells and some of the other technologies where adoption continues to push out. But we think we're well positioned. Frankly, the slower and messier this goes, my view is the better it is strategically for our commons. And so we're positioning ourselves in the places where we see that market and technology beginning to increase.

Okay, good. Sorry, I thought Mark was going to add something. Can I ask... Well, you've been talking a lot as it is. Hopefully, you'll be doing less of that this year on all these adjustments. Can I just follow up? Can I follow up on the Helm platform? Do you have targets relative to... you know, the types of unit volumes you might expect either on the NatGas side or on any of the other engine, sorry, any of the other fuel options that you can use with that platform?

We've got, you know, the rate of, the beauty of the Helm platform is it's got that fuel flexibility. And so, you know, the reality is we're still going to sell a lot of the diesel version of that, and it'll be a higher efficiency vehicle. which means lower CO2 and lower fuel costs for our customers. We've set a goal of getting to 8% on the natural gas. Version of that, we're starting to see customers adopt. Packard's launched it. Daimler Trucks will launch that 15-liter natural gas this year. Fleets are testing it. I was with a big customer last week. They're finishing their field testing. They feel good about the product, and they're looking to start to increase but it really depends on diesel fuel prices and regulation and customer CO2 goals, and so it's hard to give specific numbers on the rate of natural gas or hydrogen adoption because of that dependency on infrastructure, you know, cost and regulation.

Thank you. Next question today is coming from Jerry Revich from Goldman Sachs. Your line is now live.

Yes, hi. Good morning, everyone. Hi, Gary. Hi. In power systems, you had really excellent 30% year-over-year growth in revenue per unit in a quarter, so the ramp in the supply base is progressing nicely. I'm wondering if you'd just update us on how much more throughput you expect to get out of the supply base in 2025 for those large products, and I appreciate there could be a wide range of outcomes, but would love to get your updated views on that.

Well, I think it's important to remember that the revenue growth in particular for 2024 was also about launching those new Centum products. So we're seeing new products coming online that serve the market in addition to ramping up capacity. And for this year, it really is focused on continuing to max out our capacity capability that we have while we're making the investment in more capacity across that range of products. products and the team has done a really phenomenal job of doing that, improving operating efficiency, working with the supply base to try to get as much out of what we have. But there's some major investments that need to happen by the end of this year to really get to the full doubling of capacity.

Unfortunately, Jerry, units are not a great indicator just because the size of the generator set we've been selling is Going up, right, so the average selling price has gone up a lot over and above pricing, just the size of the set that we're selling. So the revenue has outgrown the unit significantly.

Nice problem to have. And separately, you know, in the China truck market, as you mentioned in prepared remarks, there's some optimism in the market about potentially strong demand. Can you just calibrate us? I believe, including the JV and wholly-owned business, China truck profits are maybe 10% of total company profits at this point, and given we're at the trough of the cycle, is it fair to think about pretty attractive incremental margins if demand does indeed surprise to the upside?

Yes, on the latter. I mean, China in total, maybe on a more normal run rate, would be in the range of 15% to 20% of our earnings, and yes, on highway would typically be more than half of that. So you're in the ballpark, Jerry. Yes, and there's no massive structural investments going on there in the current year. So if we get more volume, we'd expect to convert that into more profits. There's also just some lumpiness around tech fees and other things. But I think the underlying operational business is well set, as it's done in prior cycles when demand improves. We see that. And I think that just reinforces you know, how well the engine business and components did in 24. Not just did we have weakening heavy duty truck in the second half of the year, but we had weaker China throughout the year. So hopefully at some point, confident China is going to turn. We don't have a lot of visibility into that right now. Hopefully that's another leg to come.

Thank you. Next question today is coming from Tim Fine from Raymond James. Your line is now live.

Thank you. Good morning. Maybe I'll ask one to start on components. Mark, just as you think about the margin outlook for 25 on kind of flat to down revenues, pretty nice improvement. I'm wondering how much of that is maybe a benefit from kind of lapping the Atmos spin or separation, or is there obviously there's more to it than that. So maybe just a line or two in terms of what you're projecting there for components.

I think when you look across the company, you know, we've done a lot on cost reduction that hasn't been enormous in any given quarter, but we've been working at it really since the fourth quarter of 2023 when we announced voluntary separation package. We did a lot of work internally during 2024 to look at how we weighted the amount of resources we put between lines of business Functions, regional structures, and a lot of this work has paid off in terms of improving our cost structure and focus. So yeah, the components business is going to benefit from some of that. We're not breaking it out separately, but what was formerly known as Meritor, drive, train, and braking systems business, results have continued to improve there underlying. So I think there are a number of things where they're working incredibly hard on, yeah, a flattish revenue environment to drive cost and efficiency where we can.

Okay, and then, Mark, on the Accelera, just in light of the restructuring and given how the global backdrop is changing or has changed, the expectation to get that business to get EBITDA break-even by 27, is that Is that still in the cards, or are we thinking that maybe is a tougher one to hit?

Yes, I think overall, relative to our 2030 targets for the total company, we feel like we've had a really good start in 2024 and on track, and we're doing a bit better on the core business, and headwinds have come more frequently and more severely recently. to Accelera. So we are committed to significant loss reduction, but right now we are not on track towards that break even, but we do feel we're very much on track for the overall company targets. And that's really the reason why we took more pronounced actions that the Accelera team did in the fourth quarter, recognizing that we're not going to get enormous help from demand here in the near term. So we're managing what we can, and in the context of overall company results, we feel confident that we are not right now on track to get to break even as we sit here today.

Thank you. Next question is coming from Kyle Mendes from Citi. Your line is now live.

Thank you. I was hoping if you could just comment on how you're thinking about R&D spend in 2025 versus 2024, maybe more specifically within engine and components? And then just beyond 2025, how you're kind of thinking about that, how we should be thinking. Thank you.

Yeah, good question. So I think beyond 2025 is where we should see more momentum to the downside on engineering expense. We did see some improvement through the year in the engine business. We've got a lot of new product launches, both in engines and components in 2025. But after we get through those launches and through 2027, that's definitely part of our margin expansion story in those two businesses. But not a dramatic shift this year, some puts and takes between engines and components.

Thanks. That's helpful. And then just could you comment a little bit on how you're thinking about the parts outlook for 2025? Yes.

Thank you. Yeah, parts held up pretty well. In fact, pretty little bit better than expected in the fourth quarter across our businesses. And so we think in the range of flat to 5%, probably some pricing baked in there. So yeah, growing in line with the economy, I would say at least on par with the economy, with what we know today.

Thank you. Next question is coming from Jamie Cook from Truist Securities. Your line is now live.

Hi, good morning. Nice quarter. I guess a similar question that Tim asked on, I think it was the components business, just the margins mark in power systems are very good despite sort of what I would call a muted top line forecast. So is that just pricing in some of the new products? And then I guess how do you think about margin targets, you know, relative to the ones you just gave us, I guess, last year? Is it looking conservative? And then my second question is, Obviously, lots of puts and takes around tariffs and who knows what happens. But, you know, are there any changes in your terms and conditions or contracts with your customers that if we do get into an environment where tariffs and that causes price increases that we're able to absorb costs or increase price more frequently relative to last time? Thank you. Within engines, I guess.

Great. So yes, power systems doing well. I think continuing to focus on supply chain, efficient output. They did a great job last year, so I don't want to sound like we're dissatisfied. Quite the opposite, very impressed, but still think there's more to come on raising volume, raising productivity, and a little bit on price in power systems. And I guess if we really had a robust US economy, we could see growth in some of the smaller generator sets we have. high market share in some of the consumer segments that aren't particularly robust. So I guess we don't see signs of that, but if we wanted to get onto the bullish side and saw more strength in the US economy, that could be another leg to help. On tariffs, by and large, our strategy is to make most of our products in the market in which they're sold. But of course, we do have a global supply chain. Of course, nobody knows exactly what the tariff situation is going to be, but to the extent that we do incur them, then we think it's important that the market feels those and we'll look to pass those on. Let's hope that's not significant for everybody involved. But really, we're just focused on controlling what we can control. And I think, yes, we've got secular tailwinds in power systems, but the biggest driver is being able to scale growth effectively. and pushing out costs, and then you don't see it on the inside, but the work we've done inside to try and simplify our structure, improve the speed of decision-making, all of those things help and have helped kind of raise the bar in 2024. Thank you.

Next question is coming from David Razzo from Evercore. Your line is now live.

Hi, thank you. I'm trying to better understand the margin expansion in engines, and really for that matter, components. First, the DNA, the growth in the DNA, is that mostly in engines or components? It's just the margin improvement is impressive. I'm just wondering, do I have to put it down a little bit because it's more DNA than it is operational?

Well, there is an increase in DNA because that's where we're investing most of the capital in. North America, particularly in the engine business over the last couple of years.

So of the 100 DNA increase, is it 50 engines, 25 components? Just some sense so I can get a better sense of the underlying operation.

Yeah, I mean, it won't be significantly in distribution. Power systems, whilst we're increasing investment, is still modest relative to those two segments. And so on an incremental basis, most of it's going to go through engines and components, a little bit in corporate, which ends up mostly in engines and components.

Okay, that's helpful. And then even with that, it looks like there still is some slight operating, let's say, non-DNA margin improvement in engines. What's driving that? Is it a little bit of mix? Is it? I'm just trying to think about maybe the new medium engines. You're outperforming the market. How to think about those margins versus heavy. Because it's all wrapped in the idea of trying to figure out where do you think engine margins are as we sort of move out of 25 and people start to pontificate about earnings power in 26 with the pre-buy in the engine division.

Yeah, I think those are all really important questions and will be big contributors to the long-term performance. In the near term, David, I think we'll continue to expect to do well in the aftermarket side of which the engine business is our biggest single driver. So that's probably where there's still some pricing opportunity in 2025. And then, yes, the engineering is not coming down enormously, but I think we've come down off the peak there. Components probably going up a little bit. But those would be the main drivers. And as you can see, we haven't factored a lot in from China yet. So really it's cost control and aftermarket in the near term.

Thank you. Next question is coming from Avi Rozovich from UBS.

Good morning, guys. I guess in terms of your guidance for market outlook for North America heavy-duty trucks this year, it sounds like if for whatever reason we don't see it materialize this year that you'd expect retail demand maybe still negative second half. So I guess one, am I interpreting that correctly? And two, can you just discuss how you're thinking about it?

Yeah, I mean, I think if you look at the underlying performance in the heavy duty market, spot rates dropped early in 23. So truckload carriers have really had challenges now for two years and I think there's a very real chance that we'll see improvement in that over the course of this year just depending on what the underlying economy and interest rates do. So there's some potential upside in the second half for that in addition to this pre-buy phenomenon that we would anticipate would lead to a stronger second half versus first half. The range is quite wide because how high that goes is really dependent on the pre-buy and when that starts.

Got it. Okay. Um, and then in terms of medium duty, just, uh, breaking down kind of market share gains versus market growth for 2024. Um, you know, how did those, uh, net against each other? And then in terms of your sales guidance for this year within engine, uh, how are we thinking about further share gains this year? Um, not as much.

I think really, I think we're talking about following the market in 2025. There's been a long track record of significant market share gains in that market. Our engines clearly did a leader in that market. And there were some share gains. But going forwards, it's very much primarily going to be tracking the market. There can be some modest changes around that from where we are now.

Thank you.

So the guide down for the year is reflective of what we've seen in order.

Yes. The industry orders, we will feel that, yeah.

From a product perspective, we continue to feel really positive about how our product's performing in the market and our position across media and heavy duty.

Thank you. Our next question is coming from Rob Wertheimer from Milius Research. Your line is now live.

Thank you. I had two questions around power systems, if I may. And one is, as this data center market continues to develop, historically, at least, I suppose, selling an engine is one thing and then servicing is another. And if you have backup power, it doesn't get turned on that much and it's not as profitable. But obviously, this is high uptime, high criticality kind of operations. Do you see any opportunity to change that profit algorithm such that you'll be making more recurring revenue or otherwise on power? on that massive build-out of engines that you're going to do. And then secondly, if I can just wrap it in, you've had excellent results in power systems. I'm not sure if all of it's really this surge in data center or maybe the stuff you've touched on a couple times on the call already, operational improvements. I wonder if you could just expand on how you've made that business better. Thank you.

Sure. So, you know, first on the data center market. So, you know, with power generation and data centers, we have NGIN, GENSET, And then a good portion of that business also flows through the distribution business. So the strong performance you see in the distribution business last year and the outlook is reflecting the strength and power generation as well as aftermarket. But as you noted, they don't today run a lot for backup power. So typically parts revenue is relatively low as we look at shortage of power availability and how do you meet power demand you know, in the U.S. and around the world, there's potential for some shift in that. And so strategically, we're considering how we think about our role in that, which was part of the discussion on microgrids and what we do there today. But today, still very much heavily backup power and because of the high reliability demand for those applications. In terms of the power systems performance, we undertook now two years ago focused effort to really look at operating performance structure, how we made sure we were investing in the right products and getting returns on the investments we were making for our customers. And working through some of the supply challenges that have built up through the pandemic and then the rebound and the market after that. And so that really has come together at exactly the time when this data center trend has also happened. And so we really had strong underlying operating structure and performance in the business that we continue to drive improvement in as we're also taking up volumes. And so both of those are contributing to really the remarkable profitability improvement that you've seen in power systems.

Just to add, Rob, the distribution, of course, adds that extra slice of revenue on data centers and, in fact, is fundamental to winning and supporting this data center business around the world. I think that's one of the strengths we have and Few others have, and that's why you see that the market demand is concentrated amongst a couple of large engine manufacturers like us because of that service capability. But just to underline what you said, Rob, and your intuition, it would be very wrong to attribute power systems improvement just to data centers. That's a journey that's still got legs left, but the performance level has been elevated across that segment including in the alternator business, which supplies really across that supply chain. So we're incredibly pleased with the way that business has improved.

Thank you. Our final question is coming from Tammy Zakaria from J.P. Morgan. Your line is now live.

Hi, good morning. Thank you so much. So the distribution segment guide, 2% to 7%, it seems quite healthy overall. given the underlying truck market outlook. Are you able to comment on the core distribution outlook versus the power generation related services? The reason I ask, if power generation demand holds at these levels, it seems like distribution could see another double digit growth year in 2025. So any comments there would be helpful.

Yeah, I think you're typically seeing parts growth maybe slightly above the rate of economic growth. And then in this cycle, you're right, the power generation demand in data centers and in some other applications has really provided that extra leg. So I would say in the short run, yeah, power gen will be the main swing factor. I would say that some of the other segments, mining, oil and gas, if we look beyond this year, we'd expect to see more growth in the future. There's not enormous momentum in those businesses, but they're also important in markets for distribution. But yeah, one of the reasons that we like distribution, it generates a lot of cash. It's less volatile than other parts of the business and has that really strong aftermarket piece, which doesn't get the same extraordinary growth rates, but underpins the kind of year-to-year level of performance. So yeah, distribution's doing well. and hopefully the global economy strengthens, and then all of our businesses will do well.

Got it. That's very helpful. And then one follow-up question on that comment that you expect some pre-buy in the back half, but the timing is uncertain. I'm curious what pre-buy lift is embedded in the current heavy-duty and medium-duty outlook for North America. I'm just trying to understand what the market could look like Let's see if there's no pre-buy.

Well, there's so many factors at play, but that's one of the factors we believe could help. We're going to start off at a fairly modest level in the first quarter, although orders here yet in the fourth quarter of 24 were a little better than expected, I would say. But it's really, we're anticipating that strengthen in the second half to come somewhat from demand ahead of the regulations and understanding of how flexible the supply chain is for that industry. Again, I think we've all got fairly consistent views of the market at this point. We'll see how it plays out. A big factor, of course, is going to be the strength of the U.S. economy, spot rates and freight activity. All these factors weigh in. The main thing to know is we've got a stronger second half in heavy-duty truck built into our forecasts, Q1. Yeah, it's going to probably be the low point of the year with what we expect right now. The question is, will we get the improvement in the second half?

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.

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