Cummins Inc. (CMI) on Q1 2021 Results - Earnings Call Transcript

Operator: Greetings and welcome to the Cummins Inc. First Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jack Kienzler, Executive Director of Investor Relations. Thank you. You may begin. Jack Kienzler: Thank you. Good morning, everyone and welcome to our teleconference today to discuss Cummins’ results for the first quarter of 2021. Participating with me today are our Chairman and Chief Executive Officer, Tom Linebarger; our President and Chief Operating Officer, Jennifer Rumsey; and our Chief Financial Officer, Mark Smith. We will all be available for your questions at the end of the teleconference. Tom Linebarger: Thank you, Jack. Good morning, everyone. I will start with a summary of our first quarter financial results and then I will talk about our sales and end market trends by region and finish with a discussion of our outlook for 2021. Mark will then take you through more details about our first quarter financial performance and our forecast for this year. Demand accelerated in the first quarter as the global economy continued to improve, driving strong sales growth across most businesses and regions and resulting in solid profitability. The strength and breadth of the rebound in demand has surpassed our original expectations and we have raised our full year outlook. We were particularly encouraged by the significant growth of our components business in the first quarter, which is now clearly capturing the benefits of the increasing content we are able to offer our customers and partners as they move towards more complex and stringent emissions regulations in China and India. This business is also benefiting from its global leadership position as truck markets recover. While the strong demand across our end markets generated strong revenues, the pace of recovery has placed a strain on global supply chains, leading to increased costs and significant challenges in fulfilling all of our customers’ orders. The shortage of key components such as semiconductor chips has been the primary challenge with adverse weather conditions, labor shortages in some regions and bottlenecks in global logistics, further adding to order backlogs. The ability to supply is our key focus now. And we are doing everything we can to mitigate the impact. I want to thank our global employees, especially those in our supply chain and manufacturing operations and our committed suppliers for their extraordinary efforts to manage through these challenges and supply our customers. We are optimistic that the situation will improve in the second half of the year. However, we expect the demand to remain strong, making it difficult for the supply chain to catch up, unless the industry extends the order cycle. Mark Smith: Thank you, Tom and good morning everyone. There are four key takeaways from our first quarter results. First, we saw continued recovery in demand in most major end markets and regions, resulting in record revenues for the first quarter and a much stronger full year outlook. Second, the elevated level of demand across our markets have strained global supply chains in our industry, resulting in higher premium freight costs and other associated inefficiencies higher than we anticipated at the start of the year. The strength of demand, order backlogs and lack of inventory in the pipeline indicate that some level of elevated costs, are likely to continue in the coming quarters. Despite the cost headwinds associated with the tight supply chain, we delivered solid profitability and cash flows in the first quarter and have raised significantly our outlook for the full year. And finally, we returned $615 million to shareholders through cash dividends and share repurchases, consistent with our plan to return 75% of operating cash flow to shareholders this year. Jack Kienzler: Thanks Mark. Out of consideration to others on the call, I would ask that you limit yourselves to one question and a related follow-up, and if you have additional questions, please rejoin the queue. Operator, we are now ready for our first question. Operator: Our first question is coming from the line of Ann Duignan with JPMorgan. Please proceed with your questions. Ann Duignan: Hi, good morning and thank you. Could you just provide more color on your change in guidance on the Components business? It does sound like most of the change has been driven by a higher than expected pre-buy in China. Am I reading too much into that? And then my follow-up is, based on that, could you provide some color on the cadence of your revenue and profitability over the next couple of quarters, just balancing the pre-buy versus India? And then what the back half might look like as input costs dissipate potentially? Thank you. Mark Smith: Thanks, Ann. This is Mark. I will take the first pass at it. We are seeing a rising outlook for most end markets that are going to benefit the Components business, which has a leadership position in global markets. So, it’s not just China. You are right. China has definitely helped that business where we have consolidated operations that’s benefited our results. That’s primarily in the first half of the year. The impact of that strength in China is expected to ease in subsequent quarters in the second half of the year. I will come back and talk about the overall joint venture income for the company rather than just Components in a moment. So yes, that’s stronger volume, the Components business is doing a good job of converting that to additional profitability. And then the second thing is the Components business did benefit from lower quality costs and a positive change in estimate in our product coverage or warranty expense in the first quarter, which boosted the results a little bit, which is why the full year margin is a little bit below the first quarter level of performance. India, yes, India was an important contributor. We had consolidated revenues of around about $600 million in China and India combined for the Components business in the first quarter, so kind of an annualized $2.5 billion business. We expect that could drop from that rate in the second half of the year by as much as 40%, depending on the impact of demand. On the other hand, supply chain permitting, we are expecting, obviously, the North America demand to continue to improve. If I now circle back up to the total company picture, really, the story is the same on China that we expect a significant drop-off in the second half of the year. We don’t have great visibility into that. That’s an assumption right now. Q1 remains stronger than we have anticipated 3 months ago. But there is – there are some signs of concern. There is elevated inventory levels. Obviously, the price of trucks goes up with the introduction of the new emissions regulations. So, we baked in kind of a 40% to 50% drop-off in the earnings run rate quarterly in the second half of the year from where we are today. So hopefully, that wraps up a big picture on China. Operator: Thank you. Our next question comes from Jerry Revich with Goldman Sachs. Please proceed with your questions. Jerry Revich: Hi, good morning everyone. Tom Linebarger: Good morning Jerry. Jerry Revich: Tom, congratulations on the medium-duty engine wins announced over the course of the quarter. I am wondering, can you talk about how the collaboration discussions are going with some existing medium-duty engine customers for providing more services on the electrification side? To what extent does that help the discussions? Could you just give us some context on whether there is any impact as a result of working closer here? Thanks. Tom Linebarger: Yes. Thanks, Jerry. Here is what I would say is, broadly speaking, as we have said in previous calls, we are talking now to every OEM about their technology requirements going from today all the way through the eventual transition to zero carbon. And those technologies include diesel and more advanced versions of diesel, natural gas, hybrid, electric and fuel cell. And as I have also said before, for many of them, the diesel side looks less viable from an investment point of view just because their volumes are relatively smaller than ours and most ranges – but certainly in midrange. So that’s, I think, why you are seeing the announcements you are seeing. In addition, though we are offering them the other technologies, including transition technologies, to help them figure out how to get from where they are now to a place that’s a viable zero carbon solution down the road. I would say that all those conversations are all going on, but it’s difficult now for OEMs to understand what the timing of those transitions will look like and exactly what their technology approach wants to be, just as it is for most market watchers. It’s hard because the viability of those technologies in terms of cost depends on either carbon tax or regulations or something else coming into play because still diesel is quite a bit cheaper than those other solutions today. And of course, it’s providing improved fuel economy with every generation. So yes, those conversations, as you suggest, are going on. But I would just say that, for the most part, we are doing work with folks. But what exactly their plans are going to be and what role we are going to play in those future technologies is still being talked about, whereas the diesel stuff is moving now because they have to make investment choices today. Do I invest in the new platform or do I have someone else invest. Jerry Revich: Okay. Thank you. And Tom, on the light-duty diesel side, can you talk about your level of optimism about similar opportunities that we are seeing falling in your favor on the medium-duty side? What’s your level of optimism about the opportunity set in light-duty? Tom Linebarger: I would say, if you are thinking about passenger cars and that sort of thing, my view is that there are limited opportunities there. It’s not zero. We are having conversations with people, but it’s less. And I think primarily because I think most passenger car companies see investing in new diesel platforms is probably not a good investment. They are thinking themselves that they are trying to invest more for a nearer term future of conversion to hybrids or electric vehicles. Again, that isn’t true across the board. I want to be clear. Pickup trucks and some of the others are – the transition is less clear. But even there, I would say that the movement is more of that direction than it is towards let me think about what my next diesel platform is. Jerry Revich: Thank you. Tom Linebarger: Thanks, Jerry. Operator: Thank you. The next question comes from the line of Ross Gilardi with Bank of America. Please proceed with your questions. Ross Gilardi: Good morning guys. I just wanted to expand on Jerry’s question maybe the other way. What about heavy-duty engines and just the likelihood of Daimler outsourcing its heavy-duty diesel engines, too? And on the medium-duty side, have you said how much additional content you will potentially get on the component side or is that still determined – still to be determined? Tom Linebarger: Yes. So let me first address the heavy-duty question, Ross. Thanks for that. On heavy-duty, of course, what Daimler’s decision would be on that would be best to ask them, not us. But I would just say that we are having conversations on heavy-duty with a number of partners. As you guessed, the volume discussion that I mentioned earlier about trying to invest for limited volume, it’s much more dramatic in medium-duty. The relative volume of our customers versus ours is dramatically different in midrange. It’s not – it is different in heavy-duty, too. We clearly have a larger position, but it’s not as big a difference. So, those conversations are likely to take longer. And it’s not as easy a call for an OEM on heavy-duty as it is on medium-duty. That said, they still have a platform investment to make and as do we. And so the question is how many of us want to make those. So, I do expect more partnerships to occur on heavy-duty. It’s just that those conversations are still ongoing. Jennifer Rumsey: Let me just talk a little bit on the Components business. This is Jennifer. I probably don’t need to identify myself. I am the only female on this call. Of course, our strategy with our partners has been to offer engines where that’s what they would like us to supply. And when we don’t supply engines, we often supply components to them from our Components business. So, when we look at these new partnerships on the Engine side, in some cases, we have the Components business already. For some of our other components, so it will provide incremental growth opportunity for us. And then, of course, we also extend those partnership conversations on components where they continue to do their own engine. So, we do see good growth opportunity as a result of these deeper partnerships on both the Engine and Components side. Ross Gilardi: Thank you. And then just more broadly, do you think all the supply chain concerns out there plus perhaps some of the controversies on some of the newer entrants to the truck market is shifting customer interest on EV and hydrogen more towards some of the incumbents like yourselves that have established and diversified manufacturing capability around the world? Tom Linebarger: I would say, Ross, it’s hard to say. Here is what I think is that, not surprisingly, some of the new companies, that are starting up that are pure plays and in low-carbon technologies, having trouble, demonstrating a business model that works now. That’s not surprising because the volume is really low. I mean it’s – people know the transitions are coming at some point, but they are not viable without regs or some other kind of carbon tax or something that moves the needle. So, they are struggling to show a business model. That shouldn’t surprise anyone. That’s how it is. And our view is that we are well positioned to provide people with solutions today, solutions that are kind of transition kind of solutions, natural gas and hybrid and then final solutions. And so we hope that proves to be the best answer, and we think investors do well to find companies like us who can take the whole – make the whole lap. But again, I think the timing of how that’s going to work and what’s going to – whether supply chain is changing people’s mind or it’s just the business models that don’t look viable, I am not sure. But I noticed the same thing you do, that there is volatility both in the capital flows and the values of these companies and also in their perception of success. And I am sure they will have a brighter day as well as they have a cloudy day today. We just think we have the most robust solution at Cummins. Jennifer Rumsey: And as we always do, we are communicating transparently with our customers and doing everything we can to meet their demand even with all the supply challenges. And so I think continuing to do that is an important part of maintaining strong relationships. Ross Gilardi: Thank you. Tom Linebarger: Thanks Ross. Operator: Thank you. Our next question comes from Rob Wertheimer with Melius Research. Please proceed with your questions. Rob Wertheimer: How do these kind of the future strategies about Cummins. Just within Power Systems, power gen, is that recovery broad-based or is it a little bit data center focused? I don’t know if data centers have probably been climbing in the relative mix. And then just on the rest of the business, and mining seems like a pretty strong recovery, is there anything particular to call out? We all know commodity prices are strong. I don’t know if there is any one-off here? Thank you. Mark Smith: Hi Rob, it’s Mark. I would say, yes, data centers are the enduring secular growth stream, but we have seen a broader recovery in power gen demand this quarter versus a year ago, U.S., China, India and Asia Pacific, other regions. And certainly, within the U.S., China, data center is an important element of that. But it’s a little bit broader. And then in mining, most of our growth in engine sales are originating in international markets right now. Definitely, the outlook has improved – the confidence has improved a little bit on mining yet. Rob Wertheimer: Thanks. Operator: Thank you. Our next question is coming from the line of Steven Fisher with UBS. Please proceed with your question. Steven Fisher: Thanks. Good morning guys. Wondering what you have assumed for freight and other costs in the next few quarters relative to that $105 million that you incurred in the first quarter. And how that then translates to the cadence of the Engine margins over the course of the year, just wondering if that maybe gets a little bit weaker before it gets a little bit better? Jennifer Rumsey: Yes. This is Jennifer Rumsey. Thanks for the question. Yes, we saw higher than anticipated premium freight in Q1, just as we dealt with growing revenue and just trying to keep up in the supply chain and various disruptions. We do expect that that’s going to improve. So we ran 1.7% of sales in Q1. We think that will improve as we go into Q2, so down from around $105 million to more like $60 million and then continue to improve over the course of the year. We will continue to see disruptions though higher than typical, just because there is a backorder we’re trying to kind of chase the situation up. And I’ll add that the situation in India is a bit of uncertainty for us right now and how that might impact both our local markets there as well as the export from India of our engines and other components in supply chain. Mark Smith: And then on the Engine business margin, Steve, there are two swing factors. So one, yes, we’ve assumed some improvement, particularly in the second half and some of these excess costs, not all of them, but most of them are showing up in the Engine business, And then measured against that is the expected decline in China truck demand, in particular, which will impact the joint venture earnings. So the net of the – there are two moving parts, but the net is not a dramatic change quarter-to-quarter. But those are the two big assumptions that mostly play out in a different way in the second half of the year. Steven Fisher: Okay. And then just curious how – bigger picture, how you think about how natural gas fits into the picture long-term. And how does that drive the investments you’re making in natural gas today? Jennifer Rumsey: So we have a leading position today in North America with natural gas products. And our engines in the U.S. are already certified to beat the CARB 24 ultralow NOx regulations, so that may create some additional demand there. And we also are offering natural gas products in other parts of the world. So we think it’s a bridge solution. And we will plan to continue to offer products to meet our customers’ needs as a bridge between diesel engines and future zero carbon emissions. Tom Linebarger: Steve, I mentioned in my remarks, these transition solutions are important because the zero carbon solutions that we’re working on are – those are the eventual solutions that will win the day. But eventual is the hard part, that again, the cost and the infrastructure requirements of electric fleets and/or fuel cell or hydrogen fleets are significant. And so we believe working with OEMs that we will be able to get those costs and those infrastructure in place, but we will need infrastructure. We will need other investments by governments and other things to get that done. So in the meantime, these interim solutions are going to play a significant role. And how long interim is isn’t clear, and it could be extended. So our view is that natural gas and hybrid and some of these other technologies that we have will really help our customers get through those periods, which, again, could be – we could sell across our range of 1 billion engines in those ranges before – transition could be 1 billion engines. I mean it’s a lot of engines over the years, right, with – across the entire industry across multiyear. So it’s really – it’s important to be thoughtful about those transition technologies just like it is the final solutions. Steven Fisher: Makes sense. Thanks so much. Operator: Thank you. Our next question comes from Jamie Cook with Credit Suisse. Please proceed with your question. Colton Zimmer: This is Colton Zimmer on for Jamie Cook. Our first question is on China. In your outlook, are you assuming that the downturn in this market isn’t as bad as maybe you initially thought? Or is it just pushed to the right and 2022 could be another down year? And then our second question is just on the setup for incrementals next year. As the supply chain headwinds and costs go away, is there a chance to earn outsized incrementals in 2022 or did we miss it this cycle? Thank you. Jennifer Rumsey: Thanks. I’ll talk a little bit about China. So the market for the year is a little bit higher than we had originally forecasted, and we really think that is strong demand in the first half of the year. So we’re seeing growing demand for the NS V product ahead of the transition that happens in July and that pre-buy as well as challenges in the supply chain is driving our OEMs to build as much as possible at this point. One other dynamic that we think is going to impact going in the second half of the year is that some regions have extended the period with which NS V product can be registered. So as we go into Q3, we’re going to see inventory of NS V product starting to reduce. And then we’re really watching to see how quickly customers start to buy that NS VI product given it will come at a higher price with the added content. And so that is really the dynamic strength in the first half of the year. And then we’re anticipating the drop in the second half of the year. 2020 was a record year. We’ve been saying we think it’ll come back in line. It, of course, has continued to stay strong. So it’s been a bit unpredictable, but we do think we will see a falloff in the second half of the year. Mark Smith: And then it’s too early to say much about next year. As we’ve seen in the past couple of years, the government has been able to effectively set up some incentive programs that have really been taken up well by truck customers. So there is all – it’s just hard to say what the future plans are basically to take older emissions trucks out of circulation. So it’s too early to say. Certainly, second half of the year, we’re expecting a big drop-off, but wouldn’t like a comment yet on 2022. And then as to your comment about the incremental margins, and certainly, the longer these inefficiencies persist, eventually, that is clearly a headwind for this year. We’ve called it out. We expect they are going to improve in the second half of the year. We do expect that there is going to be improvement going into next year on that particular line item. There are a lot of moving parts and incremental margins. But yes, that line item alone, sitting here today, we’d hope and expect to be better next year than it is this year. The rest we will leave for a later day. Colton Zimmer: Thank you. Operator: Thank you. Our next question comes from Steve Volkmann with Jefferies. Please proceed with your question. Steve Volkmann: Great. I wanted to go back to, Tom, your discussion around transition solutions. Because it seems like a lot of people are forecasting some pretty significant hybrid solutions over the next decade or so, but we never really seem to discuss those kind of projects. Are you working on those projects? Do you have customers? And I’m wondering if that actually plays to your strength because hybrid would presumably have a little bit smaller engine all things being considered, just curious about your commentary there? Tom Linebarger: Steve, the answer to the first question is yes. We are definitely working on projects now. They are specific. They are very specific. They have launch dates, and they will be launched this – in these next several years. We will have hybrids on the road. We will be selling them through our key strategic OEMs. So hybrids are on the move, as you suggested. And again, their life mostly depends on how the zero carbon solutions come down in cost and durability, reliability and how the infrastructure gets built up, and we will need both. So I think that’s why I said that these transition solutions that are going in place, well, may be in there for a while and they may be in there for a shorter period, depending on which country, which application, which region you’re in because those two things – both the infrastructure and the cost depend on application and, of course, country and how much infrastructure being built. But the hybrid programs are real. They are getting launched. It’s happening now. And with regard to engine size, I think, initially, what we will see with hybrids is there’ll be relatively mild hybrid, the first step. And those won’t make a big difference on engine. How big the engine is won’t be impacted very much by the size of the battery. But you are right that as you add larger batteries, then you need less engine to carry the same load. But I think that’s – those are probably Generation 2 solutions rather than Generation 1. Steve Volkmann: Super. And just a quick follow-up maybe for Mark. You talked a lot about increases in cost, logistics, etcetera, but you didn’t really mention price. Are you guys following this with increased pricing? I would assume this is a pretty good environment. Just any thoughts there? Mark Smith: Thanks. Great question, Steve. So excluding the premium costs, we talked at the start of the year about positive 40 basis points from price and material cost, the combination of those. We’re hanging on to those 40 basis points, but I would say there is signs of a little bit of creeping inflation overall. So yes, we had pricing in place, had assumptions about cost increase overall. We’re just about hanging in there right now, but that’s it. Tom Linebarger: Can I just add one thing? It’s – our costs, as you saw, were significantly higher than we anticipated even 3 months ago. And just to call it out directly, the big problem is semiconductors. There is a lot of supply chain challenges. There is everything, weather in Texas and now new challenges with India. You name it, and we have a shortage on it, but semiconductors is the biggie. That’s the one that’s really hard to deal with. And in this quarter, we ended up buying chips on the market, through the aftermarket and bringing them back into production. We rescheduled and rescheduled and rescheduled to meet our customers’ demand. Our customers, after a pretty tough first half of last year, are finally seeing demand go up and really want to ship trucks to their customers. And we really want to help them do that. So frankly, we took it on the chin. We basically brought in everything we could as fast as we could and shipped it out to them and didn’t raise prices or didn’t do any of those things. We just shipped them. And we took it, took it hard this quarter. And that’s just the honest truth. And it’s because we felt a commitment to those customers to get them the product best we could while the going was good. And so we’re not really changing any of that other than hopefully, as Jennifer said, we’re going to get these costs better under control as we don’t have to reschedule so much. We understand where our chips still aren’t enough, but we understand where they are coming from more now, and we understand how many we have really. And we will be able to level some, schedule some and reduce premium freight. It’s still awful, but it will be less awful in Q2 and less awful again in Q3 as we get more set up. But it was a rough quarter, and I feel good about what we did for customers, and it was hard to get there. Steve Volkmann: I appreciate it. Thanks. Operator: Thank you. Our next question is coming from the line of David Raso with Evercore. Please proceed with your question. David Raso: Hi, thank you. First, a clarification, the component growth, right, 43% the first quarter slows to 28% the rest of the year, while Engine is the opposite, 14% growth for the quarter, 29% for the rest of the year. That is simply all related to China, India in the second half? Because, obviously, Components has twice the exposure to China, India than the Engine division, correct? It’s nothing related to how maybe your customers are taking product at this point of the site, is that correct? Mark Smith: The main answer is no, it’s a structural question. So it’s not that the Components has twice as much exposure. It’s structured in a different way. So the Engine business is principally through joint ventures in China, India, and yes, you’re right, that’s – otherwise, that’s the main factor. There can be some small timing differences, but that’s not the point here, David. It’s just the way our business is set up. David Raso: My question, is the supply chain tightness that we’re seeing and maybe, Tom, how you usually think about year 1 of a recovery than year 2, given the supply chain issues, how are you perceiving the cycle differently, how are you perceiving inventories at the end of year 1? I’m just trying to get in your head a little bit about how you’re trying to digest this cycle, given it’s – it looks like the inventory is going to be tight throughout the year. And that also dovetails into a pricing question. Not trying to get ‘22, ‘23 guidance from you, but just bigger picture? Tom Linebarger: No, I get your point, Dave. I’ll let Jen talk a little bit more about how she sees customers’ orders. But I would just say, broadly speaking, our view is that things that don’t get shipped this year we will ship next year because there is a supply constraint. There is strong demand out there. And that if the cycle takes longer to recover or people can’t get all the trucks they want, they’ll get them next year. I mean – and we’ve seen that in other regions where the capacity of the truck manufacturers doesn’t ramp up as quickly in Europe, for example, in the last upturn, we saw that. It just took them longer to finish the cycle. And I think that’s what will happen here. It will take longer to finish to the extent that the truck demand can’t be fully supplied, which would not be a bad thing per se, if it extended further. I think that’s the way we’re seeing it is a longer extended cycle just because we can’t – we’re supply-constrained. And I’ll let Jen talk about what she’s seeing from customers in that respect. Jennifer Rumsey: Yes, for sure. As Tom said, customers are really trying to get everything they can because they see high demand. Inventories are low, back orders are growing. And we – I think the industry can stay supply – largely supply-constrained through the year, which is why we want to ship everything that we can to our customers to allow them to build and meet the demand. And as I talk to customers, they think it’s going to extend into next year because it’s just not going to be able to build enough trucks to meet all of that demand that’s out there. David Raso: Alright. Thank you. Tom Linebarger: Thanks, David. Operator: Thank you. Our final question will come from the line of Chad Dillard with Bernstein. Please proceed with your question. Chad Dillard: Hi. Good morning guys. Thanks for squeezing me in. So just following on your Daimler announcement, can you talk about the cadence of the transition for medium-duty? I know you mentioned that 2024 CARB will be one catalyst, but major opportunity to gain incremental share between, I guess, next year or then? Jennifer Rumsey: Yes. As we build out that partnership, primarily the emissions regulation changeover is what’s going to drive additional position with Daimler, so what will happen in the U.S. starting in the ‘24 time period and then in other regions of the world as emissions change. So that will primarily drive the cadence of growth. Chad Dillard: Got it. And then can you talk about your components opportunity just beyond the China and India in transitions that we’re seeing this year? Where do you see like further opportunities to increase your content intensity? Jennifer Rumsey: Yes. So as you said, I mean, a big growth opportunity for us in the Components business has been China and India with emissions growth and new customers. So we’re growing content with existing customers, and then we’re also gaining new customers. Additional opportunity that I want to highlight also in China is we’re launching the Endura transmission. That’s part of our Eaton Cummins joint venture, in China this year and the market in China for automated manual transmission, we think, is growing from 8% to 22% this year. We have a low-volume mine that we now have starting to produce products. So we will ramp that up this year. That’s another growth opportunity in the Components business. In China this year, we’re also launching an 18 version of that transmission later this year. And then as regulations continue to evolve and we expand some of these partnerships, that will bring further growth opportunity for the Components business. Tom Linebarger: And Jen mentioned earlier, Chad, that when we get stronger partnerships, we not only get more components because our engines go in, which have, of course, all of our components. But also, we just introduced more of our components to the remaining engines because it just also reduces their technical investment to be able to use some of our components and our recipes on their engine. So that will just continue. That’s been ongoing trend, and that will continue. Chad Dillard: Thank you. Tom Linebarger: Thank you. Operator: Thank you. We have reached the end of our question-and-answer session. So I’d like to turn the floor back over to management for any additional closing comments. Jack Kienzler: Thank you very much. As always, thanks to everybody for your continued interest in Cummins. I’ll be available for questions after the call. And I hope you all have a very good day. Operator: Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation, and you may disconnect your lines at this time.
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Citi cited a weaker freight environment and recent cuts to North American truck production forecasts from ACT Research as key factors behind the revised estimates. Dealers are reportedly experiencing “order paralysis” among fleet buyers, who are holding back on new purchases amid uncertainty around Trump-era tariffs and potential revisions to EPA 2027 emissions regulations.

While Citi’s updated 2025 estimates for Cummins now fall toward the lower end of the company’s own guidance, the firm believes CMI is better positioned than peers to navigate the cyclical softness. Unlike others in the space, Cummins benefits from broad geographic reach, a diversified product portfolio, and strong pricing stability.

Among Citi’s coverage of the commercial vehicle sector, Cummins stands out as the only stock with a Buy rating, supported by the company’s ability to withstand short-term pressure while maintaining long-term earnings strength.

UBS Lowers Cummins Price Target to $400, Cites Truck Market Uncertainty but Maintains Buy

Cummins (NYSE:CMI) saw its price target lowered to $400 from $432 by UBS analysts, who maintained a Buy rating despite growing concerns over the North American truck market recovery.

While uncertainty surrounding tariffs, economic conditions, and freight demand has led UBS to cut its 2025 and 2026 EPS estimates by 6% and 7%, respectively, the firm still sees earnings upside for Cummins, primarily driven by margin expansion and growth in the Power Generation segment—which UBS believes is not fully priced into the stock.

Recent industry order weakness in February suggests heightened uncertainty in the freight and trucking sectors, and UBS warns that ongoing policy ambiguity could further dampen demand. As a result, estimates for earnings from Cummins’ Engine and Components segments have been revised downward.

However, Cummins has several margin improvement initiatives in place, including lower R&D expenses as 2027 engine development winds down, price increases in Power Gen, further integration of Meritor, reduced investment in Accelera, and overall cost-cutting efforts. These benefits could be partially offset by higher warranty provisions for new engines and inflationary pressures from tariffs.

Despite near-term challenges in the trucking sector, UBS sees Cummins’ broader diversification and operational efficiencies positioning it well for long-term growth, justifying its continued Buy recommendation.