Cummins, Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Highlights: Jennifer Rumsey noted strong Q1 results led by Power Systems, introduced the X10 engine as part of Cummins HELM platforms, acquired First Mode's assets for retrofit hybrid solutions, and Accelera's supply of a 100-megawatt PEM electrolyzer for bp's Lingen green hydrogen project. Mark Smith detailed financials, including revenues of $8.2 billion (down 3% y-o-y), EBITDA of $1.5 billion (17.9% of sales), and improved gross margins driven by pricing, aftermarket, and operational efficiencies.
• Sales and End Markets: North America revenues decreased 1% y-o-y, with softening in heavy and medium-duty truck markets. International revenues fell 5% y-o-y, but China saw 9% revenue growth due to data center and infrastructure demand. India saw a 14% revenue decrease due to truck production flatness and power generation impacts from prior year emissions regulation pre-buy.
• Destination Zero Strategy: Progress continued, with new engine introductions and advancements in decarbonization solutions.

Segment Performance

• Engine segment: First quarter revenues were $2.8 billion, a decrease of 5% from the previous year. EBITDA was 16.5%, up from 14.1% in the prior year despite lower truck volumes.
• Components segment: Revenue was $2.7 billion, a decrease of 20%. EBITDA, excluding costs related to the separation of Atmus, decreased to 14.3% from 14.8% the prior year, impacted by lower on-highway demand in North America and Europe but partially offset by operational efficiencies.
• Distribution segment: Revenues increased 15% to $2.9 billion. EBITDA as a percentage of sales rose to 12.9% from 11.6% the prior year, driven by higher power generation volumes, aftermarket activity, and favorable pricing.
• Power Systems segment: Revenues were $1.6 billion, an increase of 19%. EBITDA was a record 23.6% of sales, up from 17.1% the prior year, fueled by strong volume, particularly in data center applications and rebuilds, favorable pricing, and operational improvements.
• Accelera by Cummins: Revenues increased 11% to $103 million. EBITDA loss was $86 million, improved from $101 million the prior year, as costs were lowered in existing operations though offset by losses in the Amplify Cell joint venture.

Guidance

• Management stated they are unable to provide reliable guidance due to uncertainties from trade tariffs, which introduce unpredictability in demand for the year. They await more stability in the outlook to reinstate guidance, noting the impact of tariffs on economic sentiment and demand for capital goods.

Risks

• Trade Tariffs: Uncertainty from changing and evolving tariffs introduces risk to demand for capital goods, with duration and extent of tariffs influencing demand impact.
• Emissions Regulations: Uncertainty in North America emissions regulations for 2027, including potential changes to NOx regulations, poses risk to product launch timelines and cost expectations.
• Component Manufacturing: Component and supplier manufacturing affected by tariffs could disrupt the global economy and increase costs for consumers.

Question and Answer

• **Q: Understand you're not providing guidance, but can you quantify gross or net tariff cost and which segments are most impacted?

A: Tariffs are highly uncertain, and Cummins can't quantify impact today. Broader economic environment impact is the bigger concern, with steps taken to mitigate but tariffs will be passed on as clarity improves.

• **Q: Which businesses have the most visibility in backlog and pricing risk?

A: Power Generation has a multi-year order board with ability to reallocate orders. Engine and Components segments are more sensitive to on-highway market uncertainty, with customers pausing orders due to tariff and economic uncertainty.

• **Q: On Power Systems margins and EPA27 uncertainty?

A: Power Systems margins were strong, not solely data center-driven. EPA27 regulations are anticipated, with Cummins working with EPA to lower costs, including potential changes to emissions warranties, but plans to launch products as scheduled unless further changes occur.

• **Q: Tariff impact on P&L timeline?

A: Tariff impact was immaterial in Q1, but will increase in Q2 and beyond. Mitigation actions include inventory strategies and dual sourcing, but clarity on tariffs' full impact is evolving.