Cummins Inc. (CMI) Earnings Call Transcript & Summary

All right. We're ready to go. Good morning, everyone, and welcome back to our TD Cowen 16th Annual Global Transportation Conference in Boston. I Matt Elkott, TD Cowen machinery and transportation equipment analyst. And this is our meeting here with Cummins. We're thrilled to have them. We have Amy Davis, VP and President at Accelera; and Chris Clulow, Head of Investor Relations. Amy and Chris, thank you so much for joining us.

Thanks, Matt.

Amy I've said it before, if an engine manufacturer can be a household name, Cummins is as close as it gets. I do want to get to the different parts of the business. But before that, let's start with your self-disrupting segment, Accelera. What is it, what goes under it? And then maybe you can loop in some insight on the JV announcement yesterday?

Sure. Great. Thanks for having me. So Accelera is a clean energy company. So we are the division of Cummins dedicated to 0 emission solutions. And our fundamental belief is that commercial sectors will require different technologies than pass cars, so they won't translate simply, and it will be a combination of technologies. So not one single technology will work. And so we've built up a portfolio of components and subsystems that can work together to help companies decarbonize. So that's made up of battery systems. So we have batteries, including we do our own BMS development. We have now through our Meritor acquisition, traction systems and e-axle components and fuel cells through our Hydrogenics acquisition, PEM fuel cells, solid oxide fuel cells as well as electrolyzers, pemelectrolyzers. And so what we do is really work all the way from end users to OEM partners and others to say, we'll sell a component form or in subsystem, we'll help them integrate kind of bringing our technology to enable them to do it. Just talking quickly yesterday, we made an announcement on the battery part of our business around a partnership on cell technology. So again, coming back to the fundamental belief that the chemistries and the technologies need to be different for commercial sectors, we partnered with Daimler Trucks, PACCAR and ourselves and a company called EVE, who's the technology partner. So we have PACCAR, Daimler and Cummins will each be 30% owners, and we are the volume partners, EVE will be a 10% owner. They're the technology partner. And this joint venture will develop and advance LFP and LFMP-cell technology and build a cell plant here in the United States for manufacturing of that technology. So it will both advance the technology as well as manufacture it locally, which brings Cummins and Accelera a guaranteed supply of leading-edge cell technology for us to make differentiated packs for a broad array. So both PACCAR and Daimler can access these cells for their own use, but Cummins has the access for the things that we do best, all of the sectors, all of the OEMs and the entire industry. So it's a really exciting move for us guaranteeing us giving us access at low cost but leading technology cells, which has been really a challenge for a lot of battery companies.

That's very helpful. Your approach has been -- no one knows the future. I guess no one knows what the world is going to coalesce around as far as dual power technologies to power transportation. So your approach has been to invest in a select group of different technologies. Some of them will be bridge technologies. I'd love to here to start with kind of your high-level thoughts on the energy transition what you see are the most viable bridge technologies? And if you'd like to opine on what you think the world will go less around 10 years from now, we'd love to hear that too?

Yes. Well, our belief really is that this is a long transition, longer, especially in these commercial sectors than anyone thinks. And so we're playing it 2 ways, and we call it our Destination Zero strategy, which combines Accelera, which is completely focused on the end game, the zero emission solutions that are going to win and advancing those technologies through iterations to get them to the place at the pace at which they need to be there for adoption. And then the core of Cummins focuses on advancing core technologies, bridge technologies and other things that will extend the life of in really meaningful ways because there's a lot of innovation still to be had there. And so the belief is really either way we win, right? Because if we can advance faster, we have Accelera leading there, and we have these bridge technologies coming together. From my perspective, in Accelera electrolyzers are really fundamental and the scaling of those right now in our portfolio of that business is critical because the demand is kind of unbelievable because even though mobility sectors might not yet be in hydrogen, a lot of industrial sectors who use hydrogen want to do it with green hydrogen. And so we're seeing a lot of demand across industry. And so scaling that is our biggest revenue opportunity, and we're investing a lot in that. We've made a lot of announcements around pivoting our Fridley plant to build electrolyzers. We did that in 6 months. It's already building electrolyzers for our NextEra project in Florida. We're building a brand-new site in Spain. We launched a site in China with our Sinopec joint venture partner. And so we are scaling manufacturing capacity on 3 continents, quickly in electrolyzers and really working to execute on the backlog and the partnerships that we've been able to develop there. The next place for us, I really see is battery. We've been dabbling in different ways to advance our battery technology, and we're starting to see in that '27, 2030 period, the truck OEMs starting to really look at model programs developed at electrification. A lot of the trucks you see out there today are mocked up from the diesel form. And so they're starting to -- so we think having battery technology ready for commercial vehicle in '27 and 2030 is going to be really important. The bus markets have already popped, but medium-duty, light-duty truck is going to pop next. And then for fuel cells, I think that's further out, to be honest, for trucks -- we see -- we've launched with Alstom, our trains, and we now have more than 25 trains running in Europe. And we're learning a lot from that together with partners. And we also have refuse trucks, buses and a lot of various truck applications, heavy duty in more pilot forms across China, Europe and the U.S. And so these are very low volumes still at this point, and it's about really learning the application development and learning what happens in use on optimizing those. But I think you -- most people say that for trucks, it's going to be closer to 2030 that, that starts to become a more meaningful sector for the heavy-duty truck.

One of the bridge technologies natural gas, and you guys basically are the market in natural gas right now. You have a 12-liter engine. You've had a 15-liter engine in China for a while, but the 15-liter is coming to North America, the time line is next year? Is it or..

Yes. So yes, we're really excited about that. So that's that we're launching our -- what we call our fuel agnostic platform for across all our engine platforms, a 6.7-liter, a 10- and 15-liter for the 2027 emissions. The first to launch is the 15-liter natural gas. So we're bringing it over from China. It's done quite well there, and we launched in '21, and it's already had a very sizable penetration where natural gas is much more adopted in China because of just the cost differential between fuels. But we're very excited. What it is, is unlike where we've operated in the past, we've had gasified diesel engines. These are designed for natural gas. So you get performance and efficiency very comparable and range comparable to a diesel engine. So this 15-liter is capable of doing long haul, which is a new thing for the industry and really excited and customers are very excited because particularly in renewable natural gas. And if they're a public company have environmental metrics, it's the best solution for them at this time.

The 15-liter natural gas, the dedicated natural gas engine, I guess. But that's also part of your fuel agnostic engine strategy where everything below the head gasket is the same and then above the head gaskets, either natural gas, diesel -- or what's the third hydrogen.

Or actually gasoline for the some of them. So yes, it's a first in the industry, first, we've ever done, and I think probably the last time anybody has ever done. It's just the same bottom and the economies of scale and development is the first where it starts, where you can do all the programs together. Then you have aftermarket, you have manufacturing, it runs down the same line, one after another, can be different fuels. And it fits the same on the truck. That's the beauty for the OEMs and for the end customer. It looks familiar, and it can be different fuels, depending on the.

Chris, the -- we had the truckload panel before you guys, and it wasn't brought up during that panel, but I've heard it in the truckload industry that joke is the air that comes out of the new Class 8 trucks right now is cleaner than the every breath. So diesel engines, at least NOx-wise, have gotten much cleaner over the years. So can you talk about some of the upcoming regulations, both EPA and CARB -- and as the -- I mean, are there opportunities for the conventional diesel trucks to get even cleaner and as that process unfolds, is there a point where we put them under Accelera. I mean does everything eventually -- this is for Chris and you, Amy, as the legacy businesses start kind of decarbonized and get to a certain level of environmental plan, less do some of them go into Accelera and then the whole business, I guess, becomes accelerator, you just name it something else?

Yes. So yes, there is definitely opportunity for the internal combustion to move and continue to drive down our emissions both from NOx, which is the next standard. CARB 24 comes in difficult standard. We're working with them now to meet that and serve that market well, which we have products in place which we can do that. The really important thing is carbon EPA aligned. So this came in the second quarter. So they're aligned on the NOx standard for 2027, which goes from 0.2 to 0.035, really low emissions of NOx. And so this -- we can get our diesel engine there. We can get our natural gas, and of course, hydrogen there as well. It's going to add a lot of content. And so we can continue to develop it, and that's why we launched this fuel agnostic platform, a new platform, highly tuned engine, you'll have more after treatment. Think of a probably add 30% to 50% onto the after-treatment.So more on the after-treatment side. So adding content, it will be a longer useful life warranty. And so it is a challenging thing as we're moving towards this '27 emission standard. We think beyond this, I mean, to get below 0.035 NOx is probably -- is negligible at that. We think any future standards probably will be more carbon-based. And that's where it kind of starts migrating towards Amy segment. But we do think there's continued development we can do in the ICE space to further reduce emissions. And your first statement is actually technically was true in some parts of the world where we were running engines that air coming in was dirtier than the air going out.

I mean sometimes, it felt like that way here with the wildfires and all that stuff.

Yes. And just to add, Chris, I think we are keeping Accelera focus on electrification and hydrogen. And we're keeping the core focus on what you can do with internal combustion recipes and the innovation there. And I think there's going to be a long transition with both and growth in both actually. And so because of content growth and other things you see in the ore and the advancement we're making in electrification and as quickly as we are, it's going to creep into and be a cost-competitive in the next decade, more cost competitive into some commercial applications where the infrastructure is there. And that's a big pacing thing and a big challenge for the end users and I didn't sit in on the fleet sector, but it's not just charging and hydrogen fueling for folks with terminals and training technicians and having the safety mechanisms that you need to deal with hydrogen and batteries in the field, what you can do with that. I mean there's just a huge infrastructure challenge for these guys that's going to take them a long time to build up and transfer their talent and figure out how to partner or not partner on some of these infrastructure things. So all of that coming together says there's going to be a place for both, we believe, and that's fundamental to our destination 0 strategy.

You mentioned the growth in both. You guys had previously given kind of a prediction on diesel OE peak and aftermarket. Do you have any updated thoughts on that? When -- go ahead.

Yes. I would say not really. I mean we're watching. There's always nuances in each, but what we've just talked about this, I think last year, reiterated it early this year. And by and large, things look really similar. I don't see a real acceleration in the short term at all. If anything, things are slowing down again because of infrastructure more than anything.

So we might get more out of the diesel growth OE story than we had previously thought?

Certainly, when I look at the here and now, what I'm seeing for this year and going into next year and the demand that the fleets have if we're just going to talk about trucking for a second, they're having a hard time putting a lot of electric vehicles in their fleet. So our -- if I look at our forecast in Accelera, some of our demand hasn't been as high as we thought in the truck sector because they need to get trucks and they don't have the infrastructure to support it. But out in '25, '26, '27, we still see that coming up at around the same pace that we said. And I think in medium-duty truck and light duty in that '27, '28 period, like I said, it's going to really start to increase. And by 2030, we'll see fuel cells coming in, in a meaningful way. I don't know, Chris, if you want to add?

Yes. No, when we put out our kind of targets for 2030 and had some transition timing, the feedback we got was it's going to happen much faster than that. And then a year later, it's -- we're getting the feedback, it's going to happen much slower than that. But we actually haven't. I think it's to Amy's earlier point, we're prepared either way. And so we can help -- one help in the transition from the truck OEMs and so forth as they migrate. But we're also looking into how do we help invest in the infrastructure. Is there opportunities for us to get involved in this and pace this out and help drive that that's a bigger challenge to Amy's point, but it is an opportunity for us.

And I don't think you guys said what would happen after the peak OE diesel. I mean we might plateau, I guess, for a long while. And you mentioned -- I think you mentioned maybe a decade of growth in aftermarket after OEP?

Yes. There's a long tail on the aftermarket side. We looked at some of the numbers. And I think we have over $300 million in part sales for pre-2000 trucks. And so it just shows you that people hold these vehicles for a long time. And so there is a long tail there. And even when we've been talking about peak and the change, we often talk in North America, and we're a global company. We operate everywhere in the world that American company can operate. And so it's going to be different transition periods across the geographies. And so it's going to be long and messy here, it's going to be even messier when you go across the globe.

And remember, Matt, I mean, electrolyzer is completely new for us and electrification opens up other newer segments for us. We've never been in passenger rail, for example, and the electrolyzer is opening up really interesting partnerships around leveraging for stationary energy storage to help in the total plant environment for hydrogen and for charging and other things. So all of that is completely new outgrowth for the company that hasn't been even part of what we've considered and we see by the time if that -- when that plateau happens, that will be a really important meaningful piece of the company.

Big part of your presence in hydrogen is hydrogenics that's on an acquisition. And more recently, you did an acquisition and then you also spun off the filtration business. Do you think you feel this is a good place for you to kind of organically grow the existing business? Or should we expect more transactions whether spinoffs or more acquisitions?

Well, speaking for Accelera, it's -- we're going to be constantly scanning. We have a group really focused on scanning technologies, looking at what's the next battery chemistry? Are we -- when is that going to happen? And it's an interesting market. I was laughing when Chris talked about the difference in time because 3 years ago, I remember sitting at these and people were talking about doing more faster, and then I look at some of the companies who tried that and where they're sitting right now, they're struggling. So there could be acquisitions in this industry consolidation that's bound to happen as people struggle and go faster and slower and can't afford to keep up. So we'll constantly look at that. And that's one of the benefits of being a part of Cummins is having the strong balance sheet to be able to scan and make the investments when we do. And we're really focused on pacing, so that we don't get ahead of ourselves so that we can be in this position for the long haul.

Yes. And I'll add to that. I think from a core business perspective, the Meritor acquisition is biggest in our history, and we're going to focus on digesting that. I wouldn't expect another big one like that in the next -- the short term. I think we will continue to explore one other area in the core businesses, securing our supply. And we've made a few acquisitions in that space, the Jake Brake acquisition last year. We're working on a [indiscernible] acquisition for after treatment currently and a few others like that. They'll be relatively small, but it's important as we continue to see the internal combustion industry consolidate to us then make sure we have a secure supply. And so that's an area. And acquisition is not the #1 way we want to secure that supply, but it is one of the arrows in our quiver.

I have more questions on Accelera, but I want to pause a bit. And Chris, maybe go around the world and give an update on the demand conditions and different parts of the business.

Yes. So I'll start here in North America. So we got a lot of feedback on this and on the heavy duty because when it came out in our earnings call what we said was we're seeing some softness in the aftermarket on heavy-duty, more flattening. It's been very strong for a couple of years where we've been trying to catch up with the demand. We've caught up with the demand and that's starting to flatten out a little bit. Usually, that indicates in a couple of quarters, you'll see a slight downturn in the in the first dip. And that's what we're thinking for the fourth quarter as it might be a little bit slower, where everybody is looking at inventory management. And there will be some destocking clearing up red tag trucks, which is about 7,000 or 8,000 right now. And maybe what we think for next year is going to be a gentle downturn, it's kind of how we call it. More gentle than I've seen in my career actually. So we think maybe 10% down in heavy-duty truck side seems reasonable. And then kind of bouncing back from there. So it seems -- so we're kind of working that through and making plans for how we navigate through that. We've been through the cycles many times. We know how to do that. As I go around, I would say, medium duty in North America, showing no signs of slowing down. The depriortized for a couple of years. There's a backlog that continues to -- we continue to look to ramp up production to meet the demand, and that doesn't show any signs of slackening. So that's in the North America truck. As I go around India and Brazil, I think we see some upside for there. Brazil is going as a down point because of the emissions change, but that will come up. India is strong. China, of course, is when everybody watches and ask us about slow and steady recovery. It's up from last year, which was very low with a number of factors impacting that. It's not moving very quickly. We think the second half will be a little weaker just seasonally, normal function. And then we'll see what next year brings. We haven't seen any signs of stimulus that will drive the economy, but there seems to be pressure building. So I think we're watching that really closely to see what does the government do to move the economy. They've been looking for quality growth and more natural recovery, but that's taking time, and I think we'll have to wait and see. On the positive side in China, in this downturn, we've gained share. We've gained share in on-highway, a couple of hundred basis points in share in on-high with existing and new partners, off-highway has gained more than that with new and existing partners. So we're seeing some good movement for us. So when the market does come back, we're in a better position, both share and content. So we're watching that closely. Last one I'd probably talk about is Power Systems, our large engine market. And that's 2 things to highlight. Mining is very strong and continues to be strong around the world. And with a weak China, that's saying something. So that has some staying power we expect for the medium term. And power generation is very strong. Two things driving. One data centers, which we play a big role in, and the other piece is in just industrial, with more and more onshore, including building battery plants. We'll be putting in backup gen sets on prime power, that demand is very strong. So that's going to last for quite a while. So as we look at next year, heavy duty is probably the one that might be a little bit weaker, the rest seem in pretty good shape.

Is it plausible that China would grow for you guys next year even as plausible..

Yes. I think we think where the China truck market is, is at the bottom, and the same with the construction market. I think this is the bottom. Last year was subterranean, I would call it because there was outsized conditions that drove it below.

Do you think as the truckload, the Class 8 production cycle goes into declines, next year. Well, how does it affect your share usually? Because there's -- do the OEMs do more vertical integration in a down cycle than an up cycle?

They tend to do a little bit more, but it doesn't move a lot because we still have the end user pull. The big fleets are main to the ones taking the trucks still and they normally go with us. So that's -- I think that we still have a pretty good pull it might move a little bit. What will offset that is the natural gas coming in. So I think in balance, it might be a percent up or down, but not a big movement... it Used to flex a lot more.

So we'll see a mild decline maybe in the Class 8 part of the business. China plausibly could grow and Power Systems...

Probably steady.

Probably steady. Okay. It's a mining should be in...

Mining should be in good shape, should be strong.

should be in good shape. Okay.

Yes, the only 1 in Power Systems that might slack and off a bit small market for us is oil and gas because it's a switch, it's on or it's off, and it's been on for a while.

And then in construction, I think you were a bit cautious on construction for the fourth quarter. What we're hearing on construction is a lot of positive stuff. Help us understand where that comes from?

Yes. And we brought our guide to down 10% to flat, and it was flat to up 10%. It really is actually -- it was up about 2%, and now it's down about 2%. So it's really in the margins. We see it about flattish from a volume perspective. And we tend to be impacted a couple of quarters ahead of the OEMs because we're providing the power into the equipment. But yes, I think it's at a high level. I -- don't get me wrong. It's not -- we're not seeing a precipitous drop, but we're seeing just a little bit more flattening there.

Got it. And Amy to tie the Class 8 down cycle to Accelera does it present unique challenges when there's a Class 8 down cycle, maybe the customers are tightening their belts and doing less discretionary spending or experimenting with different technologies. Does it present any challenges? Or do you still feel okay about meeting the 2026 breakeven goal?

I don't see them very related, to be honest, because I don't see heavy duty as a leading sector in the decarbonization right now. They're just not doing that much in 0 solutions. It's really bought -- like our core revenue is around school bus, transit bus, medium-duty truck, light truck, refuse on that side and then electrolyzers. So from that perspective, if the industry would enter into a larger scale downturn or we would see something bigger, I do think that is an advantage for us because some of the pure plays will struggle to pace their investments over this long conversion. And so I see that as something like Chris said, we know how to manage our spend through cycles. We know how to plan that in pace. So if something large would happen, but the kind of thing we see right now just as a heavy-duty sector, it wouldn't really impact Accelera's revenue or our investments.

Okay. That makes sense. Since we're running out of time here, I want to make sure to give the audience a chance to ask questions if there are any in the audience before I get back to my questions. All right. Let's say here. I do want to ask you about the looming potential UAW strike. Any direct or indirect impact to you guys if there is a strike or...

Yes, I know that's an important one for everyone's looking at that a lot in the news right now. For us, we don't expect any direct impact. We have one UAW plant in our Components business, but it's not part of this action. So we don't expect any direct impact. We're looking at -- the one thing we learned from the pandemic is look all the way through the supply chain to your tier with the bottom. And that's where I think we -- there might be some impact, but we don't expect a long-term impact we do have a direct exposure with Stellantis for the Ram truck. So we're working with them to work on plans to address that. We're hopeful that we can navigate through that.

So the smaller the size of the truck, the higher the impact for you, would you say?

That would be -- that's the thing where you might have more of a crossover with automotive suppliers. And that's the big one. But even as you get into medium-duty truck or heavy-duty truck, you have less of a crossover on suppliers, and that's where the impact should come. So there might be some, but we're -- as we're assessing it now, it doesn't seem like it's a big one for us.

Okay. Got it. And just one final question, a follow-up for Amy. There's obviously a big push for EVs in many world regions. Can you remind us what vehicle classes you guys currently? You talked about it a bit earlier. But you'd like duty trucks, you're involved in that market. And just remind us what your EV exposure is and if there are any pockets that you're not in right now that you see yourself in the future?

Yes. I mean we will not participate in pass car. We're in those kind of segments. But in light commercial truck, we do have some pilots and we have some partnerships going on in that space. Medium-duty truck is really important for us, and we have both a lot of vehicles out there as well as some strategic partnerships that we -- that we're working co development with. And heavy-duty truck, we have both some fuel cell pilot trucks as well as some battery electric trucks in pilot form. So in heavy-duty truck, that's kind of -- we'll see that. That will be a big player in that on the fuel cell space. And with our venture, we do think some of the LFP technologies will make their way into heavy-duty truck. We're strong in all of the bus segments right now. That's really where the core of the volume has been because of all the incentives. And in China, we have both buses and trucks running with fuel cells. So that's probably one of our biggest locations there in Europe, where we have a lot of fuel cell trucks running, more than just pilots, I'd say, fleet kind of fuel cell trucks running there. So our ambition, and I'm very comfortable with the representation we have right out there is to kind of be in those core segments, and it might even advance us in more in light duty, like commercial than we've been previously at Cummins. So I think we see a lot of opportunity and upside there.

That's great to know. And then I think we just went slightly over time. So thank you so much for a great discussion. Really appreciate it. And everyone, please join me in thanking Amy and Chris...

Thank you.

Thank you, -- thank you.