Cummins Inc.

Greetings and welcome to Cummings Incorporated's first quarter earnings release. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. We ask that you please limit to one question and one follow-up. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Chris Kuhl, Vice President, Investor Relations.

Thank you, Rob. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the first quarter of 2025. Participating with me today are Jennifer Rumsey, our Chair and Chief Executive Officer, and Mark Smith, our Chief Financial Officer. We will all be available to answer questions at the end of the teleconference. Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs, and intentions on strategies regarding the future. Our actual future results could differ materially from those projected in such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the forward-looking disclosure statements in the slide deck and our filings with the Securities and Exchange Commission, particularly the risk factors section of our most recently filed annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q. During the course of this call, we will be discussing certain non-GAAP financial measures and will refer you to our website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's webcast presentation are available on our website within the investor relations section at Cummins.com. With that out of the way, I'll turn you over to our chair and CEO, Jennifer Rumsey, to kick us off.

Thank you, Chris, and good morning, everyone. As you can see from our press release and earnings material, we delivered very strong results in the first quarter, led by record performance in our power system segment. We are entering unchartered territory as the trade tariffs start to have a more significant impact beginning in the second quarter. The breadth and changing nature of the tariffs have introduced a great degree of uncertainty and mean that at this time we are unable to predict with confidence our expected performance for the year. It is important to note that we serve many different end markets, some with long backlogs and clear secular themes in our power systems business, some less sensitive to short-term economic sentiment such as our aftermarket business, and other markets where customers tend to flex demand more quickly when business confidence weakens. The duration of uncertainty and extent of tariffs will influence how much and for how long demand is impacted. Cummins is in a strong position strategically and financially with an experienced leadership team well-versed in navigating through periods of uncertainty. We look forward to restoring our guidance when we have more stability in the outlook. Now I will move on to some of our highlights from our first quarter. Then I will discuss our sales and end market trends by region. I will then provide an update on how uncertainties in our current environment may impact our end markets. Mark will then take you through more details of our first quarter financial performance. In the first quarter, we continue to make progress in the execution of our Destination Zero strategy. In our engine segment, we introduced the much-anticipated X10 as a part of our Cummins Helm platforms. This engine replaces both the L9 and X12 engine platforms and will deliver a new level of performance, durability, and efficiency for heavy and medium duty customers. Alongside the X15 and B series, the X10 provides customers with a power solution to meet their unique operational requirements while maintaining the performance and reliability for which Cummins is known. In addition, we unveiled the new Cummins B7.2 diesel engine that brings the latest technology and advancements to one of our most proven platforms. The new engine will feature a slightly higher displacement and is designed to be a global platform which creates flexibility for different applications and duty cycles. Both the B7.2 and X10 engines will be manufactured at Rocky Mountain Engine Plant in North Carolina and will go into production in North America in 2027. In our power system segment, we announced the acquisition of assets of Firstmode, a leader in retrofit hybrid solutions for mining and rail operations. This technology represents the first commercially available retrofit hybrid system for mining equipment, significantly reducing total cost of ownership while advancing decarbonization and operations. This acquisition reinforces Cummins' commitment to providing innovative and effective decarbonization solutions while meeting the needs of our customers on their transition to a lower carbon future. Lastly, our Accelera by Cummins segment announced the supply of 100 megawatt proton exchange membrane, or PEM, electrolyzer system for BP's Lindgen Green Hydrogen project in Germany. The hydrogen generation system will be the largest electrolyzer system assembled by Accelera to date and will be manufactured in Accelera's new electrolyzer plant in Spain. Once fully commissioned in 2027, the 100 megawatt electrolyzer system will produce up to 11,000 tons of green hydrogen per year. Now I will comment on the overall company performance for the first quarter of 2025 and cover some of our key markets. Demand for our products remains strong across many of our key markets and regions, offset by softening in the North America truck market. Revenues for the first quarter were $8.2 billion, a decrease of 3% compared to the first quarter of 2024. EBITDA was $1.5 billion, or 17.9%, compared with $2.6 billion, or 30.6% a year ago. First quarter 2024 results included a gain net of transaction costs and other expenses of $1.3 billion related to the ATMOS divestiture and $29 million of restructuring expenses. Excluding the one-time gain and the costs related to the separation of ATMOS as well as restructuring expenses, EBITDA and gross merchant dollars improved compared to the first quarter of 2024. This improvement in profitability was driven by the benefit of higher power generation and aftermarket volumes, pricing, and operational efficiency, which more than exceeded the impact of lower North America truck volumes and the separation of Atmos. For our power systems business in particular, we had record performance in both EBITDA dollars and percentage in the first quarter, as we continue to benefit from operational improvements and strong end markets. Our first quarter revenues in North America decreased by 1% compared to 2024. Industry production of heavy-duty trucks for the first quarter was 63,000 units, down 18% from 2024 levels, while our heavy-duty unit sales were down 21,000 or 21% from 2024. Industry production of medium-duty trucks was 32,000 units in the first quarter of 2025, a decrease of 21%, while our unit sales were 31,000, down 14% from 2024. We shipped 29,000 engines to Stellantis for use in their van pickups in the first quarter of 2025, down 25% from 2024 levels. Revenues for North America power generation increased by 12%, driven primarily by continued strong data center demand. Our international revenues decreased by 5% in the first quarter of 2025 compared to a year ago. First quarter revenues in China, including joint ventures, were $1.8 billion, an increase of 9% as accelerating data center demand and high domestic infrastructure demand more than offset lower export demand. Industry demand for medium and heavy-duty trucks in China was 294,000 units, a decrease of 4% from last year. Our sales in units, including truck ventures, were 42,000, an increase of 6%. Industry demand for excavators in China in the first quarter was 61,000 units, an increase of 23% from 2024 levels. Our units sold were 11,000, an increase of 19%. The increase in the China market size is primarily due to domestic cyclical replacement demand, rural development, and farmland renovation demand. Sales of power generation equipment in China increased 68% in the first quarter due to accelerated data center demand. First quarter revenues in India, including joint ventures, were $725 million, a decrease of 14% from the first quarter a year ago. Industry truck production was flat with 2024. Power generation revenues decreased by 11% in the first quarter as the prior year included a pre-buy ahead of emissions regulations change. To summarize, we achieved impressive results in the first quarter with record financial performance in our power systems business. Looking ahead, there's heightened uncertainty about the pace of growth in the global economy due to tariffs, which could negatively impact demand for capital goods. Absent more clarity about the likely duration of elevated tariffs, we are not able to provide a reliable forecast for the remainder of this year. As a large US headquarter company with significant manufacturing in the US, we appreciate the administration's support for American manufacturing. This support is crucial as we invest more than $1 billion in our engine and power systems manufacturing operations in the US over the next few years, employing people in nearly every state through our manufacturing plant, and sales and service branches. As we evaluate our current manufacturing footprint and our exposure to tariff regulations, we believe we are well positioned because we primarily produce engines and gensets in the markets where we sell them. For instance, our medium duty, heavy duty, and high horsepower engines, as well as power generation products for U.S. customers, are manufactured in our plants located in Indiana, North Carolina, New York, and Minnesota. However, like much of our industry, our component and supplier manufacturing would be affected by current tariff regulations, which could disrupt the global economy and ultimately lead to higher costs for consumers. In addition to trade and economic uncertainty, there is also uncertainty in North America emissions regulations for 2027. We continue to expect new NOx regulation to go in place in 2027 and are focused on launching our products on schedule while also working with the administration as they explore options to lower the cost of existing regulations. While we believe our product plan is well positioned, the uncertainty in regulations, along with economic uncertainties, have led to a weaker than anticipated recent order and also has made pre-buy for the second half of the year unlikely. In summary, we had a strong first quarter and continued our progress in improving EBITDA margins as we shared in our analyst day almost a year ago, with tariffs not a significant factor in our results. The economic environment has changed significantly over the past three months. We have an experienced leadership team that has demonstrated capability in managing through periods of uncertainty, and we will maintain focus on our customers, our employees, and shareholders. We enter this period of heightened uncertainty in a position of strength and look forward to reinstating our guidance when some of the uncertainty has subsided. Now let me turn it over to Mark.

Thank you, Jen, and good morning, everyone. We delivered strong revenue and profitability in the first quarter. First quarter revenues were $8.2 billion, down 3% from a year ago. Sales in North America decreased 1%, while international revenues declined 5%. The separation of Atmos in mid-March in the prior year resulted in year-over-year sales decline of around 4% to the total consolidated sales, meaning that we were close to flat on an underlying basis. EBITDA was $1.5 billion, or 17.9% of sales for the quarter, compared to $2.6 billion, or 30.6% of sales a year ago, which of course included a one-time gain on the divestiture of the Atmos business of $1.3 billion net of transaction costs. Also a year ago, we incurred $29 million of restructuring expenses. To provide clarity on operational performance and allow comparison to the prior year, I'm excluding the one-time gain and the cost related to the separation of Atmos and the restructuring expenses in my following comments. EBITDA was $1.5 billion or 17.9% of sales for the quarter compared to adjusted $1.3 billion or 15.5% of sales a year ago. The higher EBITDA was driven by higher power generation and aftermarket volumes, positive price costs driven by operational improvements, partially offset by lower North America truck volumes and the separation of atmosphere. Now let's look at each line item a little more. Gross margin for the quarter was $2.2 billion, or 26.4% of sales, up from $2.1 billion, or 24.5% last year. The improved margins were driven by favorable pricing, higher aftermarket, and operational improvements, especially in power systems. Selling, administrative, and research expenses were $1.1 billion, or 13.6% of sales, compared to $1.2 billion, or 13.8% of sales, a year ago. Joint venture income of $131 million increased $8 million from the prior year, primarily driven by higher technology fees within our engine business and higher volumes in our Cummins Chongqing joint venture within power systems. Other income was $23 million compared to $21 million from the prior year, as gains on investments related to company-owned life insurance more than offset the negative impact of foreign currency revaluation. Interest expense was $77 million, a decrease of $12 million from the prior year, primarily driven by a low average debt balance as a result of the separation of Atmos and lower weighted average interest rates. The all-in effective tax rate in the first quarter was 23.9%, including $7 million, or $0.05 per diluted share, of favorable discrete tax items. All-in net earnings for the quarter were $824 million, or $5.96 per diluted share, compared to $2 billion, or 14.3 $14.03 per diluted share a year ago, which includes the net gain on the separation of Atmos, which was $1.3 billion, or $9.08 per diluted share, and restructuring expenses of $29 million, or $0.15 per diluted share. Hopefully, we've now lapped all of those exclusions and adjustments and look forward to having less words around those in future quarters. All in operating cash flow was an outflow of $3 million compared to an inflow of $276 million a year ago, primarily driven by higher working capital. Now let me comment a little more on segment performance. For the engine segment, first quarter revenues were $2.8 billion, a decrease of 5% from a year ago. EBITDA was 16.5%, up from 14.1% a year even on the lower truck volumes. The engine business benefited from pricing related to the launch of updated products in our light duty segment, stronger aftermarket volumes, operational efficiencies, good cost control, and a modest increase in joint venture income. Component segment revenue was $2.7 billion, a decrease of 20%, while EBITDA excluding costs related to the separation of Atmos decreased to 14.3% from 14.8 a year ago, as lower on highway demand in North America and Europe and the dilutive impact of the Atmos separation were partially offset by the benefit from operational efficiencies. In the distribution segment, revenues increased 15% from a year ago to $2.9 billion, EBITDA also increased as a percent of sales to 12.9% compared to 11.6% of sales a year ago, driven by higher power generation volumes, higher aftermarket and favorable pricing. In the power systems segment, revenues were $1.6 billion, an increase of 19%. And EBITDA was a record, increasing from 17.1% to 23.6% sales driven by strong volume, particularly in data center applications and rebuilds, favorable pricing, and continued focus on operational improvement. Accelera revenues increased 11% to $103 million driven by increased e-mobility sales and electrolyzer installations arising from prior period orders. Our EBITDA loss was $86 million compared to an EBITDA loss of 101 million a year ago, as we lowered costs in existing operations, partially offset by additional losses in the Amplify Cell joint venture as it advances its operations. In summary, we delivered impressive profitability for the first quarter, even as demand in North America truck markets declined. Uncertainty has increased due to trade tariffs, resulting in a slowdown in the global movement of goods, particularly between China and the US. It remains to be seen how long the tariffs remain in place and the impact that they have on business confidence and the demand for capital goods. Cummins is in a strong financial position to navigate through uncertainty. With our industry-leading portfolio of products and our global network, we are well-placed to support our customers. We look forward to reinstating our outlook when the economic conditions become clearer, along with hopefully a return to growth and greater prosperity here in the US and in the global economy. In the meantime, we'll continue to focus on areas we can control in managing costs and optimizing working capital while meeting our customer commitments. We'll stay focused on our strategic priorities in what is likely to be a more complex operating environment in the coming months as the full impact of the current tariff levels has not yet been felt, in our opinion. I want to close my prepared remarks by thanking Chris Clulow for his leadership in investor relations. He's moving to a new finance leadership role in operations and supply chain and will remain a key advisor to me and our business leaders as we navigate through the current challenges. Congratulations to Nick Ahrens in assuming the investor relations role. Nick and I look forward to meeting with investors and analysts in person in the coming weeks and months. We're very fortunate to have such a strong finance team at Cummins. Now 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 in a related follow-up. If you have an additional question, please rejoin the queue. Operator, we're ready for our first question.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And again, as a reminder, we ask that you please limit to one question and one follow-up. One moment please while we poll for questions. Our first question comes from Jamie Cook with Truist Securities. Please proceed with your question.

Hi, good morning and nice quarter. I guess just my first question, understanding you're not providing guidance, but based on what's been announced so far, is there any way you can sort of help us quantify the gross or net tariff cost, you know what I mean, that would impact your business and which segments are impacted the most. And then I guess my second question, just trying to understand which businesses have the most visibility, like where your backlog sits today and just how you're handling pricing, you know, just concerned with some of the businesses that have greater backlog, perhaps there's pricing risk associated with tariffs. Thank you.

Thanks, Jamie. I'll answer the first question and pass it on to Jen. It's a very uncertain set of circumstances given the changing and evolving nature of the tariff, so we're not going to quantify that today. Quite frankly, the bigger concern is the broader impact on the overall economic level environment. We've taken the steps without knowing what the tariffs were going to be. We've taken what steps we could. to try and mitigate the impact. But beyond that, to the extent that we incur tariffs, we're going to have to pass those on. We will, of course, as we get into actual results, share what the impact of tariffs is going to be. There's inevitably going to be some lag between cost and recovery, and we'll provide more colour going forwards.

In terms of what we're seeing in different markets, as I noted, we do have some different markets that we expect to be impacted in different ways by uncertainty in the economy. We have a multi-year order board in our power generation business, and where there are customers that want to cancel or push out builds, we're able to reallocate those to other customers. you know, for the foreseeable future, we're feeling pretty confident in that part of the business. Aftermarket, of course, as customers may delay purchase decisions that can drive aftermarket business for us. And the real market that is very sensitive is in the engine business and components, some of those on-highway markets. And we're seeing that, right? You saw that on Friday with the heavy-duty truck orders for April, where customers are waiting to see what happens and and pausing in many cases on placing orders for new trucks. And so it's a little bit varied in different parts of our business with the big question of what will happen over the next couple of months. As Mark said, we're looking at passing on tariff costs where we can't mitigate those and continuing to invest in our new products and price for value that we're able to offer through those.

It's certainly not a case that we're seeing a widespread change short-term momentum. There are obviously pockets where uncertainty seems to be more evident, and it's that lack of clarity that's led us to believe the right thing to do right now is withdraw guidance versus constantly tweaking it for every latest change in momentum. So we didn't do that lightly. We're not trying to foreshadow anything other than that the uncertainty is high, but it's very much varied, and hopefully there's going to be a change, and we'll be happy to reinstate that guidance as quickly as we can.

Our next question comes from Jerry Revich with Goldman Sachs. Please proceed with your question.

Yes, hi. Good morning, everyone. And Chris and Nick, congratulations. Thanks, Jerry. I want to ask in power systems, really fantastic performance from an absolute basis and also relative to the analyst data. Targets sitting here today obviously got some volatility on costs over the next year, but can you talk about where we should be thinking about margins moving forward for this business? Is the level of performance that we saw in this quarter, should we be thinking about that as the run rate going forward as we think about what incremental volumes could look like over the next couple of years once we do get through this low visibility spot, Mark, that you spoke to?

Yeah, first, thanks and good morning, Gerry. What I'd say is there are no significant one-off items in those results. So those are pure operating results. Of course, they're going to depend to some extent on the ebbs and flows of demand in individual segments. The only thing I'd point to in those results is that the aftermarket sales were very high. They're probably higher than we would have anticipated three months ago. So right now, that's the only thing that I would say looks Yeah, probably higher than we expected. But other than that, the business has made tremendous improvement and it's continued to improve quarter on quarter. I would say the results were a little bit better than we expected, but mostly down to the strength in aftermarket, not the underlying performance of the business. So again, as long as the demand trends continue, then it will be continuing to push to maintain very strong margins and improve where we can.

Super. And then separately, you mentioned, Jennifer, in the prepared remarks, just the uncertainty around EPA 27. In the scenario that EPA 27 doesn't move forward, can you just talk about Cummins' response in that environment? Because obviously you folks have invested a lot in the next engine family. And, you know, how should we think about potential contract renegotiations, 27 plus, if we don't get a changeover with your large customers on highway?

Yeah, great. Thanks, Jerry. You know, our current view is that likely we'll see a revision and a rulemaking process around greenhouse gas phase three, and so those regulations will change from what we have currently on the books, and those go into effect, of course, starting in 2030. We still anticipate a NOx regulation in 2027. We're actively working with EPA on their work to look at opportunities to lower cost and impact of those, and probably one likely thing that will be looked at is this requirement for a longer emissions warranty that customers purchase. So today, customers have the option when they buy a new vehicle to purchase extended warranty. Some of them do, in particular in heavy duty, but the regulations as they are today would require everybody to purchase that. So we're continuing to invest in and bringing these new platforms to market with that 27 regulation. It's difficult for me to speculate beyond that on other changes. But of course, if there are further changes, we'll look at revisiting what we're launching. But we intend to continue to launch as planned currently.

Right. And that's the same question for all engine manufacturers, right? The whole industry has been investing in new products. So we're all wondering, hoping for clarity.

Our next question comes from Angel Castillo with Morgan Stanley. Please proceed with your question.

Hi. Good morning, everyone, and thanks for taking my question. Listen, I know it's an incredibly – or a lot of uncertainty out there, an incredible amount of uncertainty and just a very wide range of outcomes. But I was wondering if you could perhaps talk a little bit more about one specific scenario for 2Q, meaning there's tariffs that are already in place today that that you have a little bit more visibility to. So if we just kind of put aside maybe some of the reciprocal or errors that are paused, can you just talk to, you know, what is the impact or kind of margin and sales volume that you kind of see based on orders, backlog, in terms of paying today for 2Q? Just want to get a better sense of kind of directionally what that implies very near term, accepting that, you know, long term there might be more.

What I will say is the... the impact of tariffs on our financial results in Q1 was immaterial. So those results that you saw, which were very strong, had essentially close to zero financial impact. So that's going to change, right? It's going to change, and it's going to change month to month, certainly as we start to go through the second quarter. Probably it's contributing to the biggest degree of uncertainty for the second half of the year, in terms of the demand outlook. There's uncertainty now, but the visibility of the second half is weak. We will give the impacts of the tariffs as we go along in our financial results. Needless to say, I would say it's going to build over the next few months. There will be some lag inevitably between ordering, incurring, mitigating, and recovering all of those costs. So I would say the second half we're going to see the fullest impact, assuming the tariffs remain as they are, which is a big assumption. Hopefully it's not a good assumption, but if we make it as an assumption, then you're going to start to see the fuller impact on consumers of equipment and suppliers in the second half of the year. So we will update you as we go along. There's a lot of work going on, a lot of moving parts. I know everyone wants to do these calculations, I would just step back and say our broader concern is on the demand of the economic, on the economic environment and the overall level of demand. The tariffs will be significant for Cummins from a cost basis based on where they are right now. We've got plans to manage through that and we'll provide that to you going forward. But as we said at the start, we've taken steps to mitigate where we incur them. We'll be looking to pass them on. There'll be some lag in fact.

Understood. That's very helpful. And maybe just a little bit of a bigger picture question. Just the power systems, you talked about some of the, if I heard correctly, just some of the aftermarket strength. And particularly on the data center side, I tend to think about those kind of large backup generators as not really having a lot of aftermarket in the first place. And again, in that data center piece. So could you just talk about what you're seeing in terms of what's driving the aftermarket parts, demand growth and power systems? And to the extent that you're seeing maybe more purchases in of aftermarket related to maybe the data centers. What does that tell you about how your assets are being run? Is there some kind of maybe substituting for prime power wherever there is a little bit more of a shortage or any other factors that might impact how your assets are being used?

Yeah, I appreciate the question. I think what's happening with power systems, which is I understand why I'm not being critical, like the lens is all zoned in on data centers. What you see in aftermarket parts is the use of all of the applications, mining, oil and gas, marine, power gen for the broader economy, rebuild activity. All those things are contributing and in fact some price increases in aftermarket are all contributing to the strong revenue. It is not a data center driven phenomenon in the moment eventually there will be some parts consumption on this but it will be nothing like a mining engine or a frac rig um so i just wanted to clear that up and i would just take this opportunity to remind people the performance improvement in the power systems business is not driven by fair winds in the data center. There's been a broad-based improvement. We're very appreciative of the opportunity to serve the data center customers, and that's positive for our business. But the power systems leadership team has done a great job in driving up margins in most parts of what they do below the surface. I just want to make sure

we're enthusiastic about data center demand we're not changing that enthusiasm but this is a much bigger story the improvement and the aftermarket really relates to what's going on in years before i hope that helped him and maybe just one other reminder as we think about the power systems business and its markets is there's a strong partnership between power systems and our distribution business so just in power gen about half of the revenue shows up the power systems the other half in The distribution business, similar in aftermarket, the distribution business plays an important role in the service that's provided to those customers.

Our next question comes from Tim Fine with Raymond James. Please proceed with your question.

Thank you. Good morning. And Mark, it was nice of Chris to cook up these new snazzy slides on his way. That was good.

They told me I was very old-fashioned. Yeah.

Not used to that. New look. Just, Mark, on the business, maybe we can dig a bit more on the margin performance there, and specifically on, you mentioned aftermarket being a contributor, so maybe just a comment in terms of your expectation for parts as we look forward, and then I guess related to that on the JV income, I know those technology fees can move around a bit, but that was a nice tailwind. Just think about kind of the balance of the year. If you're still expecting this is, you know, not just the engine business, but JV income to be a headwind to profits for the year, that's still the expectation, just given some of the uptick in China. So thank you, those are my two-part question.

Engine business, yeah. So engine business margins were up, right, and we've been, of course, we set out our stall for improving margins. In the current quarter, relative to the prior year, JV income, as you said, improved from some of the tech fees. They're gonna be lumpy, probably won't continue at that rate. China, haven't been seeing any dramatic changes in demand for some time. That's a past-looking comment, not a forward-looking comment. It's been pretty steady. So, yes, probably could be a little bit lower going forward. Product coverage or warranty, as many people refer to it, has been an enormous success story over multiple years, of which the engine business is the biggest driver of that. That really helped in the second quarter. For the company, our product coverage costs were 1.9%. in the quarter, typically. Normally, we'd be looking in the 2% to 2.5% range. So that was a real positive. So strong parts demand. We hope parts demand will remain resilient as we work through this period of uncertainty, but we don't know. We got some additional pricing where we launched products in the light duty part of the business. So there were many ingredients to the engine business improvement um but of course the full year so we can say we're off to a good start we of course were expecting like others some accelerating truck demand in the second half of the year and right now the momentum you've seen the truck orders you don't need me to tell you the momentum's been going in the wrong way um so we'll we'll have to see but overall yeah it's a good start there are a number of factors some of which may continue some of which May fade. Volume is going to be the big question, I think, from here.

I just want to remind you to look at overall really strong performance in Q1, even with softening and North America truck. We remain focused on the key areas we've been talking to you about, including in our last animal estate, even as we manage through uncertainty and tariffs and work to mitigate tariffs. So improving gross margin. In the business, we have growing aftermarket population that allows that aftermarket revenue to continue to grow over time. And we're still investing in critical areas. We continue to invest in capacity expansion and the power systems business in these next generation engine platforms while also monitoring pace of decarbonization and regulation and pacing investment in other areas. And so we continue to be focused on that even as we navigate through this uncertain time.

Our next question comes from David Razzo with Evercore ISI. Please proceed with your question.

Hi, thank you. The comment earlier about more worried about demand destruction, just curious, a very understandable view just from a broad macro view. I can appreciate that. But I'm just curious, are these comments based off of already communicating maybe what your cost increases would need to be and a pushback from your truck customers? Or is it even the end user or the truck saying, hey, at that price increase, we'll cancel backlog? I'm just curious, how much is this a ready sort of floated price increase that would be needed to cover your cost that's getting that reaction? Or again, is it more just a broad, and again, understandable, just a broad macro view, of course, these tariffs can hurt the economy?

Yeah, David, what I'd say, it's really uncertainty and a broader thing. I was at ACT Expo a week ago today, talked to many both OEM and fleet customers, they just don't know, right? They're just waiting because there's a huge amount of uncertainty on what's going to happen both economically and, you know, and with tariffs. And so that's really the wait and see.

And that said, I know you don't want to go into a real exact quantification, but just to level set everybody, can you help us with your greatest exposures to costs, be it, you know, 6%, 7% of global COGS is, you know, Mexico and China, something like that so we can at least quantify and at the same time hopefully if the tariffs come down quantify in a in a positive way and also what mitigating factors have already been put in place or or at least are imminent based off the tariffs of today thank you yeah i'm just going to be honest and say i'm not going to answer all of those questions for some of the reasons i said earlier what i can say is um you know our in our u.s on highway engine plants um our mca

Compliant, right? So in the terms of the operations that we do for our own highway markets, which is the largest proportion of our business, we're in many markets, but that's the largest proportion. We are MCA compliant for all of those large engine plants. It's really what happens here from these tariffs. Yes, there's some exposure to China. Yes, there's some exposure to Mexico. Yes, there's some exposure to all some of the other countries as well. But we're going to quantify that on a quarter-by-quarter basis. We're working through all of that with suppliers, with customers, and we'll provide an update as we go forward.

Our next question comes from Rob Wertheimer with Mellis Research. Please proceed with your question.

Hi. Good morning. It was a remarkable quarter on margin on a lot of fronts, and I understand the comments within Power System on all the work you've done. Nonetheless, I do have a data center question. You mentioned China. I wonder if you'd be willing to sort of talk about, for one, I'm not 100% sure how you serve data centers there, whether it's direct or through JV. And two, I wonder if you could provide any context or color around size geographically in the data center market or momentum, et cetera. Is this largely a U.S. phenomenon or are there other areas that are, you know, importantly big?

Thank you. Well, you know, the trends that are driving data center growth are global trends, right? Increasing use of AI, data storage going into cloud digitization. And so those underlying trends are global. trends. Our market, you know, we have global markets, but in particular U.S. and China have been areas where we've seen a lot of growth. And like we serve the U.S. market through our U.S. plants, we primarily serve the China market through plants in China, including joint venture plants that we have there.

Yeah, just to add on that, Rob, the primary backup gensets in China are run with the 60-liter engines, which are made in our Cummins Chongqing engine plant there. So that's the primary source.

Yeah, and like other major markets, we are one of the very leading players. It's a very select group of companies that are relied upon in this industry for backup power.

Our next question comes from Kyle Menges with Citigroup. Please proceed with your question.

Kyle Menges Thank you. Jen, I wanted to touch on the comment you made just about the PowerGen business and you had just mentioned about cancellations and pushouts and being able to reallocate those orders. Was that more of a hypothetical or is that something that you're seeing today?

We're not seeing significant changes, but it's not atypical for some of that to happen, which we have seen. And as I said, we have when it happens and expect that we continue to be able to reallocate. We have a lot of customers that would like us to deliver some of these products sooner than is currently scheduled. And so I wouldn't describe it as a broad trend, but a limited one that we're seeing.

OK, got it. It's the business with the least visibility to any changing economic sentiment overall so far.

Right. Makes sense. And then could you guys just touch on a little bit any sort of tariff mitigation actions you've taken already and then just any mitigation steps you're exploring? And can you remind us, is there any sort of tariff pass-through baked into any of your contracts? That would also be helpful. Thank you.

Yeah. Of course, mitigating when there's a high degree of uncertainty is a little bit tricky because we're waiting to have a little bit more clarity on where tariffs will go over time. What I would say is we have done some mitigation through inventory strategies where we anticipated we would see higher tariffs. And we have dual sourcing in some of our supply base. So there's some no regrets moves that we're taking now. And then as we continue to have more clarity on what tariffs will look like. We may make changes in the dual sourcing. There's places where there are other options, but it will take time to develop alternatives. So it's really a bit of a mix. But as you can imagine, we have an extensive strategy and work underway looking at options and determining when we action those.

And as we said, we're working through all of this, which I think if you're not in the business, it'd be hard to appreciate how much work it is for supply chain and other groups. We're working through all of that with suppliers and customers right now, so we're not going to comment anymore.

Our next question comes from Tammy Zachariah with JP Morgan. Please proceed with your question.

Hey, good morning. Thank you so much. My first question is on price-cost. Are you able to share what price-cost was in the first quarter?

Yes, so we had almost exactly 2% gross margin improvement year over year, of which we had about 3% of price-cost improvement and 1% of negative volume impacts. That price cost impact varies quite a lot between segments, and you can figure that out from some of the improvements we've driven over time. And costs includes many things, including the improved warranty cost over time. But that's the macro picture.

Understood. That's very helpful. And then the second question is, I understand Cummins engines are primarily made in the U.S. for the U.S., which is great news long term, given all that's going on. But for the distribution and component segments, are those primarily made in the U.S. as well, or what's the mix of imports that serve the U.S. market for those two segments?

The distribution business is really just reselling parts from the rest of the company, so it depends on the different applications. Components... You know, we've got manufacturing facilities after treatment systems in Wisconsin, turbochargers that are made in Charleston. But it's the supply base and some of the suppliers that we use that bring more of that exposure, if we want to use that word. So that's where the complexity comes in from the tariffs. It's not. I mean, that's what I would say.

Our next question comes from Steven Fisher with UBS. Please proceed with your question.

Thanks. Good morning and impressive quarter. I think you said that you are on track with the timing of your product launches. Can you just clarify, you know, kind of some of the timing of those launches that you had in mind, particularly around the 2027 engine and then how the outcome of these NOx rules may impact the timing there.

Yeah, as I said, right now we have not changed our launch plans on any of those products. We are planning to launch the new 10 liter and the B7.2 in 27 as those regulations go in place. And we plan to launch the X15 diesel version in the 26 timeframe. We'll have a kind of a split strategy across the year with the current X15 and the new one. Remember, we already have launched the natural gas variant of that new platform. And the diesel version is going to bring significant fuel efficiency improvements, so value to the customer that we believe is worth bringing into the market early. So that's our plan.

Terrific. And then just in terms of the guidance, I'm curious what you think you need to see in order to actually reinstate the guidance. Is it actual kind of signed trade agreements or what degree of certainty do you think you need to be able to bring that guidance back?

What I would say is a few more data points would be helpful, right? I mean, the April truck orders I would describe as disappointing. um so is that is that something that can move back to a normal trend level um what do we see i mean there's tariffs are designed to be disruptive to trade right i mean that's what they're designed for and we've seen that significant slowing certainly of freight activity into the west coast that directly impacts ultimately road freight here in the us and then what even as things let's hope they stabilize improve we've caused a slowing of the global supply chain that's what happens it's not things are queuing up at ports and then it just takes a long time to write uh that momentum and i think if you're not in the industry that may be underappreciated um and so the the less time the uncertainties in place um then more quickly I think we'll have greater clarity and confidence. And the longer it's in place, then it'll just make it more difficult. Ultimately, you know, we're not going to continue forever without guidance, but we'll get a sense of where purchases of capital goods, whether their confidence is shaken or whether it's a temporary pause and we get back on and we actually start to see more positive economic activity. Right now there's not Again, we're not trying to comment on the whole of the global economy or even the whole of the U.S. economy. We're just commenting on the slices that we see and uncertainties gone up. So we want to see a few more data points on the broader economy specific here certainly to on-highway as a ranking. Those would be helpful.

Our next question comes from Chad Dillard with Bernstein. Please proceed with your question.

Hey, good morning, guys. So, totally appreciate that, you know, it's difficult to quantify the impact of tariffs, but I was hoping you could lay out a timeline for that impact on the P&L. So, you know, how much component inventory did you, you know, pull forward? When does it run out? When will you need to raise price to offset the costs? And then if you could share the percentage of U.S. OGS that are imports?

Yes, way too many things to give because there's way too many variables. What I'll say is, just to remind, no impact really in the first quarter, given the pause in some of the tariffs and the escalation and some mitigation actions, we're going to start to see creeping and growing impact, even yet as the second quarter unfolds here, there's inevitably going to be some lags between what we see, what we anticipate, what actually happens, and then all the work that's going on with customers and suppliers. So that's the reason why. But we will, when we get to the second quarter results and going forward, tell you what the impact is. And hopefully we've got more clarity then, but we'll certainly tell you what the impact was in the second quarter and what we think is going to happen to that run rate as we go through the rest of the year. I think nobody has absolute certainty on the direct flow of every single widget right through the supply chain, so that's still evolving. We're not alone, right? We're not the only manufacturer of engines, powertrains, and power systems in the in our markets.

Got it. Okay, so just one more. So just on section 232, assuming that does eventually get applied, how does that impact your relative positioning? And from your perspective, would you consider it good, bad, or neutral versus the status quo of what we are right now?

So for those that maybe haven't been paying attention, maybe you've all been paying attention, 232, the US Commerce Department launched a 232 investigation two weeks ago on foreign production of medium and heavy duty trucks and parts. And so that has the potential to result in additional tariffs on trucks and parts that come from outside the US. Of course, we've seen the announcement of we're in the middle of the public comment period. And we'll be providing comments, of course, as a part of that and just emphasizing the US manufacturing that we make and advocating for exemptions on imports to US manufacturing through a robust exemption process and ensuring that we reflect the impact that any tariffs could have on the underlying US economy. Stay tuned there, but that's the potential with 232 investigation.

Our next question is from Jeff Kaufman with Vertical Research Partners. Please proceed with your question.

Thank you, and thank you for signing me in here. And Chris, it's been great working with you. Nick, look forward to getting to know you. Mark, thank you for all the detail that you were able to give. I have one on currency. You know, given that so much of your business occurs outside the U.S., was currency translation a good guy, a bad guy? Can you give us an idea of magnitude? And then you explain the price increase on the light-duty engines well with the new product at Stellantis. Can we talk a little bit more about the ASP increase? on the power system side. Was that also new products, product mix, larger products? You did mention aftermarket. Just kind of understand what's driving that increase as well.

Sorry, you caught my attention with the pricing. Repeat the first part. Currency. Yeah, currency. Currency, yes. So the answer is generally, if we could choose, and we didn't deploy hedging techniques, then a weaker dollar except against the pound would be our perfect choice of combinations. But we do deploy, we have natural hedges from the way we're globally organized, and then we do use some very simple vanilla derivatives. So the net impact is no. If you ask any individual business leader, distribution in particular are more exposed to a strengthening dollar. But the net result is very, very modest to the P&L, like less than $10 million when you look at all the impacts of the hedges. And that's generally been the case for a long time. Sharp shifts. Where we get caught is when there's like capital constraints and currency revaluations like Nigeria. Argentina is a common topic of conversation about what to do there. But net-net, Jeff, for the company, we're fortunate that we're close to neutral.

And on your second question, Jeff, on the ASP, on the power systems, power generation product, it's a tough one to gauge. That's really kind of a bit of a red herring. Because the size is so different across that portfolio, we have lower demand and the small stuff, I think – you know, RVs or power or backup gen sets at home versus, you know, strong growth in data centers. So that can flex quite a bit, and it's usually not a really great indicator. But we continue to see strength, I guess, through the first quarter in that big stuff, and that drives a higher ASB.

We have reached the end of the question and answer session. I'd now like to turn the call back over to Chris Clulow. for closing comments.

Great. Thank you, everybody, for joining, and thanks. It's been a pleasure working with you all over the last couple of years. That concludes our teleconference for the day. We will be available as an investor relations team for the remainder of the day, should you have any follow-ups. Thank you.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.