Cummins Inc. (CMI) on Q2 2021 Results - Earnings Call Transcript
Operator: Greetings and welcome to the Quarter Two 2021 Cummins Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that, this conference is being recorded. I will now turn the conference over to your host, Jack Kienzler, Executive Director of Investor Relations. You may begin, Jack. Jack Kienzler: Thank you. Good morning, everyone. Welcome to our teleconference today to discuss Cummins' results for the second 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. And good morning everybody. I will start with a summary of our second quarter financial results and our market trends by region and then finish with a discussion of our outlook for 2021. Mark will then take you through more details about our second quarter financial performance and our forecast for this year. Demand remained strong in the second quarter as the global economy continued to improve. Driving strong sales growth across most businesses and regions and resulting in solid profitability. We are encouraged by economic trends across a number of our key end markets which point to strong demand for the remainder of this year and extending into 2022. In North America freight activity continues to grow, leading to elevated spot and contract rates and driving fleet profitability and a rising backlog of truck orders. Leading indicators for non-residential construction continue to improve and fiscal support for investment in capital projects is robust, led by North America and Europe. Iron ore, copper and thermal coal prices also remain high supporting a positive outlook for mining. Cummins is well positioned to benefit as these markets gain momentum due to our leading global position across a number of end markets and we continue to see demand for our products outpace our competition. Mark Smith: Thank you, Tom, and good morning everyone. There are four key takeaways from our second quarter operating results. First, underlying demand remains strong outpacing supply and increasing backlogs in some of our largest markets. Number two, global supply change remained constrained due to the elevated levels of demand and complications arising from COVID resulting in higher premium freight costs and other associated inefficiencies than we anticipated three months ago. We delivered solid profitability and cash flows in the first half of the year despite the continued cost headwinds associated with tight supply chain and for the full year, we are maintaining our revenue and profitability guidance. And fourthly, we returned $860 million to shareholders in the quarter through cash dividends and share repurchases and 1.48 billion for the first half of the year consistent with our plan to return 75% of operating cash flow to shareholders this year. Now, let me go into more details on the second quarter. Second quarter revenues were $6.1 billion, an increase of 59% from a year ago when the impact of COVID 19 was at its most severe. Sales in North America grew 74% and international revenues rose 42%. Currency positively impacted revenues by 3% driven primarily by a weaker US dollar. EBITDA was $974 million or 15.9% of sales for the quarter compared to $549 million or 14.6% of sales a year ago. EBITDA increased primarily due to the benefits of higher volumes and stronger earnings from our joint ventures in China and India, partially offset by higher product coverage costs and higher compensation expenses primarily variable compensation. Gross margin of $1.5 billion or 24.2% of sales increased by $588 million or 110 basis points, primarily driven by the higher volumes. Global supply chain tightness continues in the second quarter and resulted in approximately $100 million of additional freight labor and logistics costs. We expect these costs to remain elevated in the second half of the year with demand projected to remain strong, supply tight and some increase in logistics and transportation costs. Selling, general and administrative expenses increased by $130 million or 28% due to higher compensation expenses and research expenses increased by $87 million or 46% from a year ago. As a reminder due to the significant uncertainty at the onset of COVID 19 we implemented temporary salary reductions in April of last year that lasted through the end of September. Salary reductions resulted in approximately $75 million of pre-tax savings for the company in the second quarter of 2020 across gross margin, selling, admin, and research expenses. In addition, our variable compensation plan worked as designed flexing down in the face of weak economic conditions last year and flexing up with stronger financial performance this year. All operating segments experienced higher compensation cost on a year-ago for these two primary reasons. Joint venture income was $137 million in the second quarter, up from $115 million a year ago. Strong demand for trucks and construction equipment in China as well as a broad recovery in other international markets led to the improved profitability versus a year ago. Other income increased by $30 million from a year ago due to a number of positive items including a one-time $18 million gain on the sale of some land in India, which benefited our distribution segment. Net earnings for the quarter was $600 million or $4.10 per diluted share compared to $276 million or $1.86 from a year ago, primarily due to stronger after-tax earnings driven by stronger volumes. The gain on the sale of land in India contributed $0.05 of earnings per share this quarter. The effective tax rate in the quarter was 21.4%. Operating cash flow in the quarter was an inflow of $616 million compared to an outflow of $22 million a year ago, stronger earnings and dividends received from joint ventures more than offset increases in working capital. I will now comment on segment performance and our guidance for 2021, which is unchanged from three months ago. For the Engine segment second quarter revenues increased by 75% driven by increased demand for trucks in the US and construction equipment in US and Europe. EBITDAR increased from 10.5% to 16.1% of sales, primarily driven by higher volumes and lower product coverage expense, which more than offset higher costs and inefficiencies associated with global supply chain challenges and although supply chain costs in this segment remain elevated from a year ago. They did improve a little from first quarter levels. We expect full year revenues to be up 23% to 27% and EBITDA margins to be in the range of 14.5%, 15% for the Engine segment and distribution revenues increased 20% from a year ago and EBITDAR increased as a percent of sales from 10% to 10.5% primarily due to stronger performance in North America. We have maintained our outlook for segment revenue growth to be up 6% to 10% and EBITDA margins to be 9% at the midpoint of our guidance. In the components business, revenues increased 73% in the second quarter, driven primarily by stronger demand for trucks in North America. EBITDAR increased from 12.3% of sales to 15.1% due to the benefits of stronger volumes partially offset by higher product coverage costs. For the full year 2021, we expect components revenue to increase 30% to 34% and EBITDA to be 17% at the midpoint. In the Power Systems segment revenues increased 47% in the second quarter, driven by stronger global demand for power generation and mining equipment. EBITDAR increased from 11.7% to 12.2% of sales primarily due to the benefits of higher volumes and lower product coverage expenses. We are maintaining our Power Systems guidance of revenues up 16% to 20% and EBITDA margin in the range of 11% to 11.5% of sales. In the New Power segment revenues increased to $24 million, up 140% due to stronger sales of battery electric systems and fuel cells. EBITDA losses for the quarter was $60 million in line with our expectations as we continue to invest in new products and scale up ahead of widespread adoption of the new technologies. Full year, we currently project New Power revenues of $110 million $130 million and EBITDA losses to be in the range of $190 million to $210 million. Total company guidance remains unchanged with revenues to grow between 20% and 24% and EBITDA margin to be between 15.5% and 16% for the full-year. EBITDA percent for the first half of the year was 16%. Some of the key factors expected influenced second half profitability of the pace of improvement in truck production in North America. The rate of decline in demand in China and the performance of the global supply chain. We now expect earnings from joint ventures to be up 10% in 2021 compared to our prior guidance of down 5%. Stronger-than-expected demand in China truck and construction markets, especially in the second quarter is the primary reason for the increase in our forecast. Joint venture earnings are expected to ease in the second half of the year with industry truck sales expected to decline following the broader adoption of the new national Standard 6 on Highway emissions regulations in China in July. And we also anticipate the softening of demand for construction equipment coming off all-time high levels in the first half of the year. Our effective tax rate is expected to be approximately 21.5% excluding discrete items, down from our prior guidance of 22.5% due to the mix of geographic earnings. Capital expenditures were $125 million in the quarter, up from $77 million a year ago and we expect our full-year capital expenditures to be at the high end of our range of $725 to $775 million for the full year. We returned $869 million to shareholders through dividends and share repurchases in the second quarter bringing our total cash returns to $1.48 billion for the first half. Excuse me for my dry throat. To summarize, we delivered strong results in the second quarter despite continued supply chain constraints and elevated costs. Demand currently exceeds supply in a number of important markets pointing to strong demand for our products into 2022. I want to thank our global employees for their ongoing commitment to meet the needs of our customers while delivering solid financial performance. We continue to extend our leadership position through advancing the technologies, the power the profitability of our customers today. And we'll continue to do so for some time to come. This sets the company up to further increase the earnings power of our core business, while we continue to invest in a range of new technologies and develop new partnerships that position company for additional growth. Our strong balance sheet focus on improving performance cycle over cycle and consistent cash flow generation and that we can sustain important investments for the future through periods of economic uncertainty and distribute excess cash to shareholders. Thank you for your interest today. And I'll turn it back over to Jack. Jack Kienzler: Thank you, 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 comes from Jamie Cook with Credit Suisse. Jamie, you may ask your question. Jamie Cook: Hi, good morning and nice quarter. I guess, Tom, a couple of more strategic question just on the filtration business, can you remind us where the margins of this business are and just your thoughts on timing and what this business could achieve as a standalone public company versus being part of Cummins or is it more likely that this asset would be interesting to someone else. And then I guess my second question, I appreciate a lot of the color that you spent on New Power Systems and some of the relationships that have emerged. I'm just wondering as you're thinking about this business today, a lot of the growth obviously has been organic. Is there any inorganic opportunity here with the New Power Systems over the next sort of 12 to 18 months that could potentially perhaps accelerate, where this business would go longer term in terms of its earning a profit et cetera or in technology? Thanks. Tom Linebarger: Thanks, Jamie. Good morning to you. So let me start with your filtration question first. The answer is that the profitability or filtration is pretty much in line with the Components business, the segment and that business are very similar. And the strategic logic is simple, it's a great business, by the way very profitable, great cash flow, terrific leadership team and we've done a lot of improvement in that business over the last few years, which is really, really improved its financial performance as well as its operating performance. And so we feel like it's operating on all cylinders really to just for an engine analogy there but the challenge is that looking forward the opportunities to grow shareholder value look, primarily to us in diversification, the number of technology innovations for the truck business or for our end markets look like they are limited in front of us. Whereas the opportunities to take that technology platform and global footprint to other filtration segments look significant and when we think about using our shareholders' capital to invest in those other segments, the logic is in is clear. What is clear though that the company has come to a size and performance level now where we think it can stand on its own or it could be part of another bigger company that plans more diversification and other end markets. We are looking at all those options, we're exploring, everything from a sale to a spin too to some other kind of strategic option. What we want to do most of all though is realized value for common shareholders. We know that when we're the best owner and can make the most of the assets we're going to do that and when we're no longer the best owner, then we need to confront that too. And that's what we're trying to do here is just create value for shareholders and be direct about it. Again, it's the business is doing great. The management team is outstanding. We're really proud of the achievements of that business. We just think it can operate separately from us effectively going forward. Then with regard to New Power and thanks for your comments on the strategic milestones, we have achieved a lot already. And we are exploring organic, inorganic partnership options, all the time, it is such a fast-moving area. There is so much development to do an infrastructure just the product technology. The availability of fuel there so much to do to decarbonize the automotive industry, no less all the other commercial, industrial industries that we're in. There is no lack of potential partnerships and opportunities, we are those scanning always for inorganic options to, as you know, some of the valuations were elevated to a point where they were really just almost silly. But that said, that isn't always true now and we are always scanning for acquisitions that we think can position us strategically more better position us from a scale point of view that you heard me mention that in our battery electric section that there is a scale advantage to be gained both in hydrogen and electric, if we can get enough volume on some of those products, we can drive down cost significantly that depends in part on whether the technology is viable and the application or not, and that's why we're doing so much focus on what are the first mover markets and where can we actually get scale and then if we can do that and an acquisition can help, we'll do it. Jamie Cook: Okay, thank you. I appreciate the color. I'll let someone else ask a question. Tom Linebarger: All right. Operator: Our next question comes from Ann Duignan with JP Morgan. Please proceed with your question. Ann your line is live. You may. Please proceed with your question. Ann Duignan: I'm sorry, I hit mute button, I didn't see it, didn't work. Apologies, and maybe a little bit more color on the JV income. I know in your comments you said that most of the raise in the JV income was on the back of Q2 China performance but just beyond that maybe you could walk us through, and the JV driven income and maybe a little bit more color on India, JV income and fully consolidated just what you're seeing there from the fundamentals. So that will be helpful. Thank you. Tom Linebarger: Thanks, Ann. So we delivered about just over $300 million of JV income in the first half of the year, which was up from $244 million a year ago and we're expecting that first half performance to drop off between 30% and 40%, with the midpoint of the guidance we're down to just under $200 million of earnings in the second half of the year. We have started to see some slowing orders for both construction and truck. It's too early to say yet with absolute conviction where we'll end up for the year, but that's our latest forecast. In India underlying demand we think is robust. But it's been very complicated with the COVID situation. So yes, we think India earnings should improve, China of course is a bigger contributor across . Operator: Our next question comes from Jerry Revich with Goldman Sachs. Jerry, you may ask your question. Jerry Revich: Yes, hi, good morning everyone. Really nice to hear about the Sinopec partnership, I'm wondering if you just give us an update on what the order bookings for electrolyzers were for you folks in the quarter. And if you can just talk to us about the size of that pipeline, and when do we expect additional bookings, as we look out. Thanks. Tom Linebarger: Jerry, we haven't reported bookings from electrolyzer markets. What I can do though is take that in something you'd like to see and start to see if we can publish those that data, but we have not been doing that. So I can't really answer your question on bookings for the quarter. But what I can say is that, as I mentioned in my announcement that the project that we've got planned with Iberdrola and Spain for the fertilizer is it will be the largest of its kind. And so we are seeing significant ramp up already, especially in Europe, that's where, in Europe the combination of low cost renewable power combined with European money supporting projects that decarbonize industrial uses of hydrogen is really driving, is the primary driver of demand and we see some of that now beginning to form in China, same idea, decarbonizing industrial uses of hydrogen. So there is already big consumers of hydrogen, people already by a lot. But it's produced using natural gas through SMR and this supply chain, the screen hydrogen supply chain takes renewable power PEM electrolyzer like ours. And then in terms of, it makes the hydrogen low carbon or zero carbon and that's kind of the biggest driver electrolyzers today. Jerry Revich: Okay, thank you. And then, I'm wondering on hydrogen truck announcement with Air Products, can you just talk about your anticipated business model on initial hydrogen truck orders? Is it going to be primarily retrofit or are there any OEM partnerships that you can talk about? How is that business model evolving versus your traditional Powertrains? Tom Linebarger: We think the business model is going to be very similar. These are not retrofit vehicles, these are vehicles will be built for a purpose to have fuel cell electric vehicle powertrains. As you guessed, the big development area there is to have an electric infrastructure in the truck already and then you can put the fuel cell in and take advantage of the electric powertrain or the electric infrastructure in the truck. And that's still under development. Most of the trucks that we put out now, the electric infrastructure is either a prototype version or has not been fully productionized yet. And I'd say our early versions will still be that. But truck makers are electrifying vehicles at a reasonably rapid rate at least in relatively small volumes. So, we expect those platforms to improve over time. And we will be forming partnerships with OEMs to deliver those trucks. My view is that the reason you haven't seen more partnerships already is there just isn't very much demand and everyone's trying to figure out what to do with their scarce engineering resources. 'Do I use them on developing advanced diesel? Renewable natural gas? Fuel cell electric? And since I can't do all at once, which ones do I do first, second and third ?' So, we believe that truck makers will be ready to work with us on fuel cell vehicles when there is demand. So, that's why we're excited about and end-user like Air Products, high-quality company, knows hydrogen really well, wants to make their fleet fuel cells. So, I think that's going to increase truck makers' interest in trying to figure out how to fulfill this order. Jerry Revich: Thanks, Tom. Tom Linebarger: Yes. Operator: Our next question comes from David Raso with Evercore ISI. Please, proceed with your question. David Raso: Hi, good morning. Trying to think about the supply chain and your ability to react to with pricing. When you look at the second half of the year and you sort of made the comment, we should expect continue constraints through the end of the year, what are you hearing from the supply chain about the early part of 2022 that makes you feel more comfortable, and your ability to price into that market in 2022? Jennifer Rumsey: Yes, David. Jennifer here. I'll comment a little bit about what we're seeing right now. As you heard from Mark and Tom, and it's happening across the industry, supply chain really ramping up to keep up with the demand we see, first fit aftermarket has paved our ability to supply. Our teams have done a phenomenal job working closely with customers and suppliers to minimize that impact to deliver the results that we did in the second quarter, we see that easing in many places quarter-over-quarter, so improving through the back half of the year and into 2022. Microprocessor like other in our industry and other industries continues to be the biggest constraint. Our demands are relatively small on the broader picture of microprocessor supply and we had expected to see some improvement in June with COVID in Malaysia. That's delayed slightly, but that we think will ease in the second half of the year. So, we're seeing improvement in the second half end markets as we see the supply chains ease. From a price perspective, right now we're anticipating our price to cost to be 30 basis points favorable for this year and that is down from 40 to 50 basis point positive in our prior guidance, really because of those increased costs that we're seeing in materials, logistics and premium freight and we are working to mitigate that with some of our contractual things on the material side, hedging and also looking at pricing and surcharges where possible and first fit and aftermarket. So, we won't comment more on 2022 at this point, but we do expect to see some improvement both and cost coming down and getting some more recovery, end of the second half of the year. David Raso: All right, thank you very much. Operator: Our next question comes from Steven Fisher with UBS. Please, proceed with your question. Steven Fisher: Thanks, good morning. Just wanted to follow up that discussion about some of the costs. I know we talked about $105 million of cost in the first quarter related to logistics and it sounds like they're coming down a little bit. Wondering if you can quantify that with what you experienced in the second quarter and where you see that going in the next couple of quarters? Jennifer Rumsey: Yes. So, we did see those costs come down slightly in the second quarter. Our engine business cost improved more, but we saw some increase in the components in the Power Systems business due to some issues that came into that business, and we do expect that to improve again each quarter in the second half of the year. Overall, though, we're projecting $295 million in incremental logistics costs for the full year, which is $105 million more than our prior guidance, just based on what we're seeing. Steven Fisher: That's very helpful. Tom Linebarger: Maybe just to say one more word about that. I think like a lot of companies, the continued outbreaks of COVID around the world and now the delta variant just keep throwing more curve balls into the system because we see labor shortages, we see other things. And so, some of these costs as Jen mentioned, we had expected it to go from a $100 million in the first quarter to $30 million in the second quarter and then be gone. And so now we're talking about almost $300 million for the year. So, I want to be clear, that's a big hit to what we really generally expected. The thing I guess I wanted to highlight is that our company continues to earn good margins despite that by finding other ways to do it. We've been able to price in the aftermarket and we still have a big opportunity going forward in that whereas Jen said, we'll be able to add material cost adjustments contractually as we move real forward in the quarter. And just the sheer effort by our teams to get products out at the least cost as we can, I think, and in fact, so therefore we get revenue up which improves our incremental margins in the plant. So, I guess we're kind of running up and down escalator, if you will, and doing a decent job of it. And so, as those things start to get better - and even in the markets where we're still seeing disruptions our supply base gets better at operating under the same lousy conditions if they stay stable. Even stable lousy is better than changing all the time. So, all of them are doing better. What we are seeing improvement it's just wherever the new flare up is, it's where we're seeing the costs being driven. Steven Fisher: It makes sense. Thanks, Tom. And then just maybe a follow-up on China. I know you're anticipating the weakness in the second half. I'm wondering if you are sensing any policy tides turning more positively there in a bigger picture on that may influence sort of infrastructure spending and demand for trucks and construction equipment that might make your kind of second half weakness somewhat of a lagging indicator actually? Tom Linebarger: Yes. It's a good question. As a Chinese policy prognosticator, I would be of course prior immediately, but I'll just say this, that I believe based on my conversations with government officials there, that they are concerned about where the economy is and are going to continue to try to figure out ways to boost economic activity especially given what's happening internationally to demand. So, I do think it's entirely possible. We'll see government responses to try to keep business moving during this time and to your point, that might offset some of what we see as a sort of structural issues like the changing of the emission standards and the price increases of trucks. The signals aren't evident to us yet, but that doesn't mean it won't happen and we've been talking about this all year. We've called this wrong before. We've said China is going to fall off a lot and then it hasn't and we said the reverse. China is going to grow a lot and then it fell off some. So, what we think is that generally speaking with this emissions change, prices are going to go up. People bought a lot of trucks last year, second half of last year, first half of this year. So, we see diminishing demand - and not just trucks, also excavators - we see diminishing demand as the most likely expectation and we are beginning to see signs of that. And so even if the policy started to change now, I think we'd still see some demand drops in at least the third quarter and the fourth quarter until those things start to take effect. Jennifer Rumsey: I'll just add. We feel really well-positioned with the products that we're launching in China this year for the NS VI submission. So, that does take effect and customers start to buy. We think we have really good products out there that will position us well in the market and of course, we also have some outgrowth in the components business with both after treatment and transmissions that we'll start to see increasing there. So, we're feeling good about where we are in that market. Steven Fisher: Perfect. Thank you both. Operator: Our next question comes from Ross Gilardi with Bank of America. Please, proceed with your question. Ross Gilardi: Hi. Good morning, everybody. Can you hear me okay? Tom Linebarger: Yes, Ross. How are you doing? Ross Gilardi: Great, Tom. Thank you. I wanted to go back to your hydrogen event that you hosted earlier in the year and the target you had for - I think it was $400 million in electrolyzer sales within five years. Correct me if I have that wrong, but I'm just wondering if all the wins, all the collaborations you've announced, do you already feel like you've got wins in hand that take you to that target within five years and is there an upside case based on collaborations already announced that takes this to say $1 billion in five years? I realize all this is fluid and subject to very unpredictable timing issues and so forth, but it seems like you've got a lot in the hopper there already. I'm just wondering how much visibility you even have on that target at this point? Tom Linebarger: Yes, it's a great question, Ross. The answer is it depends on if I give you the answer from a CEO of 100-year-old engine company or from our new startup. The CEO of an old engine company says, we don't have the orders in hand yet, because I think of orders as actual orders. But to your point though, we project that the sum of these partnerships and where we see this decarbonizing of industries using hydrogen already will take our demand significantly over our estimate we gave at the Hydrogen Day. Again, the orders aren't in-hand. They depend on European money and all these things, all of which has been promised, but it's not all done. And the same thing in China, there is projected policy investments that will encourage green hydrogen, but the orders aren't there yet. So, that's why when you ask like, 'Do you have orders in hand?' The engine guys says no. But if you ask me as the CEO over at New Power, I'd say, I feel really good about it and I think we're going to exceed our target significantly. Ross Gilardi: Okay, thanks a lot. That's helpful. And then just kind of nearer term. Also just based on everything you've announced. When do we see a real inflection in sort of the quarterly run rate revenue for New Power? You kept your outlook unchanged for this year. I realize all these things, they take a lot of time, but do see a meaningful step-up, do you think and just sort of the quarterly run rate into next year at some point in 2022? Tom Linebarger: Let us hold on our 2022 guidance until we get there. But basically what we think the revenue guidance is going to be driven by most is this electrolyzer demand. This is the thing that's kind of going the fastest. Everything else is moving. You know that the EVs are moving, fuel cell trucks are moving just as I said, but to your point, those are all being driven by cost coming down, infrastructure being built, all of which takes a long time. The electrolyzer demand is the thing that's right in front of us. So, if we can get the projects locked down, all of the European money subsidies in place. As you heard from my remarks, we are building the capacity to produce these units. What that means with regard to the quarters of 2022, we have some work yet to do that. I'd like to tell you, yes, but I think we need to do the work and we need to see some of these projects locked down before we say to ourselves, 'It's exactly this quarter and that quarter.' So, give us some time to work that, but I understand the question well and we'll definitely give you visibility to that as we get it. Ross Gilardi: Thanks so much. Tom Linebarger: Thank you, Ross. Operator: Our next question comes from Rob Wertheimer with Melius Research. Please, proceed with your question. Rob Wertheimer: Thanks. I had a couple and thank you, Tom for the overview on the New Power stuff. I understand the comments on the old versus new world, but helpful to have the updates. Can I ask you to - I don't know if you're willing to, but if you were to go a step further, could you characterize how strong you feel on - you have a lot of things you can choose to invest and whether those drive trains, motors, whether it's electrolyzers, whether it's fuel cells, whether it's batteries, et cetera. Are you leading in some of those in sort of keeping up in others? And maybe you can show us where you feel most confident. Then I had a question on engines as well. Tom Linebarger: Yes. That is definitely a longer conversation about each technology area where we're leading and where we're not, which would be significant disputed by other competitors in the industry, I'm sure, Ross. Let's me say it this way. I think that we have a position in the market, which has been built over a long time where we understand the applications as well or better than anybody in the industry. We understand the technical ways in which the applications demand power from the power train. That gives us a significant advantage in developing whatever powertrain ends up winning because we understand what it actually has to do. Second thing I'd say is that we've invested significantly in both hydrogen fuel cells and battery electric fuel powertrains, meaning that we have as much experience technology investment as anybody in the industry. Not in straight battery cells or that kind of thing, but in the application of those units to commercial vehicles. So, we're not behind anybody who's in commercial, industrial markets. So, I believe that we are well-positioned, but I also think the industry is moving quickly. As I said in my remarks, where the strategic advantage will be gained will depend not only on the product development, but on where the infrastructure is, what the cost of electricity is versus the cost of hydrogen, a whole bunch of other factors that require us and other industry participants to be pretty nimble about how you think about what products are going to win and how advantage is going to be created. So, that's why I think it's important for us to say we like these investments, we feel like we're at the forefront of all of them, but we also need to keep thinking about where the puck is moving to and make sure we're thinking about how to get advantage. That's a little bit why you heard my comments on investing in low carbon engine technologies, because right now, we can produce hybrid diesel engines and hybrid and natural gas engines at significantly lower cost than either BEV or fuel cell powertrains that are significant improvements in both carbon and criteria pollutants. That's worth a lot to either depending on whether you're EPA, or a regulator, or you're a customer, 'I know how to use those; they are a lot cheaper. I understand how to fuel them and operate them and meanwhile, they still significantly positive impact on the environment.' So, that's why I think we're trying to make sure that we stay at the forefront of all of these and not just pile down a bit in one big pile on one place because I think that's not a winning strategy in this market. Rob Wertheimer: All right. That was a helpful answer and I don't know if this will be another tough one. But on the flip side, you guys have the opportunity to provide your expertise and scale and the last stages of diesel engine. Then you've done it a little bit, I guess on medium-duty already. How do we, on our side of the fence think about what happens? You see some of the mandates coming forward in time on auto, that's a whole lot easier to do than on truck, I understand. Should we just expect maybe there is a big announcement and we all kind of guess as to how long the tail end of diesel? Are you willing to do that or is there a risk-sharing? I don't know if you're willing to sort of characterize how those investments may go and I will stop there, thank you. Tom Linebarger: Yes, Rob. Thanks for that. It's a great question. Our view is that the tail end of diesel will be a lot longer than people expected. And that's not because we sit around and hope for the preservation of diesel. It's because the diesel market is so complicated. There are so many applications. A 100 years of applications and it's not like the cars where there's just one application. There's hundreds or thousands and each one of them has unique demand and scale. It's very difficult to achieve in some of these. And so we see the demand for diesel lasting a long time and that's why this investment in both helping customers that are trying to move out of diesel as well as trying to think through how do we invest in those technologies to decarbonize through renewable natural gas or hydrogen ICE engines, or hybrids, or other things is a good investment because it allows these applications to move down the carbon curve, have less carbon out, lower criteria pollutants in an engineering way and cost way that's going to drive utilization and people are going to actually use it and not just delay purchases. So, we think both for regulators and for customers, that's a good investment and that curve is likely to last a long time. And the answer about how long is unfortunately for people that want a simple answer, it depends on how - it's complicated. It will last a really long time if you mean all of them. If you mean the one-truck application, our largest volume, it might happen sooner than the last unusual kind of truck that's a very small volume. But the accumulation of all those curves and all those applications means diesel is around a long time. And these new applications, the lower carbon ones are going to be introduced starting now and all the way through the 2030s. Rob Wertheimer: Wonderful. Thank you. Operator: We have reached the end of the question-and-answer session. And I will now turn the call over to management for closing remarks. Jack Kienzler: Very good. Thank you and thank you, everyone, for your interest as always in Cummins. We appreciate your attendance, and that concludes our teleconference today. I will be available per usual for questions after the call and I hope everyone has a great day.CMI Ratings Summary
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Cummins Inc. (NYSE: CMI) Surpasses EPS Estimates
Cummins Inc. (NYSE:CMI) is a global leader in the design, manufacture, and distribution of engines, filtration, and power generation products. The company operates through various segments, including Engine, Power Systems, Distribution, and Accelera. Cummins competes with other major players in the industry, such as Caterpillar and General Electric, in providing innovative solutions for power needs worldwide.
On May 5, 2025, Cummins reported earnings per share EPS of $4.95, slightly surpassing the estimated $4.91. This performance reflects the company's ability to manage costs and optimize operations despite revenue coming in at $8.17 billion, surpassing the Zacks Consensus Estimate of $8.07 billion.
This strong performance was driven by higher-than-expected revenues from the Power Systems, Distribution, and Accelera segments. Total revenues reached $8.17 billion, surpassing the Zacks Consensus Estimate of $8.07 billion, although it marked a decline from the $8.4 billion reported in the previous year.
Despite the overall positive results, the Engine segment experienced a 5% year-over-year sales decline to $2.8 billion, missing the estimate of $2.87 billion. Sales in North America and international markets decreased by 4% and 11% year-over-year, respectively, due to weaker on-highway demand in the United States and Latin America. This highlights the challenges faced by Cummins in certain market segments.
Cummins' financial metrics provide a comprehensive view of its market valuation and financial health. With a P/E ratio of approximately 15.12, the market values its earnings moderately. The company's price-to-sales ratio of about 1.24 and enterprise value to sales ratio of roughly 1.41 reflect its revenue valuation. Additionally, Cummins maintains a current ratio of approximately 1.34, indicating its ability to cover short-term liabilities with short-term assets.
Citi Trims Cummins Target to $360 Amid Freight Slowdown, But Keeps Bullish Outlook
Citi lowered its price target on Cummins (NYSE:CMI) from $430 to $360, maintaining a Buy rating despite near-term headwinds in the commercial vehicle market. As a result, shares fell around 2% intra-day today.
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.
