Cummins Inc.

Greetings and welcome to Cummins, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star 0 on your telephone keypad. If you wish to register a question during today's conference, please press star 1 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nick Ahrens, Executive Director of Investor Relations. Thank you. Please go ahead.

Thank you, Donna. Good morning, everyone, and welcome to our teleconference today to discuss Cummins results for the first quarter of 2026. 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 Security 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 several risks and uncertainties. More information regarding such risks and uncertainties is available in the forward-looking disclosure statement in the slide deck and our filings with the 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 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. With that out of the way, I will turn you over to our chair and CEO, Jennifer Rumsey, to kick us off.

Thank you, Nick. Good morning, everyone. I'll start with the summary of our first quarter accomplishments and financial results, then discuss our sales and end market trends by region. I will finish with the discussion of our outlook for 2026. Mark will then walk you through additional detail on our first quarter performance and our full year forecast. Before getting into the details of our performance, I want to highlight a few major events from the quarter. In February, Cummins marked a significant milestone with the deployment of the world's first commercial hybrid electric ultra-class mining truck, now in operation and production at the Casaronas Open Pit Mine in Chile. This pilot represents our first retrofit of a 300-ton Komatsu haul truck using first-mode hybrid technology in daily operation. It reflects our strategy of delivering solutions that reduce CO2 emissions today while advancing our customers' long-term decarbonization goals. In March, Mack Truck announced the integration of the Cummins X10 engine into the Mack Granite chassis. This milestone reflects the strong collaboration between the Mack and Cummins teams and our shared commitment to delivering reliable, high-performing solutions for vocational customers. The X10 is well-suited for demanding work applications, and its integration into the Granite platform will provide customers with a compelling option in the vocational truck segment. Finally, during the quarter, we took targeted actions in our Accelera segment by completing the sale of our low pressure fuel cell business and related customer commitments for this business. This sale will enable continued improvement in our trajectory of our financial results in the Accelera segment. Together, these actions demonstrate how we are executing against our strategy across our businesses. Now I will turn to our overall company performance for the first quarter of 2026 and cover some of our key markets. Sales for the first quarter were $8.4 billion, an increase of 3% compared to the first quarter of 2025. Growth was driven primarily by higher demand and power generation markets, particularly from data centers. This increase was partially offset by weaker North America heavy and medium duty truck demand, with unit volumes down 20% from a year ago. EBITDA was $1.3 billion, or 15.4%, which included a net charge of $199 million related to the sale of our low-pressure fuel cell business. Excluding this net charge, EBITDA was $1.5 billion, or 17.7%, compared to $1.5 billion, or 17.9%, a year ago. Lower North America truck volumes and higher compensation expenses were partially offset by higher power generation demand favorable pricing, and increased joint venture income. In power systems, we delivered record EBITDA dollars, reflecting continued operational improvements and strong end market demand. Our first quarter revenues in North America decreased 6% compared to 2025. Industry production of heavy-duty trucks in the first quarter was 50,000 units, down 23% from 2025 levels. while our heavy-duty unit sales were 18,000, down 16% year-over-year. Industry production of medium-duty trucks was 27,000 units in the first quarter of 2026, a decrease of 20% from 2025 levels, while our unit sales were 25,000, down 19% year-over-year. We shipped 30,000 engines to Stellantis for use in their RAM pickups in the first quarter of 2026, up 4% from 2025 levels, Revenues for North America power generation increased by 23%, driven primarily by continued strong data center demand. Our international revenues increased by 16% in the first quarter of 2026 compared to a year ago. First quarter revenues in China, including joint ventures, were $2.1 billion, an increase of 19% year over year, driven by accelerating data center demand and strong and off-highway export activity by our OEM customers. Industry demand for medium and heavy-duty trucks in China was 353,000 units, an increase of 20% from last year, driven by strong export demand. Our sales in units, including joint ventures, were 55,000, an increase of 14%. Industry demand for excavators in China in the first quarter was 73,000 units, an increase of 19% from 2025 levels. We sold 14,000 units, an increase of 25%, primarily driven by strong export demand. Sales of power generation equipment in China increased 84% in the first quarter due to accelerating data center demand. First quarter revenues in India, including joint ventures, were $814 million, an increase of 12% from the first quarter a year ago. Industry truck production increased 21% from 2025, driven by tax incentives that are accelerating underlying demand. Now let me provide our outlook for 2026, including some comments on individual regions and end markets. We are pleased to share that our expectations for 2026 have improved since our initial guidance issued in February. We are raising our forecast for total company revenues in 2026 to a range of up 8% to 11%, compared to our prior guidance of up 3% to 8%. We are raising our 2026 North America heavy duty truck forecast to a range of 230,000 to 250,000 units, up from our prior guidance of 220,000 to 240,000 units. This increase reflects the trend of strong recent orders and improving spot rates. We now expect the first half of the year to be stronger than previously anticipated, while the second half remains largely consistent with our prior outlook, including a modest pre-buy ahead of the 2027 EPA regulations. In the North America medium-duty truck market, we are increasing our forecast to 125,000 to 135,000 units in 2026, compared to our prior guide of 110,000 to 120,000 units, reflecting stronger than anticipated demand in the first half and momentum expected to continue into the second half of the year. Consistent with our prior guidance, our engine shipments for pickup trucks in North America are expected to be 125,000 to 140,000 units in 2026. In China, we now expect total revenue, including joint ventures, to increase 10% in 2026, an improvement from prior outlook of down 1%, driven by stronger data center demand. For heavy and medium-duty truck demand, we continue to expect a range of down 10% to flat versus prior year, consistent with our prior guidance and reflecting moderation and the benefits of scrapping policy, partially offset by continued strength and export demand. In India, we now project total revenue, including joint ventures, to increase 2% in 2026, up from our prior guide of 5% declines. We expect industry demand for trucks to be down 5% to up 5% for the year compared to our prior guidance of down 10% to flat, supported by tax rate reductions improving underlying demand. For global construction, we now expect demand to range from flat to up 10% year over year, an improvement from our prior outlook of down 10% to flat. In China, strong export demand is expected to partially offset continued domestic weakness. While in North America, we expect demand to remain largely flat given ongoing tariffs and interest rate uncertainty. We expect our major global high horse power markets to remain strong in 2026. In global power generation, we now project revenues to increase 15% to 25%, up from our prior guidance of 10% to 20%. This reflects accelerating data center demand supported by capacity additions we brought on in North America at the end of 2025. We are also seeing stronger than expected international growth, particularly in China and the broader Asia Pacific region, along with increased demand for lower output jet sets to meet customer demand amid ongoing capacity constraints and larger configurations. In mining, engine sales are expected to be flat to up 10%, driven by replacement demand and consistent with our prior outlook. For aftermarket, we expect a range of 2% to 8% increase for 2026, consistent with our prior outlook, supported by aging fleets, higher parts consumption, and increased rebuild activity. In summary, coming off a strong first quarter, we are raising our full-year sales outlook to 8% to 11% increase, and increasing our EBITDA margin guidance to a range of 17.75% to 18.5%. This reflects improving momentum in North America heavy and medium-duty truck markets, with volumes recovering from cyclical loads faster than previously anticipated, a higher outlook for global power generation, improvement in Accelera, and continued strong execution across our businesses. Additionally, this quarter, we returned $519 million to shareholders, including $243 million in share repurchases, consistent with our longstanding commitment to return approximately 50% of operating cash flow to shareholders. I want to thank our employees and leaders around the world for their commitment to our customers and to each other. Their focus and execution are delivering strong financial results. While continuing to strengthen our ability to invest in future growth, advanced sustainable solutions, and create long-term value for shareholders. I look forward to discussing our long-term strategy and updated financial targets at our analyst day on May 21st. 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. Let me start with some key highlights that we want you to leave with today. First, we see stronger demand in multiple end markets, resulting in an improved outlook for engines, components, distribution, and power systems. Second, we completed the sale of the low pressure fuel cell business to Alstom, representing another step in reducing operating losses in Accelera, and we improved our 2026 forecast in that segment for EBITDA losses. And third, we took advantage of equity market volatility in the first quarter to repurchase shares consistent with our plans to return excess capital to shareholders. Now let's look at the first quarter in a little bit more detail. Hopefully I can head off some of your questions with some of these comments. First quarter revenues were $8.4 billion, up 3% from a year ago. Sales in North America decreased 6%, while international revenues increased 16%. driven by China, where data center demand is accelerating. EBITDA was $1.3 billion, or 15.4% of sales, compared to $1.5 billion, or 17.9% a year ago. First quarter 2026 results included the net charge of $199 million related to the sale of the low pressure fuel cell business. Excluding these net charges, EBITDA was 1.5 billion, or 17.7%, down 20 basis points from a year ago. Lower North American truck volumes and higher compensation expenses were partially offset by higher power generation demand, favorable pricing, and increased joint venture income. The net impact of tariffs to our EBITDA dollars in the first quarter was immaterial. And although the exact amounts in total and by segment will vary quarter to quarter, we currently expect that the net impact of tariffs will continue to be immaterial to our EBITDA for the remainder of 2026, as we've worked hard with our supply chain partners and customers to mitigate the impacts. Now let me go into more detail by line item. Excuse me. Gross margin for the quarter was $2.2 billion or 26.7% of sales compared to 2.2 billion or 26.4% last year. The improved margins were driven by favorable pricing and higher power generation sales partially offset by lower North America heavy and medium duty truck volumes and higher compensation expenses. Selling administrative and research expenses were $1.2 billion, or 14.3% of sales, compared to $1.1 billion, or 13.6% of sales a year ago, and this increase was driven primarily by higher compensation, especially variable compensation expenses. Joint venture income of $148 million increased $17 million from the prior year, primarily driven by stronger performance in our on- and off-highway joint ventures in China, benefiting the engine and power system segments. Other income was negative $178 million compared to favorable $23 million from the prior year. This decrease was primarily driven by $199 million of net charges related to the sale of the low-pressure fuel cell business. Interest expense was $76 million, a decrease of $1 million from the prior year. The all-ineffective tax rate in the first quarter was 27.2 percent, including the unfavorable discrete tax impact related to the sale of the low-pressure fuel cell business and $7 million or five cents per diluted share of other favorable discrete items. All in net earnings for the quarter was $654 million, or $4.71 per diluted share, which included $1.44 per diluted share related to the sale of the low-pressure cell business. Excluding the sale, net earnings were $853 million, or $6.615 per share, compared to $824 million $5.96 per diluted share a year ago. Operating cash flow was an inflow of $309 million compared to an outflow of $3 million in the first quarter of 2025. Additionally, we returned over half a billion dollars of cash to shareholders in the first quarter. We executed $243 million in share repurchases at an average price of $536.97. and paid $276 million in cash dividends this quarter, consistent with our longstanding commitment to return approximately 50% of operating cash flow to shareholders. Now let me comment a little bit more on segment performance. For the engine segment, first quarter revenues were $2.7 billion, a decrease of 4% a year ago. EBITDA was 10.4%, a decrease from 16.5 a year ago, as weaker North American truck volumes, higher compensation expenses related to overall company performance, higher research and development expenses as we approach our 2027 launches, and increased product coverage costs were partly offset by higher joint venture income. For the full year 2026, we now project engine business revenues to be up 7% to 12% up from our prior guidance of flat to an increase of 5%. We've also raised our EBITDA margin projections now to be in the range of 12.5% to 13.5% up 50 basis points at the midpoint of the guide. This improvement is primarily driven by higher expectations for North America heavy and medium duty truck demand with demand in the first half of the year particularly proving stronger than we'd anticipated just three months ago. Component segment revenue was $2.5 billion, a decrease of 5% from a year ago. EBITDA was 13.3%, a decrease from 14.3% a year ago. Weaker North American truck volumes and higher material costs were partially offset by pricing. For components, we expected 2026 full-year revenues now to be up 5% to 10%. An increase from our prior guide of flat to up 5% due to stronger demand for heavy and medium-duty trucks in North America. And we expect EBITDA margins to be in the range of 13.5% to 14.5%, up 50 basis points from our prior guide at the low and the high end due to higher earnings in North America and China. In the distribution segment, revenues increased 7 percent from a year ago to $3.1 billion. EBITDA increased as a percent of sales to 14.2 percent compared to 12.9 percent a year ago, driven by higher power generation demand, partially offset by higher variable compensation expenses. We now expect full year 26 distribution revenues to be up 9 to 14 percent from our prior guidance, about 5 to 10% due to stronger demand for power generation equipment, mainly. We also expect EBITDA margins to be in the range of 13.7 to 14.7%, an increase from our previous forecast of 13.25 to 14.25%. In the power system segment, revenues were $2 billion an increase of 19%. And EBITDA was a record, increasing from 23.6% to 29.5% of sales. There's increased volumes, positive pricing, net tariff recovery, and higher joint venture income, and some one-time cost recoveries all helped boost results. For 2026, we now expect power systems revenues to grow 14 to 19 percent, up from our prior forecast of up 12 to 17 percent due to stronger demand, especially in international markets. We also expect EBITDA margins in the range of approximately 25 to 26 percent compared to our previous guidance of 23 to 24. The margins for the remainder of the year are expected to be strong, but a little below first quarter levels due to the uneven nature of tariff costs and recoveries and the benefit in the first quarter of some one-time modest non-tariff cost recoveries. Accelera revenues decreased 2 percent to $101 million, driven by lower electrified powertrain sales, partially offset by higher electrolyzer sales. as we meet our remaining sales commitments in the electrolyzer business. EBITDA was a loss of $277 million, including a net charge of $199 million related to the sale of our low-pressure fuel cell business. Excluding these charges, EBITDA was a loss of $78 million, an improvement from the loss of $86 million in the prior year reflecting the benefit of the actions that we've been taking over the last couple of years, starting to gain traction across the segment. In 2026, we anticipate accelerated revenues to be in the range of $300 to $350 million, unchanged from three months ago. We now expect net losses, excluding the charge related to the fuel cell sale, to improve to a range of $270 to $300 million better than our previous projection of EBITDA losses of 325 to 355. This improvement reflects actions previously taken to reduce losses in existing operations, as well as the benefits of the targeted decisions taken in the first quarter. In summary, we now expect stronger full-year top and bottom line. We expect total company revenues to increase between 8% and 11%, and EBITDA to be in the range of 17.75% to 18.5%. And whilst power systems and distribution naturally have been gaining the headlines over recent quarters, I hope you take away from these comments that we're seeing an improved profit outlook for all of our segments for the remainder of this year. Our effective tax rate is expected to be approximately 23% in 2026, excluding any discrete items. Total investments expected to be in the range of $1.3 to $5 to $1.45 billion as we continue to make critical investments to support future growth. Summary, we delivered strong profitability in the first quarter despite weaker production levels in North America on highway markets. As those markets improve through the year, along with the continued robust global demand for power generation equipment, we are well positioned to further improve our financial performance yet this year. The actions we have taken in Accelera are improving the cost structure and reducing ongoing losses while we continue to invest in the products which we believe have stronger prospects for adoption and future profitable growth. Cash generation remains a clear priority enabling continued investment in our portfolio, returning excess cash to shareholders, and maintaining a strong balance sheet that allows us to weather any economic volatility and continue investing for the long run. We look forward to seeing some of you in person when we provide an update on our medium-term financial targets at our analyst day on May the 21st. That's enough from me. Let me turn it over to Nick.

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 is Star 1 if you would like to register a question. Today's first question is coming from Angel Castillo of Morgan Stanley. Please go ahead.

Hi, good morning, and congratulations on the strong quarter here. So just wanted to, Mark, go back to the point on power systems. Could you just, I guess, unpack how much the one time was in the first quarter here, the non-repeating, or I guess, yeah, just one time cost there, benefit. And then as you think about the cadence of the rest of the year, just curious if you could kind of help us understand, is it just kind of normal seasonality absent that one time, or how we should think about kind of the cadence of the margin for that segment?

Yep. So I don't want to diminish the extraordinary achievements of the power systems business into a really short answer because they're doing incredibly well and investing in raising capacities to meet even stronger demand, as we'll talk more about in May. But yes, if you look at the guidance, you can back normal seasonality for the rest of the year. We should expect Q4s usually just a shorter production quarter generally, but otherwise there shouldn't be enormous variation in the margins quarter to quarter. As I mentioned, there were a number of factors that contributed to margin performance above our expectations. You've got stronger demand in China, which is usually weighted more to the first half of the year. That line item would probably be weaker in the second half of the year. It's just the way that buying patterns tend to happen in China. You've got net tariff recoveries, which you heard me say at the start, for the company were immaterial. They've really been immaterial for several quarters and will remain immaterial, but it were a net boost to power systems. And then we had some one-time cost recovery. So if you factor in a slightly slower Q4, because of the lower production days, the rest of the quarter should look pretty even for the remainder.

Thank you. The next question is coming from Kyle Menges of Citigroup. Please go ahead.

Great. Thanks for taking my question. It would be good to hear just an update on the EPA 27 engines. And number one, curious if there could actually be some meaningful fuel efficiency gains with the new heavy-duty engine based on what you're seeing and hearing thus far. And then number two, just would be great to get an update on the medium-duty engine and when it might be ready and and any potential ramifications if it might not be ready, say, until later in 2027? Yeah, great.

Thanks, Kyle. Well, we remain very excited about launching our HELM platforms, the diesel variant of those, along with the EPA 27 regulation, and do anticipate bringing a lot of performance value to our customers, including fuel efficiency improvements and other service and performance optimization. And as I've talked about in the past, it's really unusual at this stage in the development cycle for regulations to be uncertain. We've been working very closely with EPA over the last year as they've been evaluating ways to move forward with the regulation, as I've said they will, while taking some of the costs associated with that regulation out. And we anticipate changes in the longer emissions warranty and emissions useful life that were in the previous version of that regulation. Based on kind of the late changes, we have made the decision to delay the launch of our B platform to January 28. That'll be the final launch of our diesel home platform. We continue to plan to move forward with X15 and X10 and 27. And as I've shared previously, the B platform in particular is the one that we sell to the most number of customers and diversity of applications. We've been transparent with EPA about our our plans on the launch and are looking forward to seeing the draft of their revised rule anticipated this quarter and getting the final version of that before we start launching our new platforms next year. So excited about the value we're bringing to the customer and just continue to work closely with the EPA as they finalize their plan.

Got it. And I'm just curious what the ramifications could be or maybe a range of outcomes. for next year if that medium-duty engine is not ready until 2028. Thank you.

So we'll continue to offer the current version of the B-Series platform through 27. This will allow us to kind of phase out the launch of our products to our customers and through our plants. And we are, as we said, continuing to anticipate some amount of pre-buy in the second half of the year, in particular in the heavy-duty markets.

Thank you. The next question is coming from Jerry Revich of Wells Fargo Securities. Please go ahead.

Yes, hi. Good morning, everyone.

Hey, Jerry.

I'm wondering if you folks can comment on how far out lead times extend for your 95-liter engines. We're hearing that for some folks it's out into the back half of 28, even at higher production levels. Can you comment how far out you folks are? And then Mark, you folks have consistently put up really attractive incremental margins in that line of business for a number of years now. As we think about production continuing to ramp higher, anything that we should keep in mind as we think what incremental margins might look like in the medium term compared to the 45% incrementals that you folks have consistently delivered here?

Thanks, Jerry. Well, you know, as you know, we doubled the capacity of the 95 liter, finished that investment last year, really taking advantage of that and continuing to see, you know, strong demand, multi-year discussions with our customers around their needs, and that's underpinning the stronger guidance this year. And, you know, we've been continuing to look closely at longer-term demand expectations and if there's additional capacity investments we want to make across our plants and supply chain. And Jenny will be sharing more with you at our upcoming analyst day on how we're thinking about those investments and the capacity.

Right, but I think, yeah, I think we're going to have a, you're going to see a strong presentation in the next couple of weeks about power systems. You know, we're very enthusiastic about the prospects going forward, and quite frankly, they've only strengthened, Geri, even in the last few months. So we are very optimistic, confident, maybe optimistic is not the right word, confident in the performance in the power systems business. Right now, whilst we are ramping up production, we have been increasing margins. We're also continuing to invest going forward, and you'll hear more about those plans here coming up. But certainly, as revenues grow, obviously we have the goal of expanding margins.

Super. And can I ask, in engines, it's nice to see the positive margin revision for the year. It looks like you're going to exit potentially in the 14% plus range. EBITDA margin range, every time on a new regulation, you folks tend to drive margins higher. Can you just talk about the puts and takes as we think about EPA 27 and the EBITDA margin opportunity for you folks on the new platforms, considering it's been a while since we've had a new platform in the U.S.? ?

Yeah, it's been a while since we've had this many new platforms at the same time. So, yes, obviously there are going to be significant content ads primarily on the powertrain for the new trucks, so that's going to benefit not only the engine business but also component story. We're expecting, you know, we're not here to give guidance for next year, but we expect some, you know, volatility in demand between the second half of this year and the first half of next year. But, yes, I think you're going to hear a positive story from Brett coming up in the next couple of weeks. We've been through a peak investment period because of all the platforms, not just the current ones. We've launched other platforms in the past couple of years that have gone well. And we are moving beyond this peak investment period. So, yes, you're going to hear from us that we expect our performance to improve over time.

Thank you. The next question is coming from Stephen Volkman of Jefferies. Please go ahead.

Great. Good morning, everybody. Can I just continue on that thread, if possible, here? The, you know, the engine incrementals this year are sort of low teens, I guess, if I'm doing my math right. Mark, you talked about some of your spending on new platforms rolling off as we go forward, but I assume warranty tends to be higher when you launch these new platforms. So just trying to think about, like, what's the fair kind of value for incremental margins in engines?

Yeah, I think over an extended period, first of all, you're exactly right. So when we launch a brand-new platform, we start with a new warranty. accrual rate and that's usually fixed for the first six quarters until we get enough field experience and then history's shown over time that we've been able to bring down those accrual rates quite significantly. Certainly over, it's one of the highlights of my time as CFO is seeing that improvement, significant improvement over time and quality. So yes, we'll start next year on new engine platforms that are launched with higher accrual rates. That will be a portion of how there's Demand may be lighter in the first half of the year. To the extent there is some pre-buy, it's always hard to know exactly what's pre-buy versus slightly improving freight conditions. Demand could be weaker. But yes, over, let's say we get through the first half of next year and into 28, we should be seeing improved incremental margins for the engine business. The tariffs, of course, probably the biggest single burden for the company has fallen on the engine business, not only, so that even though we've done a great job in trying to mitigate those and minimize the dollar impact, that's been somewhat diluted last year and this year on top of the peak investment period. So, yes, I would expect the incremental margins to improve from what we're seeing this year as we get through the next 18 months.

Thank you. The next question is coming from David Rasso of Evercore ISI. Please go ahead.

Hi. Thank you for the time. The rest of the year, the top line for the four major segments were all up, you know, 12% to 16%. So solid breath there with incrementals in engines and power both above 30% for the rest of the year. But I was curious why distribution, the incrementals the rest of the year are only 7%. and components are 19. I'm just curious, particularly in distribution, but also as components may be bearing more of those investment dollars, just trying to understand why the incrementals are that low on those two businesses the rest of the year. Thank you.

Yeah, I think one of the factors in the distribution business is we're seeing more growth. I say the rate of growth of parts is not keeping pace with the rate of growth in whole goods, as we refer to them, or power generation equipment. So that's one factor. And then I would say we had last year, we had more pricing in the middle of, particularly in the middle of the year, and that's one of the factors why the margins stepped up so well in the second. So I think you're getting into tough comparisons, Q2 and Q3 in particular. Long-term, medium-term, we're bullish on distribution growth a margin expansion, but those are some of the factors. We did pretty well in Q1, so we've just got to keep doing more of the same, and over time differences in mix and other factors will take care of themselves, and I think the prospects are very encouraging. But that's probably the main factor. There's no other one-time special item or anything like that, David.

And a follow-up on the availability of the 27 heavies. What are your customers telling you for 26 build slots, and when would they expect to be sold out and then have to ask you to introduce your 27 engine? Thank you.

Yeah, thanks, David. And we've seen, I'm sure you've been paying attention like we have to truck orders that have gone up over the last several months. Spot rates have improved, so you've got a combination of improved economics for the truck customers along with anticipation of EPA 27 regulation. And the industry, of course, was at a cyclical low. So what we're seeing is things starting to step back up. In fact, right now we're adding a third shift at Rocky Mount. So we really saw medium duty demand improving starting in Q1 and quite strong here as we go to the second quarter. And then we're seeing heavy duty stepping up. And we do think that we're watching the supply base to see if there's going to be some constraints for getting to the point where part of our top-end guide is how much can everybody take up build rates and supply to meet that ahead of the 27 regulatory changeover. And we're really focused on making sure that we can execute to meet our customer commitments as we do that. In fact, we had a big supplier conference last week with all of our key suppliers to make sure that they're ready to support all of our businesses. We're ramping up capacity at our plants and investing in new products.

Thank you. The next question is coming from Jamie Cook of Truist Securities. Please go ahead.

Hi. Good morning and nice quarter. I guess, you know, one question for you, Mark, is we think about the second half and I guess sort of, I guess, the longer term. You know, we're getting lots of questions on your ability to put up the incremental 25% margin, you know, with some of the concerns on tariffs perhaps potentially R&D not being as big of a tailwind as we would have thought if the medium-duty engine, you know, doesn't meet the 2027 emissions. Maybe that's higher, you know, puts and takes with a seller or losses. So just sort of your confidence level there. And then I guess the second question is, pace of a seller loss is decelerating. Obviously, we saw some nice progress in the quarter and what's implied in the guide. Just how we're thinking about that is a potential, again, offset to losses in 2027 and beyond. Thank you.

Good. Well, I think we'll address probably very specifically incremental margins here in a couple of weeks over through 2020-30. We'll give you an update and compare that to what we said a couple of years ago. So that should be fairly clear in aggregate. I think there are a lot of moving parts right now. That's true. Obviously, we've raised the guide for this year. So our confidence is improving. It's going to be a little bit bumpy probably in the first half of next year. But I think overall, we feel like we've taken the tough actions in Accelera. We are seeing out some remaining commitments on electrolyzers. We expect that those losses Yeah, that can vary quarter to quarter, but we're on a clear downward trajectory right now, so that's positive for our underlying performance. And then, yeah, I think the theme is still we've been through peak investment period. Yes, the odd program costs could extend through next year, but I think the theme is still going to be primarily the same, and I think we should be able to answer all of those questions pretty well. without spoiling what's going to happen in a couple of weeks.

And I'll just add, you know, on the Accelera business, Jamie, you know, I think that team has really done a remarkable job through, you know, a rapidly changing landscape for adoption of zero-emissions technology and green hydrogen, and we've really been able to focus that business now. Yeah, the actions we took at the end of the year on the electrolyzer business, as Mark noted, we're still meeting some customer commitments there. And over time, that'll continue to ramp down, you know, a big action in the first quarter with the low pressure fuel cell sale and the associated customer commitments. So we're really focused now on battery electric. powertrain, pacing investments as that market evolves. And we've got some good customer wins in that space. And so, you know, we'll focus on that part of the Accelera business going forward.

Thank you. The next question is coming from Stephen Fisher of UBS. Please go ahead.

Thanks. Good morning. Just wanted to ask about the heavy-duty truck market, the follow-up. I think you said there's no change to your second-half expectation at this point. I'm just curious how you're thinking about that because it seems like you cited an improving market and orders are good. It may just be the answer that you gave David Rassel about concerns about supply chain being able to meet that, but curious how you're thinking about the potential upside for the second half of the year on the trucks.

If you recall back to our original guidance, we kind of projected this year kind of the inverse of last year with week first half and then improving in the second half. And now what we're seeing is that improvement's coming sooner. So going up and then still we think that as you get into the second half, the build rates that we had projected are probably still accurate because of some of those supply constraints, potential supply disruption risk. So we'll certainly do everything we can to meet the demand that comes into us and think it'll be a good second half of the year, but probably some just constraining days in the year to the upside.

Without getting too much into quarters, a strong Q2 ahead, right? The first half is just to underpin that. The first half's better than we anticipated, and that's what's primarily driving the guide. So Q2 should be good.

Okay, great. And then I know you said the net tariff impact was pretty unchanged and still immaterial, and you got some supply chain benefits that were part of that. Is it possible to talk about some of the underlying kind of dynamics that netted out there in terms of the different rules and kind of where you saw benefits and where you saw incremental headwinds and how you offset those various things?

Well, if we start doing that by segment, we'll be on all night. What I would just take you back to, yes, power systems had a net improvement that's not going to persist. The company has had, when I say in material, very, very small net impacts to EBITDA. So we could do a whole lot of talking and come back to a very small dollar impact. I think the main thing is the tariffs are changing, right? Probably the gross impact to Cummins because if you recall last quarter, I tried to simplify it as much as possible. We were expecting to get to net neutral, and we thought that would take about half a percent off our EBITDA for the full year just because of recovering a large number for tariffs. That large number is still large. It's probably just a little bit less now, 20 to 30 basis points full year impact. So lots of moving parts, but a little bit lower outlook overall.

I'll just add a little, you know, the change in tariff policies, you know, continues to happen. And we continue to be really focused on managing it with our suppliers and our customers. Remember, we predominantly make and source in the U.S. We're making engines in the U.S. for the U.S. market. We're making gen sets in the U.S. for the U.S. market. Much of our supply comes from the U.S. And what I will say is as we've come into this year, at least in the truck space with the 232 tariffs, we're working really closely with the Department of Commerce to make sure they understand how do we meet our mutual goal of encouraging U.S. manufacturing and how the engine offset program is going to work. That has not been finalized yet, but our guidance does reflect our assumptions of what that will look like for our engine and components business, and that's kind of a key change to make sure that we're getting the appropriate credit, if you will, for manufacturing and sourcing and work that we're doing in the U.S.

Yeah, we've really just been battling to mitigate and recover, right? There's no windfalls to Cummins. We're not trying to make money out of tariffs. We're just trying to collaborate across the supply chain to mitigate the impact, and we've done well on that. Yes, there's some little bit of variation quarter to quarter segment, but really pleased with the net impact, better than I would have anticipated from this time last year when this really became a big deal.

Thank you. The next question is coming from Tim Thine of Raymond James. Please go ahead.

Thank you. Good morning. I just wanted to circle back, Jen, to an earlier comment about the delayed launch. of the B series engine, is it fair to assume that through the use of credits or other means that Cummins would be able to defray or potentially offset any potential penalties that may arise in that situation?

Yeah, so as I said, we've been working closely with the EPA as they're kind of working on a revision to the regulation. We've been transparent on what we're planning. You know, we're waiting to see the final rule and the details of that in terms of the exact implications. But we anticipate being able to continue to offer our current product through 27 on the B series and then launch the new 7 liter at the beginning of 28. And, you know, the details of pricing and all of that, we won't be able to finalize until the rule itself has been finalized.

Okay. All right. And then maybe just to, you know, we used to talk a lot about in the comments calls just the role of China. And, you know, it's a pretty big change in terms of the full year growth expectations from what you were thinking earlier from a top line perspective. I'm just curious about the underlying profit dynamics in China. You know, we've obviously been in a pretty long deflationary cycle in that. in that economy. So I'm just curious, you know, just how the underlying kind of pull-through dynamics may exist for Cummins in China today versus, you know, years ago.

Yeah, so just from a market perspective, you know, the big change in China has been this dramatic increase in power generation to support data centers. And, you know, you, like all of us, reading this, you know, strong investment in data centers in the U.S. and China. We have a strong position in both of those markets with the products that we're offering and, you know, really saw an increase over a year ago in China for that data center demand as well as Asia Pacific more broadly. And, you know, our team has done an excellent job of positioning Cummins in the market, you know, with very favorable business. But I'll let Mark

I think the things that have helped us, even though top-line growth in the traditional truck market and construction equipment has not been as dynamic upwards as it was five to ten years ago, the themes that have been helping us are commitment to tighter emissions regulations. That's continued to drive content. When we were first talking about new emissions regulations in China, I think there was some investor skepticism as to whether China would follow through on those regulations, and in fact they have. So that's continued to drive significant content ads. We are very successful at localizing content. That's a big advantage of what we do, and that's a big strength of being such a significant player in China. And then you see in rising displacement, right, in power generation needs, that tends to help overall. So I think those combination of factors combined, of course, with our leading position and partnerships that have been there for a long period of time, those are all helping. So yes, China's definitely more of a tailwind than a headwind right now. And it looks like the enthusiasm for data centers there is very robust. And we're very well positioned to benefit from that or support the customers in what they need. So we're excited about that.

Thank you. The next question is coming from Rob Wertheimer of Milius Research. Please go ahead. Rob, please make sure your line's not muted.

Yes, thank you. Sorry. The question is on electrification. Obviously, China has had a surge maybe for their own reasons, and I think Tesla has taken a few orders for the Semi. Can you just kind of talk about, and I think you touched on it, Jennifer, a little bit. Can you talk about what the demand pull from your customers is in North America right now and what you think the shape of that market looks like over the next two or three years?

Yeah, I mean, the demand pull in North America with the change in greenhouse gas, regulations has, outside of bus, gone to very low levels. Interest in diesel remains very high and we are continuing to sell electric school buses, but really the demand in trucks is very low and not projected to improve anytime soon. So that's why we're really focusing on some of the global opportunities we have, being ready for the market here, developing in the school bus market that we have, and monitoring signposts that say there's going to be a shift here.

Yeah, and if you track our recent earnings calls, you can see generally our demand has been outpacing the market. Or demand, not our demand, demand for our existing combustion engine products has been outpacing the market. Things can change, but that's what we're seeing right now.

Thank you. The next question is coming from Tammy Zakaria of J.P. Morgan. Please go ahead.

Hi. Good morning. Thank you so much. A couple of questions. First, could you share what was the price realization in the quarter?

Yeah, I mean, price-cost was a very modest positive overall, I would say, not significant.

Understood. Okay. And, Mark, maybe wanted to get some color. You said 2Q would be great. good in terms of bills. Keep going, David. Keep going.

I was just introducing my human.

Oh, okay. Sorry, I didn't catch that. I apologize. So I think 2Q bills, you're expecting to be better than 1Q. And so sequentially, are we talking about maybe 20%, 30% growth and then another step up in 3Q? So is 3Q sort of the peak of bills and engine segment margins? Is that how we should be modeling?

Well, I hope the margins keep growing long beyond Q3. But yes, usually Q4 is not the strongest because of the holiday periods, and then you're going into product transitions. It may be strong right through till the end, but you're right, we should see a step up in Q2. and then remaining strong in Q3. There are just usually less production days by the OEMs because of the holiday periods in Q4, and that's why it tends to be a little bit lower. I mean, there's many factors that go into our EBITDA margins, but of course demand is one of the biggest. But certainly we're expecting the rest of the year to be as good or better than the first quarter. That's the simplest way to put it.

Yeah, as you said, trucks or engines and components will step up in Q2, step up again in Q3, and then, as Mark said, the year-end dynamic in Q4 seasonally.

Right. We've even been adding a production shift in medium-duty power plant in Rocky Mountain, North Carolina, here to deal with the extra demand that just went down the slippery slope, and now we're climbing back up again rapidly. So we're excited about that. It's always managing those downturns gives us the platform to really capitalize on the way back up. So overall, looking up, yeah, a strong quarter.

Thank you. The next question is coming from Cole Cousins of Wolf Research. Please go ahead.

Hey, guys. Implied engine pricing is down year over year and sequentially in 1Q. What's driving this? And in the context of an improving demand backdrop and visibility, to higher engine prices next year. When do you think we can start to see engine pricing start to move higher this year?

Well, I think there's a number of things. There's no significant change on a per unit basis to most. What you've really got is a mix going on between what's being sold in the quarter, whether that's on highway versus off highway, North America versus international. Parts are in the revenue numbers, but not in the units numbers. So there is no significant decline in prices per unit. There's just some variation between. Content is going up for the 2027 emissions regulations in North America for the trucks, and our understanding is most of that's going to be related to the powertrain going forward, but that's going to be content-driven.

Okay. And maybe just to follow up on the – on the EPA 27 rule. If they do decide to introduce noncompliance penalties, can you confirm that this shouldn't impact your competitive position in the Class 8 market, as it seems like every OEM has a compliant engine ready at this point?

Yeah, I'm not going to speculate on what the EPA is going to do and how we'll respond to that. But as I said, we've been having a lot of conversations to make sure they're revisiting the rulemaking, they understand our business, and that they're developing a fair rule that makes sense for our customers.

Thank you. This brings us to the end of today's time for questions and answers. I would like to turn the floor back over to Mr. Ahrens for closing comments.

Thank you. That concludes our call today. Thank you very much for your continued interest in Cummins. We're excited to continue the conversation at our analyst day on May 21st, where the leadership team will share how the business has strengthened and what's next. Having achieved our 2030 profitability targets early, you should expect updates on our targets, capital deployment, and the growth opportunities ahead, including data centers. We look forward to seeing you there. Thank you very much.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.