Cummins, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Major Accomplishments: In September, full production of X15N natural gas engine started at Jamestown Engine plant. In October, Accelera by Cummins opened electrolyzer manufacturing plant in Spain. Responded to Hurricanes Helene and Milton, with employees rallying to help impacted areas.
• Market Performance: Demand strong in global power generation; North America heavy-duty truck market softened. North America revenues down 1% to $5.2 billion; international revenues up 2%. China revenues down 4% due to weak domestic truck and construction volumes but higher data center demand; India revenues down 12% due to slowdown in manufacturing and infrastructure spending but power generation revenues up 49%.
• Outlook: 2024 revenue guidance down 3% to flat; EBITDA guidance improved to approximately 15.5%, top end of prior range. Maintained heavy-duty truck units forecast (255,000-275,000) and medium-duty truck forecast (150,000-160,000 flat to up 5%). Global power generation expected up 15%-20%, mining engines down 5% to up 5%, aftermarket flat to up 5%.

Segment Performance

• Components: Revenue was $2.7 billion, a decrease of 16% from the prior year. EBITDA decreased from 13.6% of sales to 12.9% due to the dilutive impact of the Atmus separation and a weaker North America heavy-duty truck market. Some facilities in Drivetrain and Braking Systems were impacted by Hurricane Helene, disrupting production.
• Engine: Third quarter revenues were $2.9 billion, a decrease of 1% from a year ago. EBITDA was 14.7%, an increase from 13.5% a year ago due to operational improvements and positive pricing, including a retroactive pricing agreement in the light-duty business.
• Distribution: Revenues increased 16% from a year ago to a record $3 billion, driven by increased demand for power generation products, particularly for data center applications. EBITDA increased as a percent of sales to 12.5% compared to 12.1% a year ago.
• Power Systems: Revenues were $1.7 billion, an increase of 17%, and EBITDA increased from 16.2% to 19.4% of sales, driven by higher volumes, particularly in the power generation markets, improved pricing, and other operational improvements.
• Accelera: Revenues increased 7% to $110 million, driven by increased electrolyzer installations. EBITDA loss was $115 million compared to a loss of $114 million a year ago.

Guidance

• Revenue outlook for 2024 remains down 3% to flat.
• EBITDA guidance improved to approximately 15.5%, up from prior range of 15%-15.5%.
• Power Systems and Distribution segments expected to drive higher revenue and profitability, offsetting Components' decline.
• Maintained heavy-duty truck units forecast for 2024 (255,000-275,000), medium-duty truck forecast (150,000-160,000 flat to up 5%), global power generation up 15%-20%.

Risks

• Impact of Hurricanes Helene and Milton on Components segment facilities, disrupting production and incurring costs.
• Uncertainties in regulatory changes, such as California Omnibus low NOx regulation and state follow-through, affecting market demand.
• Economic cyclicality impacting heavy-duty truck markets and overall industry demand, leading to potential softening in key markets.

Question and Answer

Q: Congrats on the beat and raise. Concerns about Q4 guidance after strong Q3.

A: Factors like heavy-duty market softening, product changeover (pickup truck model year change), and fewer working days due to holidays; team focusing on profitability across the business.

Q: California Omnibus low NOx regulation impact.

A: Watching state follow-through on regulations, lower volumes this year with CARB regulations, prebuy likely in 2025 ahead of 2027 regulations.

Q: Natural gas engine demand.

A: Potential 8% market share, strong interest from fleets due to CO2 reduction and fuel cost savings compared to diesel.