Greetings, and welcome to the Cummins Inc. Q4 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions]. A question-and-answer session will follow the formal presentation. We ask that you please ask one question, one follow-up, then return to the queue. [Operator Instructions]. As a reminder, this conference is being recorded. Joining us today are Chair and CEO, Jennifer Rumsey; Vice President and CFO, Mark Smith; and Chris Clulow, Vice President, Investor Relations. It's now my pleasure to introduce your host, Chris Clulow. Please go ahead, sir.

Thank you, Kevin. Good morning, everyone, and welcome to our teleconference today to discuss Cummins' results for the fourth quarter and full year of 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. With that out of the way, I'll turn you over to our Chair and CEO, Jennifer Rumsey, to start us off.

Thank you, Chris. Good morning. I'll start with a summary of 2024, discuss our fourth quarter and full year results and finish with a discussion of our outlook for 2025. Mark will then take you through more details of our fourth quarter and full year financial performance and our forecast for this year. As I reflect back on 2024, I am pleased to share that we delivered strong financial results with records in several parts of the business while also making significant progress in the execution of our Destination Zero strategy. I am incredibly proud of what Cummins and our employees accomplished for our stakeholders, and I feel energized about the opportunities ahead for us as we continue to demonstrate our relentless focus on advancing our strategy and executing our financial commitments as we lead the energy transition. It continues to be clear that our multi-solution Destination Zero strategy that leverages advancements and solutions from both our core and Accelera by Cummins businesses will continue to position us to succeed. We demonstrated this in 2024 as we further strengthened our position through evolving our portfolio and expanding and establishing relationships with new and longstanding key stakeholders and partners. Most notably for our core business in 2024, we introduced the Cummins HELM engine platform. Applied across Cummins' legendary B, X10, and X15 series engine portfolios, the HELM platforms provide customers with the option to choose the fuel type, either advanced diesel or alternate fuels like natural gas and hydrogen, that best suits their business needs and offers the power and performance customers expect while also reducing emissions. Cummins began full production of the X15N natural gas engine at the Jamestown Engine Plant earlier this year. And we are actively engaged with some of North America's largest and most demanding heavy-duty fleets…

Thank you, Jen, and good morning, everyone. We delivered strong operational results in the fourth quarter, which resulted in revenue achieving the top end of our prior guidance and EBITDA margins exceeding our projections. 2024 was a record year for revenues, EBITDA, and earnings per share, reflecting the strong demand for our products and the strong hard work of our employees. Now let me go into more details on Q4 and the full year performance. There were some notable non-routine transactions in '24 and 2023, and I'll quantify those and describe our underlying results to give a better understanding of the performance from regular operations. Fourth quarter reported revenues were $8.4 billion, and EBITDA was $1 billion or 12.1% of sales. As Jen mentioned, we underwent a strategic review of our Accelera segment, which resulted in charges of $312 million, of which $305 million were non-cash. Excluding this charge, we delivered EBITDA of $1.3 billion or 15.8% of sales. In the fourth quarter of '23, we reported sales of $8.4 billion and an EBITDA loss of $878 million. Excluding the regulatory settlement, Atmus separation costs, and voluntary retirement and separation program costs in Q4 2023, EBITDA was positive $1.2 billion or 14.4%. I know that's a lot to digest. In summary, on an underlying basis, EBITDA improved by 140 basis points on slightly lower sales, excluding those charges I just described. Fourth quarter revenues decreased by 1% from a year ago as organic growth was more than offset by the reduction in sales driven by the separation of Atmus. Sales in North America were flat while international revenues decreased 3%. Foreign currency movements negatively impacted sales by less than 1%. The EBITDA improvement of 140 basis points was primarily due to higher power generation volumes, pricing and operational efficiency, partially…

Thank you, Mark. Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up. If you have an additional question, please re-join the queue. Operator, we're ready for our first question.

Thank you. [Operator Instructions]. Our first question today is coming from Angel Castillo from Morgan Stanley. Your line is now live.

Hi. Thanks for taking my question, and congrats on another strong quarter here. Just wanted to unpack the power generation guide of 5% to 15% a little bit more. Could you just split that out between kind of price and volume? And then maybe just tying into that, I think you mentioned a new investment of 200 million in power gen. Can you just talk about maybe what's entailed in that? I thought, I guess there was already an expansion of doubling capacity so what is kind of the incremental being done?

Yes. So as you said, we're currently in the midst of a $200 million investment across our plants in and see more Minnesota, UK, and India to ramp up capacity to meet what is a growing demand for power generation products. And so you're seeing in that guide and expectation that we have been able to take up capacity. We're continuing to look at strategic pricing and where we can bring value to the customer so you've got some price in there as well. But really, it's about capacity ramp-up and continued sales of larger engines. In the power generation and data center market, it's really the 50 to 60 liter, the 78 and the 95 liters so these are large engines as we're able to bring more capacity online in our supply chain and our plants, you see that flowing through in revenue. And we expect that trend to continue over time. And so we're tracking on plan or even slightly ahead of plan to double our capacity by end of this year and looking forward to being able to meet what is a really strong demand from those customers.

That's very helpful. And then maybe as a follow-up, just on separate on the trucks. Can you just give us your latest thoughts on EPA27? It sounds like you're still assuming some prebuy in the second half. But just given, I guess, what we've seen from the administration so far, any thoughts on the likelihood of any kind of challenges to the EPA27 rule?

Yes, our current view is that we expect the EPA27 regulations will stay in place. Many companies, including us, have been investing over multiple years in those products to bring those products to market, and we're looking forward to having a nationwide standard again in '27. And with that, we are still anticipating some -- both economic recovery and prebuy happening in the North America trucking market that helped bring higher revenue in the second half this year and into next year. We do anticipate there'll be more discussion and potential challenge over the greenhouse gas regulations that we see out into the 2030 and beyond time frame.

Thank you. The next question is coming from Stephen Volkmann from Jefferies. Your line is now live.

Great. Good morning, everyone. Maybe starting off, can you just talk a little bit more about the Accelera restructuring? And how have you changed the focus of that business? And what are you doing less of or more of or just some color around that?

Yes, I'll start and then Mark can add if he wants to share more detail. But really, this business has all along been about remaining agile and investing as we see technology advancing and markets starting to move in these zero emissions technologies. And we formed it through a number of acquisitions as well. So what that meant was we had kind of a distributed footprint and investment coming from those different acquisitions, and so we really looked at where we see market moving. We expect that battery electric vehicles will be important in some of our commercial vehicle and industrial applications, and we feel well positioned with the battery cell joint venture and some of the wins that we have with customers as that market develops so we're continuing to invest there. We're continuing to invest but pace investment in electrolyzers as we've seen some slowing in customer demand and uncertainty around incentives there, and then being selective in fuel cells and some of the other technologies where adoption continues to push out. But we think we're well positioned. Frankly, the slower and messier this goes, my view is the better it is strategically for Cummins. And so we're positioning ourselves in the places where we see that market and technology beginning to increase.

Okay, good. Sorry, I thought Mark was going to add something. Can I ask -- well, you've been talking a lot as it is. Hopefully, you'll be doing less of that this year on all these adjustments. Can I just follow up -- can I follow up on the HELM platform? Do you have targets relative to the types of unit volumes you might expect either on the nat gas side or on any of the other engine -- sorry, any of the other fuel options that you can use with that platform?

We've got -- the rate of -- the beauty of the HELM platform is it's got that fuel flexibility. And so the reality is we're still going to sell a lot of the diesel version of that, and it will be a higher efficiency version, which means lower CO2 and lower fuel costs for our customers. We've set a goal of getting to 8% on the natural gas version of that. We're starting to see customers adopt. PACCAR has launched it. Daimler Trucks will launch that 15-liter natural gas this year. Fleets are testing it. I was with a big customer last week. They're finishing their field testing. They feel good about the product, and they're looking to start to increase penetration, but it really depends on diesel fuel prices and regulation and customer CO2 goals. And so it's hard to give specific numbers on the rate of natural gas or hydrogen adoption because of that dependency on infrastructure cost and regulation.

Thank you. Next question today is coming from Jerry Revich from Goldman Sachs. Your line is now live.

Yes. Hi. Good morning, everyone. In Power Systems, you had a really excellent 30% year-over-year growth in revenue per unit in the quarter, so the ramp in the supply base was progressing nicely. I'm wondering if you could just update us on how much more throughput you expect to get out of the supply base in 2025 for those large products. And I appreciate there could be a wide range of outcomes but would love to get your updated views on that?

Well, I think it's important to remember that the revenue growth, in particular, for 2024 was also about launching those new Centum products, so we're seeing new products coming online that serve the market in addition to ramping up capacity. And for this year, it really is focused on continuing to max out our capacity capability that we have when we're making the investment and more capacity across that range of products. And the team has done a really phenomenal job of doing that, improving operating efficiency, working with the supply base to try to get as much out of what we have. But there's some major investments that need to happen by the end of this year to really get to the full doubling of capacity.

So unfortunately, Jerry, units are not a great indicator just because the size of the generator set we've been selling is going up. The average selling price has gone up a lot over and above pricing, just the size of the set that we're selling. So the revenue has outgrown the units significant.

Nice problem to have. And separately on the China truck market, as you mentioned in the prepared remarks, there is some optimism in the market about potentially stronger demand. Can you just calibrate us, I believe, including the JV and wholly-owned business, China truck profits are maybe 10% of total company profits at this point. And given we're at the trough of the cycle, is it fair to think about pretty attractive incremental margins if demand does indeed surprise the upside?

Yes on the latter. I mean, China in total, maybe on a more normal run rate would be in the range of 15% to 20% of our earnings. And yes, on-highway would typically be more than half of that so you're in the ballpark, Jerry, yes. And there's no massive structural investments going on there in the current year. So if we get more volume, we'd expect to convert that into more profits. There's also just some lumpiness around tech fees and other things. But I think the underlying operational business is well set as it's done in prior cycles when demand improves, we see that. And I think that just reinforces how well the Engine business and Components did in '24. Not just did we have weakening heavy-duty truck in the second half of the year but we had weaker China throughout the year. So hopefully, at some point, confident China is going to turn. We don't have a lot of visibility into that right now. Hopefully, that's another leg to come.

Thank you. Next question today is coming from Tim Thein from Raymond James. Your line is now live.

Thank you. Good morning. Maybe I'll ask 1 to start on components, Mark. Just as you think about the margin outlook for '25 on flat to down revenues, a pretty nice improvement. I'm wondering how much of that is -- is it maybe a benefit from lapping the Atmus spin or separation? Or is there -- obviously, there's more to it than that. So maybe just a line or two in terms of what you're projecting there for Components.

I think when you look across the company, we've done a lot on cost reduction. It hasn't been enormous in any given quarter, but we've been working at it really since the fourth quarter of 2023 when we announced voluntary separation package. We did a lot of work internally during 2024 to look at how we weighted the amount of resources we put between lines of business, functions, regional structures. And a lot of this work has paid off in terms of improving our cost structure and focus. And so yes, the Components business is going to benefit from some of that. We're not breaking it out separately but what was formerly known as Meritor, Drivetrain, and Braking Systems business, results have continued to improve their underlying. So I think there are a number of things. We are working incredibly hard on a flattish revenue environment to drive cost and efficiency where we can.

Okay. And then Mark, on the Accelera, just in light of the restructuring and given what's -- how the global backdrop is changing or has changed, the expectation to get that business to EBITDA breakeven by '27, is that still in the cards or you're thinking that maybe is a tougher one to hit?

Yes. I think overall, relative to our 2030 targets for the total company, we feel like we've had a really good start in 2024 and on track. And we're doing a bit better on the core business and headwinds have come more frequently and more severely to Accelera. So we are committed to significant loss reduction. But right now, we are not on track towards that breakeven, but we do feel we're very much on track for the overall company targets. And that's really the reason why we took more pronounced actions or the Accelera team did in the fourth quarter, recognizing that we're not going to get enormous help from demand here in the near term, Tim. So we're managing what we can and in the context of overall company results, we feel confident, but we are not, right now, on track to get to breakeven as we sit here today.

Thank you. Next question is coming from Kyle Menges from Citi. Your line is now live.

Thank you. I was hoping if you could just comment on how you're thinking about R&D spend in 2025 versus 2024, maybe more specifically within Engine and Components. And then just beyond 2025, how you're thinking about that and how we should be thinking?

Yes, good question. So I think beyond 2025 is where we should see more momentum to the downside on Engine expense. We did see some improvement through the year in the Engine business. We've got a lot of new product launches, both in Engines and Components in 2025. But after we get through those launches and through 2027, that's definitely part of our margin expansion story in those two businesses, but not a dramatic shift this year, some puts and takes between Engines and Components.

Thanks. That's helpful. And then just could you comment a little bit on how you're thinking about the parts outlook for 2025?

Yes, Parts held up pretty well, in fact, pretty a little bit better than expected in the fourth quarter across our businesses, and so we think in the range of flat to up 5%. Probably some pricing baked in there. So yes, growing in line with the economy, I would say, at least on par with the economy with what we know today.

Thank you. Next question is coming from Jamie Cook from Truist Securities. Your line is now live.

Hi, good morning. Nice quarter. I guess similar question that Tim asked on, I think it was the Components business. Just the margins mark in Power Systems are very good despite sort of what I would call a muted top line forecast. So is that just pricing in some of the new products? And then I guess, how do you think about margin targets relative to the ones you just gave us, I guess, last year? Is it looking conservative? And then my second question obviously, lots of puts and takes around tariffs and who knows what happens. But are there any changes in your -- how your terms and conditions or contracts with your customers that if we do get into an environment where tariffs and that causes price increases, that we're able to absorb costs or increase price more frequently relative to last time within Engines, I guess?

Great. So yes, Power Systems doing well. I think continuing to focus on supply chain efficient output. They did a great job last year so I don't want to sound like we're dissatisfied. Quite the opposite, very impressed, but still think there's more to come on raising volume, raising productivity, and a little bit on pricing Power Systems. So all of those things contribute towards raising the margin guidance for the year and quite a bit above the fourth quarter levels. And I guess if we really had a robust U.S. economy, we could see growth in some of the smaller generator sets. We have high market share in some of the consumer segments that are particularly robust. So I guess that -- we don't see signs of that, but if we want to get on to the bullish side and saw more strength in the U.S. economy, that could be another leg to help. On tariffs, by and large, our strategy is to make most of our products in the market in which they're sold. But of course, we do have a global supply chain and we -- of course, nobody knows exactly what the tariff situation is going to be. But to the extent that we do incur them, then we think it's important that the market feels those and we'll look to pass those on. Let's hope that's not significant for everybody involved. But really, we're just focused on controlling what we can control. And I think, yes, we've got secular tailwinds in Power Systems, but the biggest driver is being able to scale growth effectively and pushing out cost. And then you don't see it on the inside but the work we've done inside to try and simplify our structure, improve the speed of decision-making, all of those things help and have helped kind of raise the bar in 2024.

Thank you. Next question is coming from David Raso from Evercore. Your line is now live.

Hi, thank you. I'm trying to better understand the margin expansion in Engines and really, for that matter, of Components. First, the D&A, the growth in the D&A, is that mostly in Engines or Components? It's just the margin improvement is impressive but I'm just wondering it drives it down a little bit because there's more D&A than it is operational, but if you can…?

Well, there is an increase in D&A because that's where we're investing most of the capital in North America, particularly in the Engine business over the last couple of years.

So of the 100 D&A increase, is it 50 Engines, 25 Components? Just some sense so I can get a better sense of the underlying operation.

Yes, I mean, it won't be significantly in distribution. Power Systems, whilst we're increasing investment is still modest relative to those 2 segments. And so on an incremental basis, most of it is going to go through Engines and Components, a little bit in corporate, which ends up mostly in Engines and Components, yes.

Okay, that's helpful. And then even with that, it looks like there still is some slight operating, let's say, non-D&A margin improvement in Engines. What's driving that? Is it a little bit of mix? Is it -- I'm just trying to think about maybe the new medium engines you're outperforming the market. How to think about those margins versus heavy? Because it's all wrapped in the idea of trying to figure out where do you think Engine margins are as we sort of move out of '25 and people start to pontificate about earnings power in '26 with the prebuy in the Engine division.

Yes, I think those are all really important questions and will be big contributors to the long-term performance. In the near term, I think we'll continue to expect to do well in the aftermarket side, of which the Engine business is our biggest single driver. So that's probably where there's still some pricing opportunity into 2025. And then yes, the engineering starts coming down enormously, but I think we've come down off the peak there, Components probably going up a little bit. But those would be the main drivers. And as you can see, we haven't factored a lot in from China yet so really, it's cost control and aftermarket in the near term.

Thank you. Next question is coming from Avi Jaroslawicz from UBS. Your line is now live.

Hi, good morning, guys. I guess in terms of your guidance for the market outlook for North America heavy-duty trucks this year, it sounds like if, for whatever reason, you don't do a pre-buy materialized this year that you'd expect retail demand may be still to be negative in the second half. So I guess, one, am I interpreting that correctly? And can you just discuss how you're thinking about it?

Yes. I mean, I think if you look at the underlying performance in the heavy-duty market, spot rates dropped early in '23, so truckload carriers have really had challenges now for two years, and I think there's a very real chance that we'll see improvement in that over the course of this year, just depending on what the underlying economy and interest rates do. So there's some potential upside in the second half for that in addition to this prebuy phenomenon that we would anticipate would lead to a stronger second half versus first half. The range is quite wide because how high that goes is really dependent on the prebuy and when that starts.

Got it, okay. And then in terms of medium-duty, just breaking down kind of market share gains versus market growth for 2024. How did those net against each other? And then in terms of your sales guidance for this year within Engines, are we thinking about further share gains this year or not as much?

I think really, I think we're talking about following the market in 2025. There's been a long track record of significant market share gains in that market. Our engine is clearly the leader in that market and there were some share gains. But going forwards, it's very much primarily going to be truck in the market, but there can be some modest changes around that from where we are now.

There is a buy down for the year, it’s reflective of what we've seen in order made in backlog.

Yes. It's industry -- the industry orders, we will feel that, yes.

From a product perspective, we continue to feel really positive about how our products are performing in the market and our position across medium and heavy duty.

Thank you. Our next question is coming from Rob Wertheimer from Melius Research.

Thank you. I had two questions around Power Systems, if I may. And one is, as this data center market continues to develop, historically at least, I suppose, the selling an engine is one thing and then servicing is another. And if you have backup power, it doesn't get turned on that much and it's not as profitable. But obviously, there's a high uptime, high criticality kind of operations. Do you see any opportunity to change that profit algorithm, such that you'll be making more recurring revenue or otherwise on that massive build-out of engines that you're going to do? And then secondly, if I can just wrap it in. You've had excellent results in Power Systems. I'm not sure if all of it's really this surge in data center or maybe the stuff you've touched on a couple of times on the call already, operational improvements. I wonder if you could just expand on how you've made that business better.

Sure. So first on the data center market, so with power generation and data centers, we have engine, gen sets, and then a good portion of that business also flows through the distribution business. So the strong performance you see in the distribution business last year and the outlook is reflecting the strength in power generation as well as aftermarket. But as you noted, they don't, today, run a lot for backup power. So typically, Parts revenue is relatively low as we look at shortage of power availability, and how do you meet power demand in the U.S. and around the world. There's a potential for some shift in that. And so strategically, we're considering how we think about our role in that, which was part of the discussion on micro-grids and what we do there today, but today, still very much heavily backup power and because of the high reliability demand for those applications. In terms of the Power Systems performance, we undertook now, two years ago, focused effort to really look at operating performance structure, how we made sure, we were investing in the right products, and getting returns on the investments we were making for our customers, and working through some of the supply challenges that have built up through the pandemic, and then the rebound in the market after that. And so that really has come together at exactly the time when this data center trend has also happened. And so we really had strong underlying operating structure and performance in the business that we continue to drive improvement in, as we're also taking up volumes. And so both of those are contributing to really the remarkable profitability improvement that you've seen in Power Systems.

Just to add, Rob, the distribution, of course, adds that extra slice of revenue on data centers. And in fact, it's fundamental to winning and supporting this data center business around the world. I think that's one of the strengths we have and a few others have, and that's why you see that the market demand is concentrated amongst a couple of large engine manufacturers like us because of that service capability. But just to underline what you said, Rob, and your intuition, it would be very wrong to attribute Power Systems improvement just to data centers. That's a journey that's still got legs left but tide -- the performance level has been elevated across that segment, including in the alternator business, which supplies across -- really across that supply chain. So we're incredibly pleased with the way that business has improved.

Thank you. Our final question today is coming from Tami Zakaria from JPMorgan.

Hi, good morning. Thank you so much. So the distribution segment guide, the 2% to 7%, it seems quite healthy. Given the underlying truck market outlook, are you able to comment on the core distribution outlook versus the power generation-related services? The reason I ask, if power generation demand holds at these levels, it seems like distribution could see another double-digit growth year in 2025. So any comments there would be helpful.

Yes. I think you're typically seeing Parts growth maybe slightly above the rate of economic growth. And then in this cycle, you're right, the power generation demand in data centers and in some other applications has really provided that extra leg. So I would say in the short run, yes, power gen will be the main swing factor. I would say that some of the other segments, mining, oil and gas, if we look beyond this year, we'd expect to see more growth in the future. There's not enormous momentum in those businesses, but they're also important end markets for distribution. One of the reasons that we like distribution; it generates a lot of cash. It's less volatile than other parts of the business and have that really strong aftermarket piece, which doesn't get the extraordinary growth rates that underpins the kind of year-to-year level of performance. So yes, distribution is doing well. And hopefully, the global economy strengthens and then all of our businesses will do well.

Got it. That's very helpful. And then one follow-up question on that comment that you expect some pre-buy in the back half, but the timing is uncertain. I'm curious what pre-buy lift is embedded in the current heavy-duty and medium-duty outlook for North America? I'm just trying to understand what the market could look like, let's see, if there is no pre-buy.

There are so many factors at play, but that's one of the factors we believe can help. We're going to start off at a fairly modest level in the first quarter. Although orders here yet in the fourth quarter of '24 were a little better than expected, I would say, but it's really, we're anticipating that strength in the second half to come somewhat from demand ahead of the regulations and understanding of how flexible the supply chain is for that industry. Again, I think we've all got fairly consistent views of the market at this point and we'll see how it plays out. A big factor, of course, is going to be the strength of the U.S. economy and spot rates and freight activity. All these factors weigh in. The main thing to know is we've got a stronger second half in heavy-duty truck built into our forecasts. Q1, yes, is going to probably be the low point of the year with what we expect right now. The question is, will we get the improvement in the second half?

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further closing comments.

Thank you, everyone, for joining our teleconference today. That concludes the question-and-answer session. As always, the Investor Relations team will be available for questions after the call. Thank you.

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.