Greetings and welcome to Cummins, Inc. Second Quarter 2024 Earnings Call. On our call today is Jen Rumsey, Chair and CEO; Mark Smith, Vice President and CFO; and Chris Clulow, Vice President of Investor Relations. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Clulow. Thank you. You may begin.

Thanks very much. Good morning, everyone, and welcome to our teleconference today to discuss Cummins’ results for the second quarter 2024. Participating with me today are Jennifer Rumsey, our Chair and Chief Executive Officer; and Mark Smith, our Chief Financial Officer. We will all be available to answer questions at the end of the teleconference. Before we start, please note that some of the information that you will hear or be given today will consist of forward-looking statements within the meaning of the Securities and Exchange Act of 1934. Such statements express our forecasts, expectations, hopes, beliefs and intentions on strategies regarding the future. Our actual future results could differ materially from those projected in such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the forward-looking disclosure 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 the course of 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. I will turn you over to our Chair and CEO, Jennifer Rumsey, to kick us off.

Thank you, Chris and good morning. I'm excited to be with all of you today as I celebrate my two-year anniversary of becoming CEO of Cummins. I'll start with a summary of our second quarter financial results. Then I will discuss our sales and end market trends by region. I will finish with a discussion of our outlook for 2024. Mark will then take you through more details of both our second quarter financial performance and our forecast for the year. Before getting into the details on our performance, I want to take a moment to highlight a few major accomplishments from the second quarter. At our recent Analyst Day, I shared that we are raising our long-term financial targets as a result of our of our strengthening portfolio and continued execution our Destination Zero strategy. The strong partnerships that we have with customers and stakeholders are key to driving our strategy and growth profile forward. In this quarter, we strengthened those partnerships even further. In May, we announced with Isuzu Motors Limited the launch of a new 6.7-liter engine designed for use in Isuzu medium-duty truck lineup. This engine will power on-highway truck applications for the Japan market and will be available for Asia-Pacific markets and other global markets later this year. We also announced plans to launch a battery electric powertrain for Isuzu's F-Series in North America. Availability of the medium-duty truck is expected in 2026 and will include Accelera's next-generation lithium-ion phosphate or LFP battery technology. These advancements mark an important milestone for both Cummins and Isuzu as Cummins enters the Japan on-highway market for the first time in our history. We are proud of the partnership our two companies have built, and I'm excited to leverage our collective strength and scale to deliver profitable growth for…

Thank you, Jen, and good morning, everyone. We delivered strong results in the second quarter. Given the strength of those results and our improved outlook, we've raised the midpoint of our full year expectations for 2024. Second quarter revenues were $8.8 billion, up 2% from a year ago, as organic growth more than offset the reduction in sales driven by the separation of Atmus. Sales in North America increased 4%, while international revenues decreased 2%. Foreign currency fluctuations negatively impacted sales by 1%. EBITDA was $1.35 billion or 15.3% of sales for the quarter compared to $1.3 billion or 15.1% a year ago. The year ago numbers included $23 million of costs related to the separation of apps. The benefits of higher volumes and pricing as well as the absence of the separation costs were the primary drivers behind the improved profitability. Now I'll go into a little more detail by line item. Gross margin for the quarter was $2.19 billion or 24.9% of sales compared to $2.15 billion or also 24.9% a year ago. Flat margins were primarily driven by favorable pricing and operational improvements, offset by the removal of Atmus and higher compensation expenses. Selling, admin, and research expenses were $1.21 billion or 13.7% of sales compared to $1.26 billion or 14.6% last year. Joint venture income of $103 million decreased $30 million from the prior year, primarily driven by lower technology fees and the weak domestic truck market in China. Other income was negative $3 million, a decrease of $27 million a year ago. Interest expense was $109 million, an increase of $10 million from prior year, primarily driven by higher weighted average interest rates. The all-in effective tax rate in the quarter was 23%, including $9 million or $0.07 per diluted share of favorable discrete tax…

Thank you, Mark. [Operator Instructions] Operator, we're ready for our first question.

Thank you. Our comes from the line of Steven Fisher with UBS. Please proceed with your question.

Thanks. Good morning. Just on China truck, you didn't change your expectations there. Wondering how you're thinking about some of the new incentives that the government put in place there to support the second half of the year. Is that a potential point of conservatism in your outlook? Or do you think it may not materialize in there?

Yes. Thanks for the question, Steven. Good morning. We've seen pretty consistent performance out of China and the economic conditions over the last 18 to 24 months, and there's been previous indications of actions the government may take, none of which has really translated into any meaningful change in our industry. So, really, we're seeing the strong performance still with natural gas product an export and a relatively weak domestic diesel market and are not anticipating that changing in the near-term.

Thank you. Our next question comes from the line of Jamie Cook with Truist Securities. Please proceed with your question.

Hi, congratulations on a nice and clean quarter. I guess two questions. One, Mark, the margins in Power Systems are quite remarkable on a pretty muted sales growth assumption for 2024. So, if you could just help us understand what's going on there, sort of what's structural versus -- and do you see the opportunity for margins to improve from these levels in the out years given you're already assuming a close to 18% margin this year? And then my second question, Jen, just -- I know you don't want to give a guide for 2025, but how you're thinking about the markets? Is there -- as you think about the U.S. with the potential -- with the election and the overruling of Chevron, are you more conservative about a potential pre-buy? Do you think that gets pushed out? I guess the two positives would be China comes back and then the power system. So, I'm wondering, ultimately, is the incremental margin potential better in 2025 with those assumptions on a muted 2025 pre-buy with better mix from Power Systems in China? Thanks.

Okay. Good questions. We'll try and fit in our answers with the time available for us this evening. On Power Systems, there's really three elements to the margins. And to answer the last part of your question, yes, we do expect there's still more to come. So, the team there is doing a fantastic job, started with some cost reduction, reprioritizing where we're where we're investing, investing less, strong pricing environment on the Power Systems side and then yes, there's more to do on the operational efficiency. So really, it's several strings to the bow in terms of what's been driving the results and still more to come. So we're really, really excited. Hopefully, you felt the confidence from Jenny Bush and to the team from the Analyst Day and have continued to deliver here in the second quarter, and we're bullish on that segment. That's -- those are really the main drivers on Power Systems.

Yes. On the market outlook, what I would say is in the power gen market, the continued growth that we see there, in particular the data center, I don't see that letting up anytime soon, and where we have strong demand, high backlog. And as you know, we talked about in May, making some capacity investments to take advantage of the growing market there. In US on-highway, the medium-duty truck has continued to be strong. We see strong backlog and demand and don't see that letting up in the foreseeable future. and heavy duty, we do see build rates coming down, projecting about 10% down in the third quarter and 20% overall for the second half of year. And the question is what will happen next year with the broader economic environment because well stabilized spot rates and these truck prices are at a lower level than they've been historically, and that's impacted some of our customers demand. And so how that comes together with a pre-buy. The Supreme Court overturning of the Chevron deference, we don't anticipate any impacting regulations in the near-term. We believe that 2027 regulations will continue to move forward. And probably the bigger question is what we see with Phase 3 greenhouse gas in the 2030 time frame. And so we still anticipate some amount of pre-buy ahead of that emissions changeover. But the industry has also demonstrated there's capacity constraints that we've seen in the last couple of years. So how large that pre-buy will be, I think is still question, but we're preparing to have strong demand as we go into the 2027 regulation change.

Thank you. Our next question comes from the line of Steve Volkmann with Jefferies. Please proceed with your question.

Great. Thank you, guys. Mark, I think you mentioned maybe both of your pricing being positive. It sounds like it was positive in truck. It sounds like its positive in Power Gen. Can you just double-click on that for us a little bit? I mean how much pricing are you seeing? And sort of how should we think about that for the rest of the year?

Yes. Great questions. So on average, across the company, very, very much by segment, but 2.5% for the year, and that really hasn't changed. That's not changed in the results, but it definitely has been an important driver of the Power Systems results. And I don't think it's going to vary a lot that year-over-year increase should mostly hold across all the quarters.

Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.

Yes, hi. Good morning, everyone. And Jennifer, Happy Anniversary.

Thank you.

I wanted to ask on the medium-duty engine platforms globally, right? So you folks are picking up Daimler's business, now you're picking up Isuzu business in Japan. Can you just expand and talk to us about how many more medium-duty engines, you folks expect to ship globally 2026 versus, I don't know, call it, two or three years ago, given the timing of the transition? And if you could just comment on Japan, is it -- help place to import product into given the currency. Can you just talk about how you folks are able to do that economically? Thank you.

Yeah, sure. So you've seen this trend and some of the announcement that we made over the last few years playing out now as regulations start to occur. So we're seeing growing medium-duty demand in the US, of course, with Daimler transitioning to us and us as well as some other customers like keno here in the US. So we're growing our position in the medium-duty market here. We've now launched the medium-duty product in India with Daimler. So we'll start to see some volume there. Their strategy is really driven by regulation change. So when you see regulation change in Europe and Brazil will continue to grow volume with Daimler. On the Isuzu business, we are building that new B6.7 and their Tohoku plant in Japan. So we're not importing that engine. We're building it in the market. First time we've been on-highway market, we've been in the off-highway market there, of course, for many years. And so we'll see some slow volume growth there in Japan. And then as I noted, they'll then launch that truck into other Asia Pacific and global markets later this year. So you're just going to see steady growth, I would say, from Cummins year-over-year in the medium-duty space as these new customer partnerships grow and emissions regulations change and ads.

In India and Brazil to the later 2027.

2027 through 2029. Yeah.

Thank you. Our next question comes from the line of Angel Castillo with Morgan Stanley. Please proceed with your question.

Hi. Thanks for taking my question, and congrats on the strong quarter. I was hoping we could just unpack a little bit more the engine segment. You raised the outlook there on margins, and you've been talking about medium duty, but just as we think about your second half that is expected to decelerate on the heavy-duty side, can you talk about the components driving your margin improvement there? And just helping us kind of quantify what's ultimately driving that and how are you thinking about kind of 2025 margin improvement?

Yeah. So we've got a little bit of help. We've improved the parts outlook. So that certainly helps overall -- we've been taking some measured actions across the company since the second half of fourth quarter of last year into the fourth quarter -- into the first quarter of this year, those should help with some lower costs in the second half of the year. And then we've got a stronger outlook in medium-duty truck. So those are really the three key elements. We're not going to get into breaking down the profitability by us. Those are really the three things that have helped improve. Yeah, and I think the conversion on the volume and the second quarter showed us there's still more room for improvement just in general operating efficiencies. No real change in -- in pricing most of the segments.

Thank you. Our next question comes from the line of David Raso with Evercore ISI. Please proceed with your question.

Hi. Thank you my question is on the guide. One area little skeptical on -- one area where it seems like you have some upside. The engine business, the second half of the year, you're guiding the revenues down only 3% year-over-year. And I'm just trying to go through heavy truck builds down double digit or the parts business mutes that. The light duty has the soft fourth quarter on the model change. Off-highway, comp fees, China a little better but big declines in Ag and some in construction. So I'm trying to understand why the revenue going down 3%? Or is it there's enough new penetration of customers that can push against all that, and at the same time, the engine margins only go down 30 bps sequentially on lower revs. And then the upside is PowerGen revenue growth less than 5% year-over-year in the second half, you're up over 6% in the first half. And the margins are down sequentially, I mean I understand the industrial piece within power can be down, but at least there are comp fees. So I'm just trying to understand, I assume PowerGen has a little more focus, a little more capacity, right, being pushed at minimum, good pricing. So again, why the -- or maybe it's just conservative, conservative on PowerGen, and if you can make us more comfortable on that engine? Thank you.

Thanks, David. Good question. So I think on Power Systems, I don't think there's any fundamental changes. So it's really a key like how much do we -- how much product do we deliver to our customers and the conversion. We've given a range of outcomes for the margin. The business is performing well. And quite frankly, we're raising capacity. So I don't think the sales will go a lot above, but yet we're leaning on the profitability strongly, the business is really doing well. So I don't think there's much to be concerned about there, and we've raised the outlook. On the engine business, I think what's helping mitigate the margins, which is, I guess, the most important part is really some of the cost reduction actions that we've taken during the year, slightly better outlook for parts. And then there's just some of the puts and takes on the revenue. But those are the reasons why the margins at those revenue levels, we expect to hold up. Next question please.

Thank you. Our next question comes from the line of Tami Zakaria with JPMorgan. Please proceed with your question.

Hi, good morning. Very nice quarter. I have two quick clarification questions. One is on the distribution segment. I think margins were lower, but sales were great. So is that margin guide prudently conservative? Or is this a function of the mix headwind from PowerGen? Or is there anything I need to be aware of for that? And then the other question is on price costs. I think you just said price still you expect 2.5% at the enterprise level. Since some of the raw material prices are coming down, do you expect some improvement in price cost for the year?

So to the latter, not significantly, we've probably got about 50 basis points of cost headwind across all the different categories, varies by business and segment. And then on distribution, you're right to point out the margins. So there's really -- yes, for distribution, PowerGen is a little bit dilutive relative to the rest of the segment, even though obviously within Power Systems, its very accretive. So that's true. We've called that out. Also in the first and the second quarter, there was some modest individual charges that didn't merit to be called out in the overall results. So I don't merit a lot of commentary, but just say they've trimmed the margins a little bit. And, therefore, we're really just reflecting where we are for the year. We do believe distribution margins have still got significant potential to improve over time, so that’s what’s going on.

Thank you. Our next question comes from the line of Tim Thein with Raymond James. Please proceed with your question.

Hi. Good morning. I'll maybe combine these before I get the hook. Actually both pertaining to the North America heavy-duty segment. And the first part is just around market shares, Mark. Obviously, those can and do shift around quarter-to-quarter. And I'm just thinking big picture as we get in a softer back half of the year where the sleeper segment likely is disproportionately impacted from a production standpoint at the expense of vocational. I would imagine that favors Cummins from a share perspective, just absent any kind of specific OEM programs and other factors. So, maybe just your thoughts on that. And then the second part is just on the parts business, obviously, has been kind of a choppy past few quarters, but the commentary seems to be more positive, whereas some of the dealers and OEMs that have reported recently have flagged softness there. So I'm just curious, is that just kind of an absence of customer destocking that you went through last year or better just fleet utilization? What's driving that? If you can things. Thank you.

Yes. Great. Thanks for the question. And as you noted, I mean, we work to create customer pull for the heavy-duty product across different segments. But generally, as you said, for the vocational segment, we have stronger customer pull compared to the truckload, and that's the portion of the market that's been stronger right now. But of course, our goal is always to have the best product and create demand for Cummins products. But as you see that shift between the different segments of market and what OEMs are doing around incentives that could -- as well as capacity that can shift around a little bit over time. On the parts, it's somewhat demand driven and also this inventory destocking was a pretty big factor. There was a focused effort last year to reduce some of the inventory levels that have been carried because of the disruptions that we were all seeing and coming back down to more normal inventory levels. It was a little bit hard to separate between destocking and demand in the market. And so now you see us settling into what we see as pretty steady and solid demand in both our on- and off-highway markets.

Thank you. Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.

Thanks. Maybe hoping to get an update on demand in the order books for the X15? And how is it looking for the back half? How is it tracking the expectations and basically what's the response so far from the OEs?

Yes. Great. Thanks for the question. No, we are launching that product this month. with PACCAR excited to get it out in the market and then we'll launch it next year with DTNA, so have more offering there. We've got some early demand from some of the big fleet customers that have sustainability goals in the market, and we'll see how that develops over time, really with those fleet and other customers. And so we've projected we could get up to about 8% in the market, but I think it's going to take some time for us to get up to that. that level and for that market to develop in these operating costs and sustainability goals to drive demand up.

Thank you. Our next question comes from the line of Jeff Kauffman with Vertical Research Partners. Please proceed with your question.

Thank you very much. I just wanted to follow-up on the engine slowdown that you're projecting for the second half of the year and maybe try and carry this into early 2025 because I think there's a perception that we're weak for a quarter or two and then the pre-buy kicks in and we're off to the races. When do you believe we start to show positive comparisons potentially in North American engines? And then we have an election this November, and I don't really know which way it's going, but just any thoughts on how a Republican victory or a Democratic victory might change the outlook for engines or new power?

Yes. So in terms of the heavy-duty demand, we all wish we had a crystal ball that could project how this is going to play out. This cycle has been very different than past cycles because of the pent-up demand that we had seen and then, of course, getting into pre-buy expectations. So it's really difficult to predict at what point next year we'll start to see improvement and economic conditions will certainly play a role in that. So I'm not going to project exactly when, but I think at some point in next year, we'll see recovery. And we've taken the steps to be prepared for that softening over the next few quarters. In terms of the election, again, I'm not going to make a prediction on that one either. What I will say is, as always, we worked in the past with the Trump administration, and we worked with the Biden administration. We worked across party lines to make sure that the opportunities and the challenges in our industry are understood and that regulation and policy reflects appropriately what those are. We will continue to do that in particular with the regulations that are in front of us. and our destination strategy at its core is about recognizing the economic importance of commercial and industrial applications and a need to decarbonize that industry over time and how do you take the appropriate steps to regulation and incentives to do that. So we're going to continue advocate for that. And some of the money that has come out of the inflation production Act has been allocated and is flowing into the market and creating jobs across the United States. So we'll continue to do that [indiscernible] those points and the opportunities and challenges that we're facing and how we navigate the energy transition. I think Cummins is really well positioned, regardless of how that plays out, but the industry, of course, is making investments in preparing for that. And so we want to make sure that we have stability and regulation, most importantly.

And I just -- I know there's a lot of questions about heavy duty. But as we mentioned earlier, the demand for medium duty is getting stronger. We're actually investing to raise capacity over time, partly because of the strength of the market part because of the new business we've won. So right now, the expectation is that less volatility and a sustained high demand is what we're being told right now. Things can change based on the economy. But there's more question marks about heavy. Clearly, it's going down in the near-term and a lot less questions about medium duty for now.

Thank you. Our final question comes from the line of Kyle Menges with Citigroup. Please proceed with your question.

Thank you. I just wanted to dive a little bit deeper into the power systems and really focus on the unit outlook and how to think about capacity for the remainder of the year and then how you think about you could exit the year from a capacity standpoint or just doing the math, it seems like. And assuming you're running pretty hot from a capacity standpoint, it seems like unit shipments capacity for the year would be around 20,000 or so units. I'm curious what that might look like the capacity on an annualized basis exiting the year and looking into 2025 with some of the investments you're making?

Well, there's a lot of there, unfortunately, in that business, there's more variation, right? There's just such a wide range of engines and applications. And so it's not a -- unfortunately, it's not a simple explanation as it would be, say, for on-highway markets where there's a narrower range of products across the market. I don't think there's going to be dramatic capacity increases this year, but we're working towards, obviously, supporting the one key global secular theme, which is the data center capacity, Jenny Bush talked about at Analyst Day. That's the one. It varies by segment, some of our more consumer-facing segments demand has dropped over the last 18 months. So there's some more capacity there. So it very much depends by end market. But the general theme is some investment in capacity, some reorganizing where we make product around the world. We feel confident about the revenue guide for this year. We feel confident we can support through our production revenue going into next year. But unfortunately, I just because of the variation in the products, the pricing, the applications that like a rule of thumb on the unit isn't quite as applicable in that segment.

Yeah. The only thing I'll add to Mark's comments, which are absolutely accurate is, in particular, the data center market. What you've seen happen in the first half of the year was we worked really hard on our supply base and production and the 95 liter, which is running now at capacity, and then we launched the Symptoms product, which adds -- adds additional platforms, including a 78-liter that's able to run at this 3-megawatt key data center point. And so helped us the supply chain improvement as well as the new product launches helped us increased revenue and what we're selling into the market. But we're continuing to run into capacity constraints on some of the platforms in that data center market, in particular, which is why we're making some modest investments to be able to take up capacity over the next couple of years.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. Clulow for any closing remarks.

Thanks, everybody, for participating today. That concludes it for today. As always, the Investor Relations team will be available for questions further after the call and throughout the rest of the week. Thank you. Bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.