Cummins Inc. (CMI) Earnings Call Transcript & Summary

Hello, and welcome to the Cummins Management Call. It is now my pleasure to turn the mic over to Steve Volkmann.

Great. Thank you, and hello, everybody. This is Steve Volkmann. I cover Cummins at Jefferies, and thanks for joining us for a little bit of a post quarter kind of recap with Cummins management this afternoon. We are joined by 3 folks from Cummins. We have Mark, the CFO; we have Tony Satterthwaite, COO; and then we have James, the Director of Investor Relations -- Executive Director of -- Executive Investor Relations. So I think the way we're going to do this is Mark's going to do a bit of an intro for us. I think it will be quite short. We would love to have questions from any of you. [Operator Instructions] I have some questions of my own as well based on some of the feedback that I have gotten post the quarter. And then we should have a little bit of time at the end for live questions if you'd prefer to do it. [Operator Instructions] So with that, Mark, why don't we kick it off with your intro?

Good. Thanks, Steve. I want to do a really quick level setter, not repeat a lot of information that you've already digested. So just for those who were maybe less familiar with the story, Cummins is a global power provider. We operate all around the globe. About -- while we're diversified across geographies and regions, about 70% of our revenues, give or take, is tied to on-highway markets of different shapes and forms from heavy-duty trucks, medium-duty trucks, pickup trucks. And obviously, we're a big player in the powertrain and component supply into other off-highway markets, such as construction, mining. Power generation is a big part of our business. And we really touch on many, many parts of the global economy. As we talked about yesterday, we started the year anticipating a slowdown, and we'd already put in place a number of cost-reduction actions. And then all of us in our industry and around the globe are having to deal with these unprecedented conditions presented by COVID pandemic. So we're happy to join today and share a little bit about -- or respond to questions about what we're doing to navigate through and what we see and kind of what Tony and I and other members of the leadership team are thinking about at this time if that's of interest.

Great. So I had a number of follow-up -- sorry, Tony, did you want to say anything? Or are we just going to head into questions?

No, Steve. You can -- feel free to head into questions. Mark summarized it well. I don't think I need to say any more.

Super. Okay. So a couple of kind of follow-ups I've gotten from the quarter. And I guess starting off maybe talking about kind of cost savings, restructuring, et cetera. Mark, how much of the restructuring program from the fourth quarter, as you mentioned, that you kind of got ahead of it, how much of that do you -- those savings do you consider permanent?

I think we consider a significant proportion permanent. I guess the test to whether all of it's permanent, Steve, is how do we come out the other side. So examples of clearly permanent, we exited some underperforming parts of our business last year, engine supply to Nissan in the pickup truck market, the medium-duty transmission business that we have in our joint venture with Eaton. We're undergoing a transformation effort with the Distribution business in North America, which lots of business has already shown a lot of improvement, but we think that we can take that to another level. And then we've done a number of changes in -- we've really pushed hard on SG&A, particularly on G&A. You could see that in our results in Q1 versus a year ago. So we've been trying to redesign the work so we can do with less. But it would also be wrong to say if we rebound back to $24 billion that we're not going to add people. Just hopefully, it won't -- well, we do not expect it to be all in the same jobs and roles. So I would say a significant proportion we expect to be permanent, but let's not pretend nothing will come back. That would be wrong.

Okay. Fair enough. And then sort of the shorter-term stuff that you've done that's saving you $30 million a month or so, that's obviously kind of temporary. But how do we think about how that layers back in as business comes back? And sort of what do you need to see? What are the signposts as we think about what that will look like?

So we have committed to our employees that we will not ask them to work for significant lower compensation indefinitely. So that kind of common sacrifice, if you like, will end at the end of September. I think, between now and then, we have to decide. Hopefully, we'll get a bit more clarity about what kind of environment we're in and what other things we want to accelerate or reduce depending on the environment we find ourselves in. And obviously, we won't -- we'll be trying to decide that long before the 30th of September. But it is -- we haven't had salary reductions, Steve, since 2001, which you know was a period when we were a very weak company. It's the level of suddenness and the level of uncertainty about exactly how things -- once everybody starts to open up, what does that demand look like, says to us this is extreme. We're going to take these measures which seem to lose on balance better than some of the other options we could have taken. And then we're in high monitoring and evaluation mode in addition to running a lot of scenarios, not just sitting and waiting to determine what we're going to do after that. So they're definitely not permanent in their current form.

Got it. Okay. So...

Yes...

Sorry, Tony, go ahead.

Yes. I was just going to add, Steve. What we were looking for was something we could pull the lever on quickly that would be an immediate cash and expense reduction. And as we went through it, we realized it couldn't last forever. To Mark's point, we can't pay our people less than their jobs are worth or less than -- or ask them to work less than a full week is essentially what we're doing for forever. So we were very clear about we want something that would impact quickly, that would save cash and expense, and we ended up with a temporary measure. So we will be watching how things move to decide what our -- what any subsequent moves will be that these short-term cost reductions will come off, if you will, at the end of September.

Got it. So we can basically model the $30 million savings for the second and third quarter. How do we think about the fourth?

I think the answer...

You can't.

That's the question, yes.

Well, at least I asked the right question.

I was going to say...

Yes. The way to think about the -- go ahead, Mark.

I was going to say, I mean, the dream scenario, which seems highly remote, Steve, is that somehow things rebounded faster, we -- then we would take a different direction. But honestly, with the way the truck cycle is in North America even before this extra level of complexity, it's hard to see a short-term removal of those things. But we have the option to go -- to pull it earlier if we thought things were better. But that's -- we don't have any visibility to that right now, just to be clear.

Great. Okay. Good. We've started to get a couple of questions on the web page. So thank you guys for that. Keep them coming. If you have anything, feel free to type it in at any point, and I'll try to sort of group them together. So that's a good segue actually because, obviously, lots of interest in sort of what's happening on the truck cycle. And I guess the first thing people -- some people were interested in is just what does your visibility look like these days. I think we used to believe that you had decent visibility about a quarter out, and then things would get locked in at least 30 days out. And has that changed right now? Or do you actually know kind of what May looks like already in the truck business?

I'll take that one, Mark. The short answer is, we're not even sure when our customers are going to restart in May. So the answer, short answer, Steve, is it's hard to tell. Things are still moving around. I would say that the single biggest uncertainty as we look at the North American truck market is the Mexican government's kind of plan, intention, approach to letting industry restart or not. They are talking out of both sides of their mouth in a way that's not helpful at all. And so I think our OEM customers who have plants in Mexico are very unsure of exactly when they're going to be able to restart. And I think this is, again, summed up in what we said previously. This level of uncertainty is kind of unprecedented, but it is exactly the environment we're dealing with.

And how much...

And so we don't have strong -- to be clear, we don't have a good view into May because we don't know when our customers are going to start or at what rate they're going to start.

Mark, were you going to answer...

Yes. A couple of things. I think, first of all, Tony, I was just on an individual investor call prior to this, just kind of one-on-one meeting. And that investor seemed to be confused that most of our customers were still operating. That's clearly not the case. I mean, April, most of our largest -- in fact, all of our largest customers had a significant disruption to the business. I just want to kind of level set everybody. And then why -- I'll say a little bit about Mexico, and I'll come back to another indicator that I look at, Steve, that may or may not be interesting to people. But Mexico is not just for our supply chain, but -- you probably know this, Steve -- we ship engines made in the U.S. into our customers' truck plant assemblies in Mexico in some places. And then those products -- some of those products come back into the U.S. So Mexico is a key part of U.S. truck, pickup truck supply chain in more ways than some people may realize. I just mean that from a general you wouldn't know as much as we do living in that business today. Going back to your original question, one thing we look at having an extensive Parts business and Distribution business is what's happening to parts consumption. So when we get excited about truck activity or truck orders rebounding is when that parts consumption is up because, typically, what happens, and we're in this phase now that -- it's an unusual environment, but the steps that fleets take is quite predictable. They park trucks. We can see that. They prioritize the newer, more efficient ones when they're choosing which ones to run because they're getting better fuel economy. We can track some of that in the parts consumption by model year of the parts we supply into truck engines. So we're on that parking of trucks and overcapacity stage, Steve. And then when we get excited is when we can see that parts consumption really grow as those trucks are put to more use and the older ones come back online and start to really consume parts, and then we are starting to get very, very enthusiastic. But we are on that kind of down slope and overcapacity position right now. And as you know, we've got literally millions of engines in the field to draw this data from.

Great. That's interesting. So is the parts stream still getting worse? Or is it sort of stable?

It's not really getting worse, I would say, at this point in time. Well, it depends really -- it'd be interesting to see what happens through the course of this quarter. It clearly dipped down. I mean we saw a bit of destocking last year, and then it's definitely there's been some dipping down here. But by model year, we can see all the trucks have dropped quite a lot more than the newer trucks kind of emphasizing this dynamic. So I would just say we're in this period of overcapacity. It's hard for me to forecast that -- it hasn't changed, really. That would probably be a little bit aggressive at this point in time. But we're in a difficult period, very difficult without the visibility to the improvement right now.

Okay. All right. So you guys, in this truck business, I think truck production in the industry was down like 10% sequentially, but you were sort of flat with your revenues. And a number of people were sort of trying to figure out how to square those things up. Any thoughts there?

I think what you see in the early part of the down cycle is understandably some of our customers, all of whom make some level of their own engines, tend to prioritize their own production, their own fixed cost absorption. And we tend to dip as a share of people's -- in truck OEM production. That isn't, of course, necessarily a reflection of what end customers want to buy, but that's how the OEMs do it. So you saw our share dipped down a little bit in the second half of last year. And I think what you're seeing is this quarter is a sign that, that could be normalizing. So you're going to see these, what I call, nonmarket-based dips and rises as people kind of reshuffle their production and their fixed costs. It's going to be further confused by who can start up better and who's got all the engine and truck components they need. But I think that's what's really going on there, Steve. I think Tony's best placed to comment from me. But feedback on heavy- and medium-duty products doing really, really well in the market, very strong share, but we do see these gyrations, particularly on heavy duty kind of entering into the down cycle. And then on the way up, we tend to have that more flexible capacity for the industry as well on the way up and tend to do well supporting customers then.

Yes. Steve, I'll just add. This is Tony. Can I just add a couple of things? This issue that Mark talks about, this kind of fits and starts of stopping and starting production and how inventory moves and how truck sales move, I think that's going to cause share to move around a bit over the next couple quarters. It's a very unsmooth, right, very jerky kind of time in terms of our shipments, our customer shipments. And I think when you do the math, I think you're going to see the share is going to jump around a bit. I would reinforce exactly what Mark said. The feedback we're getting from our end-user customers is our products are performing very well, and we continue to be heartened by that. And our newest products, our X15 Efficiency Series has done well, is offering extended fuel economy improvements and when you pair it with our Cummins Eaton transmission, even more fuel economy improvement. So that's -- that product has become very attractive. But I do think you're going to see some movement around quarter-to-quarter in share just as we work through these production stoppages, starts and everyone adjusting their inventory in between.

Okay. How [ much ] inventory do you think is in the system? In other words, if the customers all started up next Monday, [ would you ] sort of be ready and need to start shipping right away? Or are there kind of 2 or 3 weeks where they sort of absorb what they had and then you get [ sort of caught up ]?

Well, standard procedures, Steve. I would say standard procedure is everyone has a bit, a week or 2. And then it wouldn't surprise me if many of our customers, as we have done, have looked at the supply chain and gotten a little nervous and brought in a little extra. So I would say there's a couple of weeks inventory in the system. There is not a lot though. Don't get me wrong. There is not a significant amount, but a couple of weeks is generally kind of where I think many people are right now. Of course, you know the problem with building an engine or a truck is if you have 99% of the parts but not 100%, you still can't build it. And so I do think those supply chain disruptions are working their way through the system as we speak. And I don't want to overemphasize, but I do think, to Mark's point, this Mexico shutdown is a significant impact to our industry. The automotive and the commercial vehicle industry in the U.S. is being highly impacted by what's happening in Mexico.

Okay. Great. Maybe we'll shift a little bit to some [ longer-term ] questions now. And there are a bunch of people sort of questioning the impact of COVID but also the impact of low diesel prices on what you think is going to happen with various types of alternative drivetrains, a; and b, whether lower diesel prices might mean that people are less apt to upgrade to new trucks because that fuel efficiency gain is just not what it used to be. So pretty broad topic there but some longer-term questions.

Okay, well, I'm just going to...

You want to start, Mark?

Yes, I'll start, then you can finish. So I think, for example, like new technology, Steve, like we've never -- we've been very low conviction of the ability for fully electric trucks, fully electric powertrains to power long-haul heavy-duty truck. So our view of significantly different technologies is much further out there. We're investing in fuel cells as are others. But clearly, the payback on the nearer-term applications where electric is more -- yes, it's got more of a foothold in buses and other things. Those paybacks are obviously just getting significantly longer. Then you've got the question mark of what are the resources of some of those more independent companies to keep going through this environment. But I think it's fair to say it doesn't seem like there's going to be an acceleration in the U.S. in the near term for new tech. I think in Europe, it's a bit more of a complicated picture in the sense that you've got this more demanding CO2 regulations wherein a new technology has to play a bigger part in the solution. And so you see the OEMs. You saw the Daimler and Volvo announcement. They're going to have to keep on with developing new technology, whether on their own or in partnerships. It seems like the need's more pressing there. And with regard to new trucks, I think -- do people need it? I guess the only thing I'd say is, after the truck, the fuel and the driver are the most significant parts of operating the truck. And of course, if you've got a new truck in the near term, you've got some parts covered by warranty, you've got better fuel economy. So history shows that we haven't had -- the freight dictates the level of need for trucking miles. And then at a certain point, those older trucks just become economic -- uneconomic. The delta on the fuel economy combined with the rising repair costs makes it -- for the well-capitalized, at least, makes it a very clear choice to keep moving forward. And again, on any given week or month or quarter, could that be pushed out? Yes. But eventually, we cross over into the economics that it makes sense. And I think reliability in the industry, not just Cummins, has improved a lot. So I think those incentives are still there.

I think you want to add...

Yes, Mark. Steve, if I could add -- yes, please, Steve. Yes. Two things, I guess. In many ways, I think we've come to realize that diesel price movements are very short term in nature. And people don't make investment -- long-term investment decisions based on diesel prices today because everyone knows how volatile they are. The thing that I think -- in terms of alternative drivetrains, the thing that I want everyone to remember is the carbon footprint or the carbon impact of diesel has not changed. And the logic for alternative drivetrain is not yet an economic logic. It's mostly a climate change emissions logic, and that hasn't changed. And so I think we're right -- and people are right in saying, wow, the economic interest in alternative drivetrains has gone down because diesel has become cheaper. I think there is never much economic interest to begin with. It was really a climate interest. And the debate, I think, that's more interesting is, is the climate interest going to go up or down as a result of COVID? And that -- I've read stuff on both sides of that equation. But I think that's the way I see it right now. Truckers are trying to take advantage of the lower diesel price and try to figure out how to make a little more money out of their business rather than making long-term investment decisions on the basis of that. I think everyone knows that's very risky. And the only other thing I'd like to add, the benefit of a new truck for a trucking fleet typically is way beyond fuel consumption. And in particular, as you know, there's been a real competitive fight for drivers in the industry. And one of the things many trucking fleets use to attract new drivers and to attract the better drivers is to offer them newer trucks with more safety features, more creature comforts, easier to drive with an automated manual transmission. And so I think -- don't forget all these -- all those other benefits come in new trucks, not just lower fuel consumption.

Okay. Great. Fair enough. Next question, I'm going to sort of combine a couple of questions. Somebody is interested in whether you think there will be more convergence between light vehicle EV tech providers and commercial vehicle EV tech providers. And maybe then we'll sort of segue to the next question, which is much broader is, are you guys seeing any good M&A opportunities in this environment? Any distressed suppliers that could be interesting to add?

Tony, do you want to...

Mark, you want to take the second one, and I'll take the first one? Yes?

Yes.

All right. So let me -- I think it is our belief, Steve and everyone, that there is a difference between pass car EV and commercial vehicle EV. Not just -- and particularly in terms of what customers expect, what the technology needs to deliver, how robustly it's used, how reliable it is. We see that today in the differences in how the vehicles are used. And we're not seeing that -- we're not expecting that would change significantly in an EV environment. So we are kind of seeing the pass car, and I know light commercial vehicle's kind of a weird space between pass car and commercial vehicle. But our view is that the light EV is still very much a pass car-driven thinking and approach, whereas most of our customers are talking to us about what the truck or what the vehicle needs to do for a commercial application. And it's not coming up with the same things. So we still see our customers wanting a difference. The attractive thing about pass car EV is the, at least, the headline numbers on what they say the systems are going to cost. That is very attractive, I think, at least from a planning perspective. But the concern is, will it do the job? And will it do it the same way and as well as commercial vehicles have traditionally done? Or do we need a more robust, more designed for -- fit-for-purpose, so to speak, EV system, which is what Cummins has been working on for the last couple years. And so we don't currently see a lot of convergence, but that's our view of how it stands today. I do realize I think that the battery manufacturers have -- the actual manufacturers have a big part in how this plays out. And so there are scenarios out there where I think things could be more similar, and there are scenarios out there where I think things could be quite a bit more different as we think about the future of commercial EVs and light-duty or pass car EVs.

Great. And Mark, what are we thinking more broadly about M&A in this environment?

So generally, we've laid out kind of a landscape with the -- with our Board of Directors over the past 4 or 5 years. So I guess, yes, we do -- Tom, Tony, myself and a few others are, of course, working on what -- are there opportunities to strengthen the company's position as we go through this? Yes, not for today. So we have a radar. I would say it's not so much driven by distress, although that could always play into some things, but we have the opportunity to really further advance the company's position. So far for a variety of reasons and having looked closely at a number of things over the past few years, we just haven't found the right combination of value and quality. Really, those have been -- there's been opportunity but just hasn't been the right combination of value and opportunity. I would say it's not so -- and it's certainly not so much on the EV side. I mean we have made pretty much smaller bolt-on acquisitions, but this is something else we could combine with the cost. So that close monitoring goes on. We're in a strong position. So we expect to be one of the winners as we come out of this difficult period, Steve. We do have the strength to make some investments. But yes, right now, it's kind of let's just get through this next period. We've got strong liquidity. Let's focus on preserving that here. And then when things settle down a little bit, we'll come back around and see what opportunities are out there. But right now is not the time.

Understood. Slightly shifting gears here, another follow-up from the first quarter. You obviously protected your R&D spending in the first quarter, and somebody wants to know how to think about that level of spending for sort of 2Q, 3Q, 4Q. The trend there would be great.

Yes. I think absent significant decisions, new decisions that we would have to make, generally, you should think -- we've taken the actions we've taken, obviously. The thing that -- the 2 things that kick in from here on in are the salary reductions, which we've already quantified. And those just landed in our paychecks here -- or tomorrow. So middle of April onwards, so those were not in the Q1 run rate. And those are both impacting everybody, every line of the P&L, basically, cost of sales, selling, admin, R&E. So that takes that expense down a little bit. And then engineering, the one area, as you know, is a little bit lumpy. It's project-driven. But in general terms, we're not hiring lots of people when we're cutting salaries, right? There might be the odd 1 or 2 critical positions, but basically, we're not hiring. We've just completed the last major tranche of reductions in the Distribution business where some of which were a bit more towards the end of the quarter. So there's a little bit more runway in those numbers. The R line can be lumpy, too. In general, I would say flat less the salary cuts is the way we're headed in general direction. R maybe a little bit lumpy depending on individual projects. And then we'll see what we -- what condition we're in, in the fourth quarter. Otherwise, those expenses will obviously be going back up again.

Okay. Understood...

So if you look at the New Power business, right, that's an area where we have investment and losses. We're not expecting those to accelerate up either. We're in the middle of product development there. So it's going to be flattish to down, really.

Great. And then just a couple more sort of specifics post the quarter. What's the year-over-year variable comp benefit in 2020 versus '19?

So where we accrued for in the first quarter if things stayed at the projected level we have there, you'd be looking at around about $150 million of year-over-year improvement, maybe $140 million. There's still -- we still -- there could be more to come there. We haven't gone to 0. We haven't withdrawn our variable compensation plan. Our view is it works as designed. And if results are significantly better, then it will increase from that number. And if there's significant -- if we're down for longer, then they'll deteriorate. Then the payout will go down, sorry. Not the results, but the payout will deteriorate.

Right. Understood. Okay. Maybe this is a Tony question. Can you just comment on sort of what you're seeing in the supply base? Is anything making you nervous or any disruptions?

There's a lot making me nervous. Let me be clear about that. In the context that -- I wish I knew what all of our suppliers were doing from a when are they starting, when are they stopping, why are they starting, why are they stopping. I wish I knew what they were doing to take care of their employees because of COVID. But we have a broad and big supply base, and we don't know all the things about it. I wish I knew. I think I said it a couple of times. I want to emphasize Mexico has me concerned just as an economy because their COVID lockdown has been one of the most heavy-handed, I guess, is the way I would put it. India has got some of the same characteristics, but India is showing more flexibility in gradually lifting the business lockdowns and letting manufacturers get back to work. If I thought about our supply base geographically, we've been through the disruptions, mostly in the U.S., where people were shutting down, not sure if they should be running. Most of that sorted itself out. We've talked to people. Most people are now running again at some level of capacity. Where we're struggling is where there's governmental restrictions on businesses being able to work and just finding solutions. I will say that one of the things that has impressed me greatly about the way our company has responded has been our ability to find alternate sources, alternate suppliers and make alternate engineering kind of judgments or calls and keep our plants running. And this is something we've really been doing since the end of January when China shut down abruptly. And so we have really honed our skills in responding and reacting to suppliers. The number of times they've told me, we're a week out, we're a week out from running out, and then all of a sudden, a week later, we've found some way to fix the problem, this is what we do. This is what the supply chain team does, and they've done an excellent job so far this year. So there's many things that make me nervous. But I would say the thing that makes me confident is our ability to deal with those things. And so I feel pretty good about that. There's really -- in the supply chain, I will share some facts, I think, that are pretty well known. Tier 2 suppliers in the electronics space is one of the big concerns across the industry. And those are mostly kind of -- these are Tier 2 suppliers that are supplying components for electronic subsystems. That's probably the single most high-profile concern. Many of these suppliers are based in Southeast Asia, not typically in China but typically in Southeast Asia. And that's been the one area that's probably the -- been the most worrying for the longest period of time.

Okay. Great. I'm just going to sort of bounce around now because we have a few more questions that we want to get in before the end here. Warranty accruals were lower in 1Q. What drove that? And is that sustainable?

So yes, it was a pretty low number, Steve, because we were at a pretty low -- very low level of campaigns. So that basically, our warranty costs are made up of the accruals that we estimate are relevant to the engines when we ship them. Then we have adjustments to those estimates if we think those are too aggressive or too pessimistic. We really didn't have major variation on our accrual accounting, so -- which tells you the payment data did not show any variation of significance compared to our accruals, a little bit positive, to be honest, but not enormous. But the real thing was the very low level of campaigns. So campaign is where we decide there's a problem out there that it's better for the customer to go and take care of it rather than just let it -- fixes fail. And we had a pretty low level, very low level. So that part isn't realistic to sustain. So we were at 1.6% of sales for Q1. It will be -- it's most likely going to be a bit higher in future quarters. We started the year saying 2.4%. Q1 was a little bit lower than we anticipated even knowing that, but probably that kind of 2.4-ish isn't a bad number to use for the full year. But really, it was just low campaigns. That was nothing to do with COVID. We just didn't have anything in queue to say we need to go and fix that right now. There invariably are things throughout the year. So that number was very, very low.

All right. And final kind of 2 questions that I have here. I'm going to sort of loop it together into one, and they're really focused on what a recovery will look like for you guys. So not the timing of it but how -- talk about your ability and flexibility to sort of ramp back up when you need to. Specifically, there was some interest around what the working capital would look like in that scenario. And then the third piece, and I'll repeat it if I need to, but people were sort of wondering about could the recovery in '21 or whenever it is sort of be steeper than people expect because we haven't really built much in the way of trucks for 12 or 18 months, perhaps. And there might be some real sort of shortage of new vehicles out there. So kind of 3 questions about what a recovery might look like.

Let me make a couple of comments, Tony, and then you can finish it off, round it all up. The first thing we tend to see around the world is that when an economy slowed and then picks up, recovery in freight and, therefore, trucking activity is one of the early signs and beneficiaries of a recovery. Of course, there's always a period of adjustment and lag, which I alluded to with kind of the parts consumption comments. But yes, we're typically -- the truck's earlier cycle in recovery. And typically, we've been able to deal, in our history, and you can -- you've experienced more of these directly than I have, Steve. But we've had to deal with massive prebuy, then massive post lulls. We've had to deal with all kinds of variations around product changeovers. So I think we've demonstrated our capability. And I think Tony can add to that. But our OEMs kind of count on us even more on that up cycle because, typically, demands are now outpacing their capacity. So they rely on us to be really, really flexible. We've got parts of the world where the truck demand has been down for a while, like India, the economy has been very, very slow. I'm not pointing to an immediate bounce back, but that's an area where we've just had an emissions change. We've got more content on the engines. If and when the economy stabilizes, it seems like that truck market would be ready to improve. China, you heard I kind of chuckled because we just had a record production month for truck engines in China. So I'm not suggesting you should extrapolate that. Just to say, we've gone from 0 to the highest-ever number of engines we've built in a matter of weeks. And that has caused some sleepless nights in the supply chain. So yes, I'll be confident, albeit with some caveats around supplies in the current environment, but we will be geared up to ramp up as quick or quicker than anybody else. I can't speak to 2020. We're literally spending time looking by end market or to the age of mining fleets, trucking fleets, construction fleets, rental equipment, just trying to get a sense of like if people were deferring, how long could they defer. It seems to within the U.S. There is a period in which some deferral could occur for a while. But very much, the freight activities, at the end of the day, the sustained increase in freight is going to be the big driver on the truck side.

And working capital sort of per dollar of increased sales, I mean, how do we think about that in the outgoing...

Yes. Typically, in stable terms, our total working capital is running about 20% of sales. There's quite -- we have a global supply chain. So we carry a bit more inventory, but that gives us a cost advantage. Receivables vary by region quite a lot. But that 20% is a good norm. So in a down year, normally, we'd be very confident that liquidating working capital would offset a lot of the cash earnings loss. The inventory is, not surprising, a little problematic right now since we just kind of had a chunk -- a big chunk of our global business shut down for a while. So the metrics don't look quite as good right now, and it's going to be lumpy going through Q2 as well, but we'd expect to be on the improvement track next year. But yes, as we grow, that's a consumer, but since -- of cash. But since we have strong gross margins and strong incremental gross margin, you've seen we've -- over time, we've been able to really increase our cash generation. The Parts business generates a lot of cash, and we've been improving cash as a percent of sales as well. So all points to a very healthy model, albeit being put to the test in its fullest in the short run because of this very unusual set of circumstances we're on. So hopefully that helped with a little bit more color than you asked for.

That's great. And maybe, Tony, what do you think of the thesis that there could be some almost kind of some capacity tightness in the sort of new truck fleets as we go into whatever your choice of recovery might be '21, '22, after a couple of pretty lean years of production?

Well, I would say a couple things, Steve. First of all, let me just add one comment to what Mark said. The one thing that I do want you all to extrapolate from our China experience is the capability of Cummins to go from 0 to record production in a month. I can't say the demand is going to do that, but I can tell you that we think our supply chain, the way we run it, it is flexible, and it moves fast. And we can do that. And I just want to give you confidence that if things recover very quickly, we will be doing a very good job keeping up. So I just want you to know that we have prided ourselves in prior upturns of our ability to ramp faster. We kind of -- we think we know how to do it. And so we -- I would just want to give you confidence that we can do that. If I took the traditional business cycle and then laid COVID in the middle of it, I think what it could preview, obviously, is a down cycle in the truck market combined with a COVID dampening over a significant period of time, as in 4, 6, 8 quarters, then I think you could definitely see a return in demand that's pretty significant, particularly if you think that return could occur somewhere prior to an emissions deadline. And you could see how you could get a little bit of a perfect storm of significantly higher demand in the short term. You could see that. I think that's a possible outcome. I do share Mark's concern that truck fleets are generally pretty young right now. And therefore, we need to see some of that truck fleet age before I think customers are going to feel they need to do significant renewal.

And one other thing, Steve, just to kind of finish off, is our market share, as strong as it is, is even stronger with the larger fleets. I mean that's where we're able to dedicate more resource in [Audio Gap] et cetera. So to the extent they're better capitalized than the individual owner/operators, yes, I think we should be well positioned with the people who've got more capital to place when that demand comes back.

Great. Okay. Well, on that, I know you guys have another show you need to get to. So we all will be very happy [ to hear you ] next time and insights. And we'll catch up with you soon. Thanks, everybody, for dialing in. Follow up with me if you need anything, and hopefully the trucking is back up. And Tony, Mark, James, thanks so much for joining us.

Super, really enjoyed it. Thanks, everyone.

Appreciate it, Steve. Thank you very much. Take care, everybody.