Cummins Inc. Q4 FY2025 earnings call

Management Statement and Operational Highlights

• 2025 Performance: Despite weak North America truck markets, trade tariffs, and regulatory uncertainties, Cummins delivered strong financials. Introduced new engines (X10, B 7.2). Acquired First Mode and collaborated with Komatsu for mining hybrid solutions. Completed capacity expansion for Power Systems.
• Fourth Quarter 2025: Revenues $8.5 billion, up 1% y-o-y. EBITDA $1.2 billion (13.5% of sales). Charges related to electrolyzer business. Excluding charges, EBITDA $1.4 billion (16% of sales).
• Full Year 2025: Revenues $33.7 billion, down 1% y-o-y. EBITDA $5.4 billion (16% of sales). Charges related to electrolyzer business. Excluding charges, EBITDA $5.8 billion (17.4% of sales).

Segment Performance

• Engine Segment: 2025 revenues were $10.9 billion, down 7% from 2024. EBITDA was 12.7% of sales compared to 14.1% in 2024. 2026 projections: revenues flat to up 5%, EBITDA margin 12%-13%.
• Component Segment: 2025 revenues were $10.1 billion, down 10% from prior year. EBITDA was 13.8%, up from 13.5% in 2024. 2026 projections: revenues flat to up 5%, EBITDA margin 13%-14%.
• Distribution Segment: 2025 revenues increased 9% to a record $12.4 billion. EBITDA was a record 14.6%, up 250 basis points from 2024. 2026 projections: revenues grow 5%-10%, EBITDA margin 13.25%-14.25%.
• Power Systems Segment: 2025 revenues were a record $7.5 billion, up 16% from prior year. EBITDA was a record 22.7%, up 430 basis points from 2024. 2026 projections: revenues 12%-17%, EBITDA 23%-24%.
• Accelera Segment: 2025 revenues increased to $460 million. Net operating loss was $438 million compared to $452 million in 2024. 2026 projections: revenues $300 million-$350 million, net losses $325 million-$355 million

Guidance

• 2026 Outlook: Total company revenues expected up 3%-8% y-o-y. EBITDA to be 17%-18% of sales. North America truck demand expected to improve in second half. Power generation markets to remain strong. Engine business revenues flat to up 5% in 2026. Distribution revenues to grow 5%-10%. Power Systems revenues to be 12%-17%. Accelera revenues expected $300 million-$350 million with net losses declining.

Risks

• Tariffs: Ongoing trade tariff volatility impacting margins.
• Regulatory Uncertainty: Changing regulations and their impact on product development and costs.
• Electrolyzer Business: Weak demand in green hydrogen affecting Accelera segment.

Question and Answer

Q: Can you update us on how you are thinking about potentially adding capacity in power systems for the diesel variant and also what are the updated thoughts around potential natural gas product? And can you update us on where lead times stand now as well?

A: Yep. Happy to do that, Jerry. So, you know, we continue to see very strong demand in our power generation business. And as noted in the comments, we completed the doubling of our capacity of the 95-liter engine and genset that we supply, which is very popular in the data center market. We have completed the launch of our Sentum product line, and we continue to see benefits of those investments as well as ongoing operational efficiency performance in power systems and DBU, which is leading to the guide for this year. We had record order intake in Q4 for power generation. We are taking orders now well into 2028. So the demand remains very strong for diesel backup power, and we are well-positioned with the product and channel support that we offer to provide that. We are continuing to look at opportunities to increase capacity. For this year, you can expect the benefit of those things that I already outlined to come through full year and in smaller improvements and efficiency in how we leverage what we have. We will be talking more in May at our Analyst Day about where we think we may have the opportunity to continue to leverage the capacity and products that we offer and if there are any additional investments into new products. But as you would expect, we are very thoughtful and disciplined in how we think about that.

Q: Just a quick question on the sequential revenue in Power Systems from 3Q to 4Q. I do not know whether that was any capacity issues, timing issues, or anything else. Obviously, you are growing next year. So I was just curious about the relative lack of growth. And then more generally, you mentioned demand into 2028 for data centers, which is great. Is there any change in the shape of what is happening? Is there more behind the meter that might demand more backup? Is there any trend in the design of data centers that either favors or not diesel backup?

A: Yes. On your first question, what I would say is we were able to deliver the 95-liter capacity expansion ahead of schedule. So we saw more benefit of that sooner last year. And then as we went into Q4, we had a few down days that are not atypical at the end of the year and things that you do at the end of the year within plants. A little bit of softening in aftermarket. So those things had some impact on top-line performance. And then the other dynamic we had in Power Systems in Q4 was tariffs are still changing. Let us just acknowledge that while there may be some places where we are getting more clarity, that is still changing in the India tariff. In Q4, it had a negative impact. We are working to recover those costs, but as things change over time, there is typically a lag in how we manage through that with our customers. In terms of diesel backup, you know, there continues to be a desire for most, you know, really all data center customers to have diesel backup power available to just ensure a level of uptime and reliability that they need, and the conversations are more around how do we use the product line that we have to meet the strong demand that is out there.

Q: Hi, good morning. I guess, Mark, just two questions, if you could just unpack the margins or implied lack of incremental margins in 2026 for the engine business? I understand we have tariffs, but I thought we were getting pricing through and perhaps some benefit from Section 232. So is there anything else in there? Is there a first half, second half story there? We are exiting the year incremental margins higher. I am just trying to understand how you think about incremental margins through this cycle relative to your 25% target that you guys laid out for engines? And then my last question on just distribution. Again, the implied margins are below 14%. You talked a little, I think, in the last answer about growth or sorry, investment in that business. So how much is the investment? Where is it going to? And just again, exiting margins exiting 2025, the fourth quarter with a 15.1% margin, and ending implied 2026 below 14% just does not make a lot of sense.

A: We have had a lot of discussions about the distribution margins. And the performance over a number of years has been really good. So we are really thrilled with the distribution leadership team continuing to grow earnings and margins. The tariffs throw a little bit of a spanner in the works from a percentage basis. You know, we are in tens of basis points of dilution there. It is taken longer to work through distribution. And then the recoveries. And yet, there is a little bit of investment. Nothing underlying has fundamentally changed. So we still think the distribution business is going to be a dollar and a percent grower over time. There can be some, yeah, modest investments in a over a short period of time, but nothing fundamentally changing there. And then in the engine business, yeah, there is not a lot of pricing this year. There has been a lot of tariff recovery work and tariff mitigation work going on in 2025. But not this year. We are really in preparing for more demand whilst preparing for new product launches. All of those things are going on at the same time. Little bit of dilution from tariffs. And then there is not nothing is happening significant we do not expect on the JV income line, maybe even be down in on-highway a little bit in China, maybe up a little bit the power systems JV earnings in China. So the net guide is at close to zero for JV earnings for the company, but it may be a little bit of dilution embedded in the engine business guidance and a little bit of enhancement embedded in power systems overall, but nothing dramatic or changing. But yes, overall, I would say pricing is not a big feature of 2026.

Q: Hi, thanks for taking my question. I just wanted to start out maybe on the supply side of power gen or actually the supply demand. One quick one on the demand side. You mentioned record level of orders in the fourth quarter. Can you size your backlog exactly at this point and maybe provide a little bit more color on what the growth rate was either year over year or sequentially to your in terms of orders or the backlog? Then on the supply side, we have been hearing about capacity investments from perhaps other competitors. How are you kind of thinking about what that means for the competitive environment out there? And impact your decision to invest in capacity as well?

A: Yes. I mean, we do not quantify the size of our back order. So all I can say is we had a record in Q3, we set another record in Q4 in terms of that demand intake and multiyear strength and continued discussions with our data center customers on how we can meet their multiyear needs and what they are doing. So there is at this point, we see plenty of demand and, you know, some of the investment questions is just defining the plan that we think is efficient use of the capital we have as it relates to natural gas or other things having confidence in the multiyear outlook. On what, the market demand may be. We do feel pretty confident that we will see strong demand continuing for diesel backup power. And so there really is that developing the detailed plan of what we think we can do and also our suppliers' abilities to invest and keep up with what we are doing in our own facilities.

Q: Thanks for taking the question, guys. I did want to ask on EPA 27 now that we have gotten more clarity on that and we have heard from various others in the industry that it could lead to a plus or minus $10,000 of increase just to the cost of a truck. So trying to think about how that would actually impact Cummins, I guess, on just engine pricing margin and then also just how to think about the impact to components volume, just given the added content as well as pricing?

A: Yeah. Great. Let me break this down in a couple of things. You know, first, we are committed to always delivering innovative efficient solutions to our customers to meet their needs and with the regulation. And for those of you that have been around the industry for some time, it is quite unusual to have this level of uncertainty, this close to a regulatory implementation date. So the EPA indication late last year, as you noted, that they will move forward with the 27 NOx rule was an important step to give more regulatory certainty. And I think the EPA has worked hard to balance with regulatory certainty and allowing those that have made big investments in products to launch in '27, not only to comply with the regulation but to bring other values to our customers to move forward while also looking at reducing the cost impact to the end customer. And so they have given some indication of what that looks like. We think we are very well positioned with our Helm engine platforms and the new products that we are going to be launching around those regulations. There is still a lot of work underway that we are active in with the regulators, with our customers, with our suppliers on the details of those changes that they are going to make and that we complete our validation and certification process in accordance with those. So we are working through that. And just will note, you know, we work with multiple OEMs. The most OEMs on our B series product, which is in a, you know, high variety of different applications. So that is one in particular that we are focused on. Net of that is we are all moving forward toward that gaining the additional clarity that we need and it will still result in content ad in engine business and in the components business after treatment. In particular, ACT is estimated $10,000 to $15,000 for a heavy-duty truck ad associated with that, and the majority of that will be in the powertrain. So it will split for us in our content ad between the engine business and the components business. And we will see that coming in with those new product launches. But again, they are also bringing more efficiency, more power, advancing our digital solutions, excited about the value we are going to bring to our customers along with that regulatory change.

Q: That is a perfect lead into my question, which is now that we have a little bit more certainty that this is going to happen, even if we are still looking for the fine points of it, what is the guide embed for, any kind of prebuy for '26?

A: Yeah. I mean, it is a big question and part of what I would say is will influence the range and how much the second half comes back. But we are assuming we will see some prebuy in the second half of next year. There is a combination of the natural coming out of the down cycle for the truck market, the more stability and tariffs that will cause customers to start buying trucks again, and then prebuy in the second half of the year. But we are really watching to try to how much will that be. You saw strong orders in December. Improvement in orders last month. But how that flows over the course of the year, I think we are all cautiously optimistic is what I would say. And then, you know, demand does start to strengthen, how quickly can the supply base flex back up because it dropped quite dramatically last year. So those are the things to watch.

Q: I will just kind of package these together. Question one is just on Mark going back to the comments earlier about the capital allocation flexibility that you have. I am curious as part of that, maybe it does not factor in or not, but your joint venture partner in your AMT venture announced a potential or likely spin-off of that business. I am just curious if that impacts could that give rise to potential option for Cummins if it wanted to increase its stake there. Maybe just thoughts around that. And then I guess part two is the data center revenue in total in '25. Can you help us on that? And then what is embedded in 2026 across power systems and distribution?

A: Yeah. You know, of course, we have an important partnership with Eaton, as you noted, in the Eaton Cummins joint venture. I think it is premature to say how that will happen. We would expect continued partnership with that portion of their business going forward, and that joint venture and really making sure that we have optimized powertrains for our customers.

Q: Hey, good morning, guys. So with the restructuring you took in Accelera, can you talk about how that changes the cost structure? Where do breakeven margins go? And then just maybe a little more color on just what the actions were.

A: Yes. So with this, the actions in the fourth quarter were really focused on our electrolyzer business. And just frankly, with the policy changes in green hydrogen, the demand for green hydrogen has dried up, dramatically lower. And so that has had a relook at our participation. You know, we have commitments to customers that we have made, but we will stop future commercial activity. And so what that means and even with some of the that are starting to flow through that we took a year ago is we have meaningfully lowered losses for this year, but some of these things take time to fully play through just based on existing business and commitments that we have, but we have meaningfully reduced our participation in hydrogen. And we continue to feel like we have got some good capability in battery electric powertrains and pacing our investments there. Given the slowing in the market, but the anticipation that that will continue to grow over time is really where we are focused. And then, of course, we never stopped investing in the engine side of our solutions. And so, anticipate more strength there for longer.